It’s that time of year again. On 1 June the North Atlantic hurricane season officially started. As a result, we’ve turned into an industry of storm chasers once again. We may not physically chase storms like the half-crazed enthusiasts racing around in their trucks in Tornado Alley, but we will religiously log in to our preferred forecaster every morning between now and November to see what tempests are brewing out at sea.
We observe as these depressions grow into hurricanes and watch them christened with names that will become etched in our memories should they prove destructive. Our attention is all the time on the storm’s projected path and where it is expected to make landfall. We breathe a sigh of relief as a category 5 storm ploughs into a sparsely populated part of Mexico and shudder as a category 1 makes its way towards Florida. There are few things that make a reinsurance boss more nervous than a major hurricane bearing down on the US coastline.
The contradiction of course is that while the next Katrina or Andrew will undoubtedly cause substantial losses, it will also bring new opportunity. In a softening and competitive market, a major storm loss in the US is one of the few events with the ability to reverse the downward trend in rates. But it is not good karma to wish for catastrophes.
So what activity can we expect in 2008? The National Oceanic and Atmospheric Administration has predicted an above average season with 12 to 16 storms, six to nine hurricanes, and two to five major hurricanes. The season has already got off to an early start with Tropical Storm Arthur forming off the coast of Belize on 31 May. It was the first storm to form in May since 1981.
Forecasts are always uncertain – activity was high in 2007 as predicted, but with low insured losses. In 2006, despite predictions for an active season, the industry was spared at a time when it was still recovering from Katrina, Rita and Wilma in 2005. The expected storms did not materialise. Hurricane Andrew on the other hand, happened in an otherwise low activity period. Which is just to state the obvious – that the weatherman often gets it wrong.
“There are few things that make a reinsurance boss more nervous than a major hurricane bearing down on the US coastline
Scientists and catastrophe modellers agree that we are in a period of heightened hurricane activity. This is linked to a naturally occurring climatic cycle called the Atlantic Multi-decadal Oscillation. Whether the AMO is exacerbated by man-made climate change is less easy to establish. The common assumption is that a warming climate will lead to more hurricanes, but in fact the opposite might be the case, according to Dr Peter Dailey, director of research in atmospheric science at AIR Worldwide. “Research indicates that hurricane frequency and/or intensity may decrease under a warm climate,” he said at a catastrophe modelling conference in London in June. “This has until recently gone unnoticed by the media.”
The fourth assessment report from the Intergovernmental Panel on Climate Change points to a “likely increase in tropical cyclone intensity” with “less confidence in global decrease of tropical cyclone numbers”. So even if the number of storms decreases, the IPCC believes hurricane intensity will grow.
What insurers and reinsurers can be certain about is that the cost of catastrophes will continue to increase. Around the world, population growth and wealth generation means exposures are going up all the time. The American Dream is alive and well and everyone wants a condo on Miami Beach. RMS estimates Miami’s exposed assets will rise from $400bn today to over $3.5trn by 2070.
The fundamental question of course is who pays for catastrophes? As insured losses grow, should governments in hazard-prone regions step in? The capital markets with their sheer size could have the capacity to absorb cat losses that would be otherwise uninsurable. In the US, where senators are again considering the feasibility of a pooled approach, a national catastrophe fund may be a long-term solution to tomorrow’s trillion dollar losses.
Helen Yates, EDITOR GLOBAL?REINSURANCE