According to an analysis conducted by AIR Worldwide (AIR), a risk modeling company, the 2004 hurricane season should not be considered rare.
The analysis, based on the AIR hurricane model, revealed that insurers should expect to see four hurricanes make landfall in the U.S. approximately once every 12 years. The expected frequency of four loss producing hurricanes in Florida is about once every 150 years – still within the range to which most insurance companies manage their catastrophe risk.
AIR also analyzed the financial impact of the season, which according to preliminary loss estimates from ISO’s Property Claim Services (PCS), will likely exceed $20 billion. The analysis indicates that insurers should expect to see similar aggregate losses in a single season about once every 13 years for the U.S. and about once every 24 years for Florida.
“Insurers and reinsurers should certainly consider the probability of multiple event seasons when analyzing catastrophe risk,” said William Riker, president of RenaissanceRe Holdings Ltd., which writes a relatively large share of the Florida market. “The AIR hurricane model allows us to easily analyze the impact of multiple-event seasons on our portfolio.”
For many insurers the potential loss from individual hurricanes, rather than the accumulation of losses from multiple events, has been the dominant issue when analyzing catastrophe risk. “For the past 15 years a single event has driven most of the annual hurricane losses,” said Uday Virkud, AIR senior vice president. “However, this past season, which is not unusual when compared with long-term historical experience, demonstrates how important it is for companies to recognize the likelihood of multiple-event seasons when analyzing catastrophe risk.”
Florida Farm Bureau, which writes 100 percent of its business in the state, has been using the AIR hurricane model to manage risk from multiple-event seasons for a number of years.
“The greatest threat to surplus may not be a severe event, but rather an accumulation of moderate events,” added John Rollins, Florida Farm Bureau’s chief actuary in a September 2002 conference presentation. “The AIR hurricane model tells us we face the potential risk of several small to moderate hurricanes in a single season. Several hits to a retention can add up very quickly.”
On Oct. 18, A.M. Best Co. affirmed the financial strength rating of A (Excellent) of the Florida Farm Bureau Group, partially as a result of its aggressive catastrophe management plan.
Although the 2004 hurricane season was the most active since 1986, when six hurricanes made landfall in the U.S., there have been six years since 1900 with at least four hurricanes making landfall in the U.S. Furthermore, AIR’s analysis also revealed that 2004 would be one of eight years in the last 100 in which losses would exceed $20 billion, adjusting for current property densities and values.
“The 2004 hurricane season is above average, but not extraordinary from either a frequency or an aggregate loss perspective,” said Virkud. “Fortunately, tools are available that enable insurers to manage the risk to their portfolios from active seasons like this one.”
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