Re/insurers prepare for above normal hurricane season
Re/insurers are girding for a busy and potentially expensive Atlantic hurricane season as a combination of record sea surface temperatures and the development of La Nina conditions in the Pacific are expected to come together to bring as many as 25 named storms this summer.
And one agency is warning that the long term economic outlook from hurricanes is "dire" and threatens to destabilise the insurance market.
Hurricane season officially starts tomorrow and the US NOAA's National Weather Service predicted an 85% chance of an above normal season.
In line with other forecasters, the Weather Service's Climate Prediction Center forecast 17 to 25 total named storms (winds of 39 mph or higher). Of those, eight to 13 are forecast to become hurricanes (winds of 74 mph or higher), including 4 to 7 major hurricanes (category 3, 4 or 5; with winds of 111 mph or higher). Forecasters have a 70% confidence in these ranges.
"The upcoming Atlantic hurricane season is expected to have above-normal activity due to a confluence of factors, including near-record warm ocean temperatures in the Atlantic Ocean, development of La Nina conditions in the Pacific, reduced Atlantic trade winds and less wind shear, all of which tend to favour tropical storm formation," the agency said.
"We are facing the start of what’s expected to be a particularly active 2024 for hurricanes – with potentially profound effects on insurance, CRE, and supply chains, as well as on creditworthiness and general economic strength for particular global regions and for broader markets. With June 1 approaching, Moody’s shares key commentary and outlooks, as well as previews our unique pre-landfall analysis, on-the-ground and real-time data collection, and leading post-storm impact projections and loss estimates, as the world looks to navigate this year’s hurricane season.
Moody's Ratings said in its hurricane outlook that forecasters were projecting an average of 22 named storms compared to the historical average of 14 named storms per year between 1991 and 2020.
But it said reinsurers entered the 2024 hurricane season well positioned, with strong capital.
"Property catastrophe pricing remains high, although more competition is entering the market, particularly at the top end of reinsurance programmes. Reinsurance terms and conditions generally remain firm, with primary insurers retaining more risk at lower return periods,” said James Eck, vice president-senior credit officer, financial institutions.
If any of the hurricanes make landfall in heavily populated areas, that will add to the $275 billion in insured losses they have incurred in the US since 2017, when the 12-year hurricane drought ended, said Julie Serakos, managing director, insurance at Moody's. "Event losses are escalating due to population increases in coastal areas, social inflation, construction inflation, and regulatory mandates."
In economic terms, the long-term trend is gloomy, Moody's said.
“While the 2023 hurricane season was devoid of costly hurricanes, the long-term trend is dire. The combination of mounting temperatures and rising property values has resulted in 17 of the 19 costliest tropical cyclones in the US occurring in the last 20 years, even after adjusting for inflation," said Moody's climate economist Chris Lafakis.
"Moreover, NOAA estimates that the total cost of US billion-dollar disasters over the last five years (2018-2022) is $595.5 billion, with a 5-year annual cost average of $119.1 billion, the latter of which is nearly triple the 43-year inflation adjusted annual average cost. These costly storms also threaten to destabilise the insurance market, as an increasing number of private insurers abandon some or all parts of expensive property markets such as California and Florida.”
Senior regional economist Adam Kamins added: "“The US. avoided a truly catastrophic hurricane season last year, but if forecasters are correct, we may not be so lucky in 2024. With few signs of a slowdown in building in high-risk coastal areas, a major storm would have significant consequences, not only in terms of the human toll but when it comes to lost output and property damage.”
Lloyd's re/insurer MS Amlin, whose sister company Amlin Re has substantial Bermuda operations, said the consensus from 20 separate forecasters was that 2024 could be one of the most active on record.
The analysis, which combines over 20 separate forecasts, projects a “substantially above average” number of storms forming between June and November.
"Some of the forecasts have drawn comparisons to the hurricane seasons of 1998, 2005, and 2010 which included Hurricanes Georges, Mitch and Katrina that caused severe damage to parts of the US and Caribbean," MS Amlin said.
Dr Ed Pope, a Geoscientist in MS Amlin’s Exposure Management team, said: “Unfortunately, all the predictions point towards a potentially active hurricane season in 2024 – with some agencies forecasting record levels of activity for this stage of the year. Importantly, there has been general consensus in those forecasts for a number of months now about potential activity, despite the uncertainties associated with making forecasts early in the year. Even if we hit the low end of these forecasts we are likely to see an above-average season.
“However, it’s important to remember that predictions relate to basin activity, not landfalling hurricanes. Even if record-breaking activity is observed, this could be confined to the oceans. Local weather and steering patterns will ultimately determine storm impacts on at-risk communities – and this is often only predictable weeks, or days, in advance.”
Munich Re agreed in its highly regarded forecast that it was difficult to predict how many storms would make landfall - or where.
"But a greater number of storms means a higher probability of multiple landfalls," it added. "In addition, there could be a higher risk of storms in the Gulf of Mexico and Caribbean Sea this year, which in turn means a higher risk of storms making landfall in these regions."
Munich Re added: "It is well known that warmer oceanic temperatures in the tropical North Atlantic, such as those currently prevailing, provide more fuel for the potential development and intensification of tropical cyclones. The ENSO cycle in 2023 was characterised by strong El Niño conditions – the opposite of the La Niña phase that is expected to develop this year. El Niño years are typically accompanied by strong winds at high altitude over the North Atlantic. This is known as vertical wind shear, which inhibits tropical cyclone development because it literally tears storm systems apart. Under La Niña conditions, high altitude wind shear is reduced, making it easier for tropical cyclones to develop.
"A further possible effect of La Niña influences the tracks of the storms. There is typically a large high-pressure area between the Azores and Bermuda. Its intensity influences how far west individual storms will track before drifting away north. During a La Niña phase, this high-pressure area is often more pronounced, so storms can move further to the west, thereby potentially increasing the risk to the Caribbean and the Gulf of Mexico."
The reinsurer reiterated that researchers believe climate change is contributing to more intense storms, although not necessarily to a higher number of storms overall, but added: "However, most climatologists believe that climate change is playing a significant role in the exceptionally high water temperatures in the North Atlantic."
Anja Rädler, meteorologist and climate expert at Munich Re, said: “Forecasts of storm activity in the hurricane season should always be treated with caution. However, this year we have two important factors that will probably favour cyclones – the development of a La Niña phase in conjunction with very high water temperatures in the tropical North Atlantic, the formation area for the hurricanes. For that reason, the forecasts seem to be more reliable this time.”
Munich Re's report added: "If severe hurricanes make landfall on the US coast, they frequently leave behind many billions of dollars in losses. Further inland, the storm surges and floods that typically accompany hurricanes heavily influence the scale of damage.
"Hurricanes affect not just the southern and southeastern states of the USA, but also the northeast coast of North America including Canada. Accordingly, in order to minimise losses and protect human life, prevention in the form of robust buildings and optimal early-warning systems is particularly important."
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