Preparing for hurricane season in the US

13 July 2017

As in any year, the coming hurricane season could bring a landfalling major hurricane to the US coastline. After an 11-year drought, some think it’s well overdue. Are insurers prepared? By Garry Booth

State of emergency declared as huge waves and 140mph winds batter the Southeastern seaboard of the US.” It’s a headline that’s receding from the insurance industry’s memory.

There have been a few close calls in the past decade – Hurricane Ike was downgraded from category 4 before clobbering Texas in 2008, while Hurricane Matthew threatened Florida last year as a category 5 storm but weakened before hitting the coast.

But not a single category 3 to 5 hurricane has made landfall in the US since Hurricane Wilma in 2005. 

Florida hurricane landfalls

Equally as remarkable, the state of Florida had been hurricane-free for 11 years until Hurricane Hermine came ashore as a category 1 storm in August last year.

Both periods of ‘no landfalls’ are unprecedented in the historical record. And it means the clock is still ticking until the next major hurricane strikes.

“The return time of an 11-year stretch without a major hurricane landfall across the US coastline is in excess of 300 years,” says Josh Darr, lead meteorologist in JLT Re’s catastrophe exposure and risk management services unit. 

“Meanwhile, the long-term historical record for Florida hurricane landfalls is roughly once every other year. The stretch between Wilma in 2005 and Hermine in 2016 was quite impressive for the highest risk state in the US.”

But, as Darr points out, (re)insurers with US cat exposures have still had to contend with losses from lower category storms. And whilst the frequency of category 1 and 2 hurricanes has also been below average in recent years, the severity pattern for these weaker storms has been the exact opposite trend.

For example, although Superstorm Sandy in 2012 is currently the second largest economic and insured hurricane on record, it ultimately made landfall in New Jersey as a borderline category 1 storm. Hurricane Ike, meanwhile, is the third largest economic/insured loss on record, but made landfall in Texas only as a category 2 storm.

“Both of these storms were exceptionally large in the breadth of hurricane storm force winds,” Darr explains. “While Sandy’s losses were roughly half of [hurricane] Katrina’s, Sandy’s peak winds were roughly half of that seen in Katrina at landfall.”

Are warmer waters the answer to the lack of hurricane landfalls?

What are the possible reasons for the relatively low number of landfalling major hurricanes in recent years?
Strictly speaking, each hurricane season is independent and there’s no evidence that one season is predictive of the next. But data is clear that a warmer than average Atlantic Ocean, particularly tropical regions, correlates to increased overall basin activity.

There are several theories that try to account for the lack of major landfalls.

It’s possible that the US coastline has been through an exceptionally rare period of luck and that reversion to the mean, with continued warm sea surface temperatures, will ultimately occur.

Some believe the record warm Atlantic sea surface temperatures over the past five to ten years hold the key. Some research points to warm Atlantic Ocean temperatures correlating to more high latitude landfalls or storms more likely to recurve into the north Atlantic without landfall. 

This could be the reason that Bermuda has been hit by three hurricanes during the past three seasons.

Another recent paper posited that a warm Atlantic basin tends to promote less storm intensification near the coastline. 

Conversely, it found that cold phases in the Atlantic are more likely to see hurricanes experience intensification near the US coast, potentially reaching major status.

Professional hurricane watchers are consequently starting to revise their opinions. In April this year, catastrophe risk model consultant RMS released its medium-term rate hurricane forecast with its version 17 North Atlantic Hurricane Model.

For the US as a whole, RMS’s new 2017-2021 medium-term rate forecast of hurricane landfall frequency is now 1 per cent below the long-term historical rate for category 1–5 storms. 

The trend is even more stark for major hurricanes, given the projection for category 3-5 storms is 6 per cent below the long-term average. “The focus of the medium- term rate forecast falling below the long-term average is focused on the southern US from Texas to the Southeast. 

“Meanwhile, RMS projects the next five years still featured slightly elevated landfall activity in the Mid-Atlantic and Northeast US.”

It’s the first time since RMS’s introduction of the five-year forward looking view of hurricane landfall that future expectations have dipped slightly below the long-term rate.

Hurricane risk forecasts

And it’s a significant change in position. Every year since 2006, RMS has put forth the view that the subsequent five-year period would feature above normal landfall activity for the US, most specifically for the damaging category 3 to 5 storms. But these five-year predictions have failed to pan out.

Tom Sabbatelli, RMS hurricane risk expert, stresses that, while the latest RMS forecast anticipates below-average landfall activity in the US as a whole, the risk of a large tail event – beyond the 100-year return period – impacting Florida or the Northeast remains above average.

“Hurricane Matthew’s graze along the Florida coastline reminds the industry that a large insured wind event remains a possibility each season, as a small deviation in Matthew’s track would have created a much more severe situation,” he says.

In the event, preliminary economic damage estimates for Matthew have been projected around $4 billion to $6 billion, according to CoreLogic.

“Although the (re)insurance industry may be better prepared to absorb the financial impacts of a US hurricane, based on the lack of landfalling events in recent years, such a forecast reminds us that significant events can still occur in years with activity that is below average overall, for example, Hurricane Andrew in 1992,” Sabbatelli added.

The fourth costliest hurricane on record, Andrew left insured losses of $17 billion (original values). A similar storm making a direct hit on Miami today could result in insured losses of $200 billion.

Sufficient costs in (re)insurance sector

David Flandro, Global Head of Analytics at JLT Re, believes that the insurance and reinsurance sector is sufficiently well capitalised to withstand a major, modelled windstorm event on the Gulf and/or East Coast.

“A $100 billion loss would be absorbable. It would be an ugly year but it wouldn’t be as bad for the sector as it was in 2005 when the sector’s solvency ratios were much lower,” he says.

Referencing a recent exercise in the London market, Flandro says it’s the sequence of events that really matters. 

“Everyone is planning for a big nat cat event, but what if we had a cyber outage that nobody understood and a big catastrophe? That’s an example of when you get a change in expectations,” he says, “that’s when the sector’s capital adequacy comes into question.”

Unlike 2006, 2017 is a good time to buy reinsurance, with rates much lower on a risk- adjusted basis. The coverage is also broader.

Reinsurance is a very cheap form of capital no matter how you slice it, according to Flandro. “Versus the cost of equity of most firms today, it’s cheaper. It’s also cheaper in many instances than issuing preferred shares and better than long-term debt for companies that don’t want to increase their leverage ratios,” he says.

“Reinsurance is very flexible and it’s reasonably priced.”

But whatever their catastrophe risk management plans, insurers and reinsurers need to be realistic about landfalling hurricane frequency and severity.

“We hope that the insurance and reinsurance sector hasn’t got to the point where it’s taking the last decade of hurricane landfall experience and baking that in as normal,” Flandro warns. 

“We’ve had extraordinarily low hurricane landfall activity – but it’s just randomness. Changing your expected loss numbers would be foolhardy. There will always be spikes. Nobody should get complacent.”

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For further information, please contact David Flandro on +44 (0)20 7466 1311 or email david.flandro@jltre.com