With the prospect of high hurricane activity and pressure to keep rates low, reinsurers face a growing need to mitigate their risks, as Bob Ward explains.
With the 2008 hurricane season now officially underway, it is tempting for the re/insurance industry to look back at the last two years and assume that the risk of landfalls along the western coastlines of the North Atlantic has declined.
Since the record-breaking seasons of 2004 and 2005, the last two years have been comparatively quiet in terms of landfalls in the United States. Yet the evidence suggests that potential hurricane activity in the North Atlantic remains high.
The average annual frequency of tropical cyclones in the North Atlantic basin has been 13.7 since 1995, compared with the long-term average of 10.3 since 1950. The proportion of major hurricanes has also steadily increased since the 1970s.
The 2006 hurricane season was relatively quiet due to the late onset of El Niño conditions, which are associated with low activity in the North Atlantic. Last year was a more complex story, with 15 named storms, but only six hurricanes. Although just one category 1 hurricane, Humberto, reached the coastline of the United States, an unprecedented two category 5 storms, Dean and Felix, made landfall in Mexico and Nicaragua, respectively.
“Insurers and reinsurers are under political pressure to reduce rates
All of the seasonal forecasts for 2008, from organisations like the United States National Oceanic and Atmospheric Administration, point to above-average activity in the North Atlantic basin. Although there is still no agreement among researchers about whether the increase in activity is due to natural cycles in ocean circulation or man-made climate change, there is a consensus that we remain in a period of more frequent and severe storms.
With concerns about the cost of coverage against wind damage in many coastal parts of the United States, insurers and reinsurers are under political pressure to reduce rates. In addition, the growth in capacity that occurred after 2005 and the low losses of the past two years have also led to a softening of the private market. But with the risk of damage remaining high, portfolios need to be managed carefully to avoid overexposure.
The most sensible way of reducing insurance rates is by lowering the risk of losses through mitigation measures, such as better informed land-use planning, building codes and other initiatives to make properties more resistant and resilient against damage.
Bob Ward is director of public policy at Risk Management Solutions