Reinsurers, Rating Agencies, Modelling Firms issue warnings for upcoming hurricane season
Munich Re is warning that this year’s hurricane season could be ‘exceptionally active’ in a new outlook just posted on its website.
The reinsurance giant said that the main phase of the hurricane season, which is due to start in coming weeks, is likely to be characterised by climatic conditions favourable for storm formation over the North Atlantic. The last such string of years, said Munich Re, with these La Niña conditions was in 1998-2000.
As a result, the company said that it expects as many as 18 named cyclones in the tropical North Atlantic during the 2022 season. Of those 18, roughly eight could be hurricanes, including possibly four major hurricanes with wind speeds exceeding 110 mph (177 km/h).
Anja Rädler, a meteorologist and climate researcher at Munich Re, said: “Three consecutive years of ENSO conditions, which favour tropical cyclones, is truly unusual. Needless to say, for insurers it is tremendously important to determine whether this was just a fluke or may become more common in future. In any case, whether and, if so, how climate change affects the ENSO phases like El Niño and La Niña is the subject of intensive research.”
Munich Re pointed to climate change as a factor in its outlooks for hurricanes.
It said that while climate change does not tend to cause more tropical cyclones, it does cause more frequent severe hurricanes with destructive winds and storms with extremes of rainfall.
In 2021, there were 21 tropical cyclones in the North Atlantic, including seven hurricanes and four major hurricanes rated category 3 to 5. The costliest tropical cyclone of the year was Hurricane Ida, which produced overall losses of $65bn, of which $36bn was insured. The previous year included a record-breaking hurricane season, with no less than 30 storms.
The ENSO conditions are also likely to influence the typhoon season in the Northwest Pacific, albeit with roughly the opposite effect. Consequently, Munich Re anticipates a level of storm activity that is slightly below the long-term average in the Northwest Pacific. From 1965 to 2021, the region was visited by an average of 25.9 tropical cyclones per year, including 16.2 typhoons and 8.8 especially powerful typhoons of categories 3 to 5.
Although Japan is normally home to the highest typhoon-related losses, the firm said it saw a trend towards increasing insured losses in China and India.
Torsten Jeworrek, member of the board of management and CEO of reinsurance at the firm, said: “Given the enormous potential losses, it is essential that we have a precise grasp of hurricane-related risks. Accordingly, our staff includes a range of meteorologists and climate researchers. In this way, we can support our society and economy with insurance covers, even when there are changes in risk, for instance due to climate change.”
A hurricane that hits land could present additional challenges to a P&C sector beset by inflation increases and the potential for stagflation, says Fitch in a new note.
The firm said that natural catastrophe losses, particularly severe weather-related events, represent a major source of loss volatility, but capital levels of large (re)insurers should absorb near-term large insured losses from an individual hurricane or other catastrophic event. This comes against a backdrop in which the firm said the North Atlantic Basin will experience above-average hurricane frequency this year.
However, the firm said that insurer capital within the US P&C sector was still sufficient to withstand hurricane season. It said that industry policyholders’ surplus (PHS) increased by 40% over the last three years and now exceeds $1tn.
Fitch also said that Florida homeowners’ insurance specialists reported continued performance deterioration and a decline in capitalization levels despite no hurricanes hitting the state since 2018.
It added: “Many insurers in the state have experienced severe pressure regarding underwriting performance and capitalization levels, leading to the liquidation of a number of carriers. As a result, policyholders have found it increasingly difficult to find private market homeowners’ insurance coverage.”
Fitch also said that the June/July reinsurance renewals would be challenging for Florida primary underwriters with reduced reinsurance supply. This, said the agency, would reflect recent adverse loss experience. Rate increases were also expected to shift into double figures, with many reinsurers limiting capacity in Florida to curtail volatility.
It concluded: “Fitch currently has a neutral sector outlook on the US P/C insurance industry and the global reinsurance sector. Capital strength of (re)insurers should allow them to absorb near-term large insured losses from an individual hurricane or other catastrophic event, but a confluence of large events in a short period may lead to capital reductions and ratings pressures.”
With the 2022 North Atlantic hurricane season officially beginning on June 1st, analysts at RMS have warned the insurance and reinsurance industry of the potential for another above-average year for hurricane activity.
Several forecasting agencies have already forecast above normal activity for this year’s season, which runs for six months through to November 30th.
The US National Oceanic and Atmospheric Administration (NOAA) has forecast 14-21 named storms, of which 6-10 are expected to become hurricanes, and 3-6 of those are forecast to become major hurricanes (Category 3 or stronger).
On average, the North Atlantic sees 14 named storms, 7 hurricanes, and 3 major hurricanes.
These forecasts reflect the state of the two main oceanic and climate factors that historically dictate hurricane activity in the basin: the El Niño-Southern Oscillation (ENSO) and sea surface temperatures in the equatorial North Atlantic.
RMS notes that ENSO is forecast to remain in a La Niña phase through the summer.
Such conditions reduce the vertical wind shear across the North Atlantic, which typically enhances hurricane activity by providing a more favorable atmosphere for storm development and intensification.
Moreover, sea surface temperatures in the tropical North Atlantic are expected to remain above average throughout the summer, RMS adds, which also typically increases hurricane activity in the basin.
If the current forecasts verify, 2022 would be a record seventh consecutive above normal season.
However, RMS also noted that these forecasts only provide a guide to the anticipated level of activity across the North Atlantic, and do not provide an indication of the expected number of storms to threaten land or make landfall.
Although long-term statistics indicate that the probability of a hurricane making landfall in the US increases during more active seasons, there are notable exceptions.
“2010 was a particularly active year but only one tropical storm made landfall in the US,” analysts observed. “Conversely, Hurricane Andrew, one of the most intense and costliest hurricanes in U.S. history, was one of only seven storms to develop during the quiet 1992 season. It only takes one landfalling storm to make the season a memorable one.”
Tropical Storm Risk (TSR) has maintained a forecast of above normal activity for the North Atlantic hurricane season activity, with a particular threat of enhanced activity late into the season.
Analysts predict there will be 18 named storms, 8 hurricanes and 4 major hurricanes this season, which would put it above average but at a lower level than the previous two years.
But TSR points out that some Niño forecasts predict a slight strengthening of the current La Niña conditions through the autumn, which if verified, would increase the chance of enhanced late season activity.
“TSR’s latest update is consistent with the initial prediction of an active storm season,” said Nick Wood, Commercial Director of EuroTempest, which took over TSR from University College of London in April this year.
“We consider that the more likely scenario is for tropical North Atlantic and Caribbean Sea waters to be slightly warmer than normal by August-September 2022, and for weak La Niña conditions to persist through late summer and into the autumn,” Wood explained.
“This is likely to contribute to reduced trade winds over the tropical North Atlantic and Caribbean Sea. Both these environmental factors are expected to enhance North Atlantic hurricane activity in 2022.”
Source: Reinsurance News, Munich Re warns of 'exceptionally active' hurricane season - Reinsurance News, Hurricanes could challenge P&C industry this year, says Fitch - Reinsurance News, RMS warns of above-average hurricane activity as season begins - Reinsurance News, TSR forecasts higher late season hurricane activity - Reinsurance News