With the official start of the 2020 Atlantic Hurricane season fast approaching, analysts at Kroll Bond Rating Agency (KBRA) have warned that some regional insurers could face additional headwinds as early forecasts point to a continuation of above-average activity.
Despite the 2020 season officially commencing on June 1st, the formation of Tropical storm Arthur in May ensured that for the sixth consecutive year, a named storm has formed prior to the official start of the Atlantic Hurricane season.
As the season nears, hurricane forecasters have released their predictions for hurricane activity in 2020, and it’s become clear that early season forecasts suggest that activity will be well above historical averages.
As highlighted by KBRA, the long-term average (1981 – 2010) Atlantic hurricane season has 12.1 named storms, 6.4 hurricanes, and 2.7 major (Cat 3, 4, or 5) hurricanes. However, for the past four years, there’s actually been an average of 16.3 named storms, 7.8 hurricanes, and 3.8 major hurricanes. In addition, KBRA notes that since 2016, there have been four consecutive years with a Category 5 hurricane, with two in both 2017 and 2019.
Specifically, KBRA discusses forecasts from the Colorado State University Tropical Meteorology Project team, predicting six named storms, eight hurricanes, and four major hurricanes in 2020. KBRA notes that this level of hurricane activity would see a continuation of above-average Atlantic hurricane activity since 2016, while forecasts from both AccuWeather and the Weather Channel also suggest significantly above-average activity.
“Kroll Bond Rating Agency (KBRA) believes that some regional insurers could face additional headwinds if early season forecasts come to fruition. In addition, any hurricane landfall could further push reinsurance pricing to less manageable levels for some insurance companies,” warns KBRA.
Of course, for property market insurers and reinsurers hurricane landfalls pose the greatest threat and of are of the most concern. So, it might not be the most welcomed news that landfall probabilities for 2020 are also far higher than historical averages, according to KBRA.
Over the last century, there has been a 52% probability for at least one major hurricane landfall across the entire continental U.S. coastline. This probability declines to 31% for the U.S. east coast including Florida peninsula, and to 30% for the Gulf coast from Florida panhandle westward to Brownsville.
In contrast, analysis from the team at the Colorado State University forecasts a 69%, 45%, and 44% probability of at least one major hurricane landfall in these regions, respectively.
Re/insurers are well aware that it only takes one major landfall to alter market dynamics, and with the marketplace still grappling with the challenges of the ongoing COVID-19 pandemic, the potential for heightened hurricane activity in the Atlantic adds to the uncertainty.
Driven by catastrophe loss activity in previous years and subsequent loss creep, reinsurance rates have continued to rise so far in 2020. While COVID-19 is clearly having an impact on the insurance and reinsurance industry, it’s believed that the structural forces that were in play prior to the pandemic remain and will serve to drive up rates through the remainder of 2020 and into 2021.
What’s more, another major hurricane landfall in 2020, combined with the COVID-19 impacts, would most likely serve as a catalyst for greater reinsurance rate increases at the January 1st, 2021 renewals and beyond.
“An ongoing concern is that companies did not purchase adequate reinsurance coverage, which could result in not having enough coverage to pay all claims. In addition, with rising pricing, more companies may not be able to afford the same coverage next year,” says KBRA.
Interestingly, catastrophe risk modeller RMS said recently that a hurricane striking the U.S. while pandemic restrictions remain in place could inflate the ultimate insurance and reinsurance industry loss by 20%.
Commentary from company executives during Q1 2020 earnings season has highlighted rising reinsurance rates, but for the most part, primary players have said that these are both manageable and necessary. As insurers respond to the COVID-19 pandemic and look to better protect their balance sheets at times of stress, demand for reinsurance could surge on the back of this, especially in the catastrophe arena.
“In addition to dampened balance sheets, COVID-19’s loss impact will not be known for months or years. However, with loss reserves escalating, regardless of if and when a hurricane landfall occurs, the U.S. property and casualty insurance industry is already facing its first catastrophe of 2020.
“As sea levels continue to rise, storm surge flooding is expanding further inland. And as coastal area population density grows, storm surge flooding is causing greater losses. Regardless of what the 2020 Atlantic hurricane season brings, KBRA believes that carriers must assess the long-term impact of climate change on property portfolios as it relates to increases in the severity and frequency of wildfires, stalling hurricanes, and coastal and non-coastal flooding,” says KBRA.