Updated forecasts for the 2018 US hurricane season predict that the North Atlantic Basin will produce average hurricane frequency relative to long-term results, according to the latest US hurricane season special report from rating agency Fitch.
The report said that environmental forces that serve to encourage the development of tropical storm activity appear to be relatively neutral and could result in a near-average season in 2018.
Fitch said that the 2017 hurricane season included a unique set of events and devastating losses that primary property/casualty (P/C) insurers withstood reasonably well. However, in aggregate, this year likely represents a 1-in-10- to 20-year level of incurred losses, revealing the potential for more severe future hurricane losses. The nature and size of the 2017 storms also limited US primary insurer net losses with a large proportion incurred by offshore reinsurers, alternative capital and the National Flood Insurance Program.
Significant property losses in 2017 will lead to higher premium rates in loss-affected primary insurance segments. Market pricing data indicates that the soft market appears to have finally reached a bottom, with premium rate increases seen in more product segments, particularly property and catastrophe business. Pricing improvements may ultimately prove short-lived as the level of rate increases achieved are falling below underwriter expectations, and competitive market dynamics are relatively unchanged.
The Fitch report said that demand for insurance linked securities (ILS) and catastrophe bonds remained very strong in the first five months of 2018, despite the significant hurricane activity experienced last year. US wind risk remains the leading peril in the catastrophe bond market with nearly $3.6 billion of bonds exposed to named storms already issued this year. There was initial uncertainty as to whether the capital markets would return in full force following losses paid and trapped capital from lengthy claims settlements. However, investors have yet to show signs of being deterred.
Looking at the forecasts that have been made so far by organisations such as the National Oceanic and Atmospheric Administration, Fitch said that so far these forecasts were close to the long term average of 11 named storms this year, of which six were likely to be hurricanes and three of those likely to be major hurricanes.
Fitch said that the US P/C insurance market remains positioned to withstand a future significant catastrophe event in 2018. While the industry reported larger underwriting losses in 2017 related to more severe catastrophe experience, aggregate industry policyholders’ surplus grew significantly during the year due to higher total investment returns. Industry surplus grew by 7.5 percent to $765 billion at the end of 2017.
According to Fitch, given the current substantial level of industry capitalisation, it would likely take a record individual storm loss, or a confluence of significant losses, from events that may include catastrophes, equity investment losses, higher bond defaults and adverse loss reserve experience to cause a material decline in the industry’s aggregate surplus.
Fitch, 2018, hurricane season, average, forecasts, losses, damage