hurricane
4 August 2014 Insurance

Caution over complacency

More than 20 years on from the destruction caused by Hurricane Andrew, which ripped through Florida in 1992, killing more than 60 people and causing insured losses of $17 billion, the US property/casualty (P&C) sector is enjoying the rewards of a more benign period for such large scale storms and losses.

According to analysis by ISO, part of Verisk Analytics, and the Property Casualty Insurers Association of America (PCI), a significant absence of hurricanes in 2013 left the sector with an increase in underwriting profit for the first time since 2007.

Verisk says that the sector’s net underwriting gains increased to $15.5 billion from $15.4 billion in 2012, while the sector’s combined ratio dropped to 96.1 percent from 102.9 percent the previous year. Net income after taxes grew to $63.8 billion in 2013 compared with $35.1 billion in 2012.

While these figures indicate that insurers are strong, well-capitalised, and well prepared to pay future claims, they must, however, strengthen economic resiliency before the next major natural catastrophe or terrorist attack occurs.

"Hurricane Alicia in 1983 and Hurricane Betsy in 1965 both formed and did significant levels of damage in otherwise benign hurricane seasons." Phil Klotzbach

“The US marketplace emerged relatively unscathed from the hurricane season last year, but advanced risk models show that losses from catastrophic events will continue to increase, and insurers will need to keep on building their financial resources to protect policyholders and bolster economic resiliency before the next major event like Hurricane Katrina or the September 11 terrorist attack occurs,” says Robert Gordon, PCI’s senior vice president for policy development and research.

Michael Murray, ISO’s assistant vice president for financial analysis adds: “Insurers earned net gains on underwriting in just 12 of the 55 years from the start of ISO’s data in 1959 to 2013, with insurers posting cumulative net losses on underwriting amounting to $485.9 billion during that period.

“With much of the improvement in underwriting results last year attributable to special developments including relatively benign weather, a sharp drop in catastrophe losses, and increases in reserve releases, one has to wonder just how sustainable the net gains on underwriting will prove to be.”

Dr Phil Klotzbach, a research scientist in the Department of Atmospheric Science at Colorado State University, agrees.

“While we are predicting a below-average hurricane season this year, there have certainly been significant hurricane impacts in quiet years,” he says. “A good case in point is Hurricane Andrew in 1992. Only one major hurricane formed that year, but obviously, Andrew did huge amounts of damage.

“Likewise, Hurricane Alicia in 1983 and Hurricane Betsy in 1965 both formed and did significant levels of damage in otherwise benign hurricane seasons.”

Klotzbach explains that the region has been in an active era for Atlantic hurricane activity since 1995 and that according to previous findings, historically active periods last for 25 to 35 years. “Assuming this active era behaves like ones in the past, we would expect to see another 10 to 20 generally active years, followed by a potentially quieter period,” he says.

According to the annual hurricane prediction report released by Klotzbach and Dr William Grey, the forecast states that it appears quite likely that an El Niño of at least moderate strength will develop this summer and fall, and that the tropical Atlantic has anomalously cooled over the past few months, which is why they expect a below-average probability for major hurricanes making landfall along the US coastline and in the Caribbean.

But, despite these predictions, the report states that coastal residents should “prepare the same for every season regardless of how much or how little activity is predicted”.

Cashing in

Aon Benfield’s reinsurance market outlook noted that benign catastrophe losses in 2013 contributed to sub-90 reinsurer combined ratios. Coupled with a 28 percent growth in alternative capital this led to a 7 percent increase in total reinsurer capital during 2013, representing a nearly 60 percent increase since the reinsurer capital level of 2008.

The report states that growth in traditional reinsurer capital was supported by robust net income generation as companies benefited from low catastrophe loss activity and continued reserve releases.

Catastrophe loss activity continues to provide the largest volatility in results, with the lowest contribution to the overall combined ratio since 2009 of 4.7 percent.

As reinsurance rates remain low, Gordon says that insurers are “taking the steps necessary to secure their financial commitments to consumers. We are also working with homeowners, businesses, and federal, state, and local officials to improve disaster readiness and mitigation to minimise future human tragedy and economic losses. Catastrophe planning and preparation continue to be critical watchwords for 2014”.

One insurer which is reaping the benefits of the current climate is Citizens Property Insurance Corporation, the Florida not-for-profit insurer, which has approved a $3.1 billion risk transfer programme for the 2014 hurricane season.

The Citizens programme is designed to make the most of the current low cost of reinsurance in both the traditional and the alternative markets which, including the $1.5 billion Everglades Re cat bond, means that Citizens has increased its reinsurance protection by nearly 70 percent from previous levels.

"Catasrophe planning and preperation continue to be critical watchwords for 2014." Robert Gordon

After these new risk transfer transactions are closed, Citizens will have approximately $3.1 billion in reinsurance available in the event of a major storm or series of storms this hurricane season.

The insurer said that the increase in its two-pronged risk transfer programme, using traditional coverage and cat bonds, was designed to capitalise on what it described as favourable market conditions in the reinsurance space to “dramatically increase reinsurance coverage at a lower price”.

Citizens has also bolstered its participation in the traditional reinsurance market with the expected purchase of approximately $1.3 billion in coverage for the 2014 hurricane season, including approximately $750 million that covers aggregate losses in the event of multiple storms.

The reinsurance package will cost Citizens approximately $300 million in 2014, roughly equal to the amount spent in 2013 for $1.85 billion in reinsurance coverage.

Chris Gardner, chairman of the Citizens board of governors, said: “This is incredible progress and the result of a lot of hard work. Essentially, in the last three years, we have reduced the risk to our taxpayers of an assessment by more than $9 billion, or approximately 80 percent.”

Jennifer Montero, chief financial officer of Citizens, said: “We’ve been able to capitalise on favourable market conditions across the board to maximise our 2014 risk transfer programme. Such market conditions have allowed us to exceed our initial expectations in regard to the level of reinsurance coverage at the most efficient pricing.”

Hell hath no fury …

A study which analysed death rates from US hurricanes from 1950 to 2012, suggests people prepare differently for hurricanes depending on whether the storm has a male or female name.

“Feminine-named hurricanes (as opposed to masculine-named hurricanes) cause significantly more deaths, apparently because they lead to a lower perceived risk and consequently less preparedness,” a team of researchers wrote in the Proceedings of the National Academy of Sciences.

In other words, a hurricane named Priscilla might not make people flee, as a hurricane named Bruno would. It also suggests that changing a severe hurricane’s name from Charley to Eloise could nearly triple its death toll.

“For severe storms, where taking protective action would have the greatest potential to save lives, the masculinity-femininity of a hurricane’s name predicted its death toll,” the study says.

However, some are not so open to the theory and have called it a statistical fluke, especially as until 1979 all hurricanes had female names. Therefore, more people could have died on average in the 29 extra years of female-named hurricanes.

The researchers, however, have countered these comments by saying that they conducted a series of experiments to test their hypothesis, as well as analysing death tolls.

In one experiment, participants predicted the intensity of 10 hurricanes—five with female names and five with male names. The male hurricanes were deemed more intense, regardless of the gender of the participant.

In another test, participants were asked to judge the risks of two hurricanes named Alexander and Alexandra. The participants were told that both had uncertain intensity, but collectively they decided that Hurricane Alexander would be riskier.

A third experiment tested whether participants would be more likely to evacuate due to Hurricane Christopher versus Hurricane Christina. As predicted, in the test more people would flee from Hurricane Christopher.

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