Insurance Rates Unlikely to Rise a Lot Even If Hurricane Season is Above Normal: Fitch

By | June 2, 2016

Hurricane forecasters may be split on whether the 2016 Atlantic hurricane season will be above average or normal, but even a higher level of storms might not boost property insurance prices to levels seen in prior market cycles, according to Fitch Ratings.

“A large catastrophic hurricane in 2016 would likely promote a shift towards positive pricing movement following years of property insurance pricing declines in the U.S. property/casualty market,” Fitch said this week.

“However, abundant available underwriting capacity for primary and reinsurance property coverage is also likely to diminish the magnitude of any upward price movement compared with past market cycles,” the rating agency added, referencing its 2016 annual hurricane season reference report, “U.S. Hurricane Season 2016 (A Desk Reference for Insurance Investors).”

Not everyone sees the upcoming season shaping up to be an average one. A number of forecasters have warned it could be busier than normal.

On May 27, the National Oceanic and Atmospheric Administration and researchers at Tropical Storm Risk separately published forecasts, with TSR raising its numbers significantly from an earlier forecast in April.

NOAA predicted a 70 percent likelihood of 10 to 16 named storms (winds of 39 mph or higher), of which 4 to 8 could become hurricanes (winds of 74 mph or higher), including 1 to 4 major hurricanes (Category 3, 4 or 5; winds of 111 mph or higher). These expected ranges are centered near the 1981-2010 seasonal averages of 12 named storms, 6 hurricanes, and 3 major hurricanes, NOAA said.

TSR predicted 17 named storms, 9 hurricanes and 4 major hurricanes—up from an April 5 forecast of 12 named storms, 6 hurricanes and 2 major ones. The forecast anticipates 2016 hurricane activity that is 30 percent above the 1950-2015 long-term norm and about 40 percent above the recent 2006-2015 10-year norm, TSR said.

“Sizeable uncertainties remain but there is an 80 percent likelihood that 2016 will be the most active hurricane season since 2012,” TSR said. TSR said that among the sources of uncertainty surrounding its forecast of an active hurricane season is the strength of a predicted La Niña, which was also cited by NOAA.

MDA Weather Services, an affiliate of Canadian information technology firm MacDonald, Dettwiler and Associates, forecast there would be more storms this year than normal, with 14 named storms and seven hurricanes, three of which will be major hurricanes.

Also, meteorologists at AccuWeather, a private weather forecaster, have predicted more storms than normal this year, with an expected 14 named storms and eight hurricanes, four of which will be major hurricanes. AccuWeather also said three of the named storms would likely make landfall in the United States.

Colorado Normal

But yesterday saw a vote for a season with closer to normal activity. According to Colorado State University’s June 1 forecast, the Atlantic should produce 12 storms, which is normal, during the six-month hurricane season, while the U.S. coastline has a below-average chance of being struck by a major system. CSU’s Phil Klotzbach said that of the 12 storms, five could become hurricanes and two could strengthen into major Category 3 or stronger. Overall, CSU forecasters believe there is a 50 percent chance that the U.S. will be hit by a major hurricane.

But even a jolt in the aggregate counts won’t lift insurance prices to the levels of past hard markets. If storm levels actually line up with higher forecasts, the weather activity won’t prompt a change in Fitch’s sector outlook to negative, the rating agency said, noting that such a move in the rating agency outlook would likely only come if storm losses equal to 15 percent or more of industry aggregate surplus.

Still, the potential ratings impact of a major catastrophe or series of events on individual insurers and reinsurers will vary by company exposure in loss-affected areas, Fitch said.

“Meteorologists predict an average hurricane season and insurers and reinsurers in 18 major U.S. coastal states are well positioned to manage losses; however, insurers could face torrential blowback if there is a record breaking storm or battery of storms in succession,” said Christopher Grimes, director, Fitch Ratings.

Tom Sabbatelli, product manager at modeling firm RMS, thinks it’s no time for the industry to be complacent.

“While increased activity does not necessarily translate into an increase in the number of U.S. landfalls, just a single storm can cause significant loss to the industry. Re/insurers will need to monitor hurricane activity closely and be prepared for a range of possible outcomes,” Sabbatelli said.

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