This will also happen to bows stored under tension sometimes. Particularly if stored in an area that gets cold and dry seasonally. The hair will contract and a few or several strands break, usually right at one end or the other, not generally in the middle. It happened once to my psaltery bow with black horsehair because I forgot to releive the tension. It hasn't reoccurred since I've remembered to loosen the bow.
This is the first I've heard of horse hair bugs, but I'm convinced somewhere in nature there is a bug that will eat just about anything. An alternative to mothballs without the dangers of naptha is red cedar oil. A few drops in the case upholstery keeps the insects away. Another alternative is fresh tobacco. Nicotine is toxic to insects and they stay away from it. I wouldn't want naptha fumes to be concentrated around the finish of the instrument for extended periods.
It depends on the finish, but I've been very careful after a bad experience with nitrocellulose and aerosol DEET bug repellent. That stuff will soften the finish. Some of that was on my shirt at an outdoor gig a few years back and it left the impression of the shirt cloth on the back of my Fender.

Yikes! Fortunately it was not vey deep at all and polished out mostly after a few years.