Insurance Industry Takeaways from 2014 Tropical Season

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Sourc:e NOAA 2014 Atlantic Storm Tracks

Now that Arctic air has made its way across a good deal of the lower 48 states and snow had already covered 50% of the nation, the Atlantic hurricane season, and the threat of landfall along the U.S. coastline, is effectively over.
The season was forecast to be below the long-term average, and that is exactly what happened, for the most part. We will likely end up with a total of eight named storms, six of which became hurricanes. Two out of the six hurricanes made it to Category 3 or higher, with one, Gonzalo, reaching Category 4 – the strongest storm in the basin since the 2011 season. While we fell short of the average number of named storms (usually 10 per year), the number of hurricanes and major hurricanes is on par with what is expected in a typical season.

A better method of gauging seasonal activity, in my opinion, is the Accumulated Cyclone Energy index (“ACE”). By measuring the proportional energy of a named storm, it provides an accurate picture of how active a season might be and puts greater weight on the severity of the season as stronger storm accumulate a higher ACE than weaker storms. A typical season has an ACE value of around 104. This year the ACE score was 65.1, 62.5% of which was produced by the two major hurricanes of the season (Edouard and Gonzalo). This below-normal ACE activity follows the predictions made by most of the reliable agencies that produce seasonal hurricane forecasts. It should be noted, however, that the El Niño, which many of these forecasts believed would be the cause for a below-normal season, also failed to materialize. So, as discussed in previous postings, other factors that can lead to less storm activity, like African dust and cooler sea surface temperatures, actually did occur.

As I had previously blogged, Hurricane Arthur ended the absence of a hurricane stronger than a Category 1 hitting the U.S. coastline that had existed since 2008, and came close to ending the long-standing major hurricane drought, which has lasted 3,317 days and counting. However, many have already forgotten about Arthur due to its low impact. It is also worth noting that Florida alone has not had a hurricane of any intensity since October of 2005. This is simply an incredible statistic that, unfortunately, could negatively affect the Sunshine State if and when a hurricane hits in the future due to the fact that many may have become complacent regarding hurricane risk.

No other Atlantic hurricanes threatened the United States this season. However, there were indirect effects, such as high surf and rip currents from Bertha and Cristobal east of Cape Hatteras. Amazingly, at odds of 500-1, the small 20 square mile island of Bermuda was the unlikely recipient of two direct hits from named storms this season. Fay and Gonzalo both passed right over the island, causing power outages and some damage to buildings. Bermuda fared very well considering the impact from two systems less than a week apart, partially due to the strict building codes that have been followed and enforced, which is an important lesson for the insurance industry.

Another lesson from this event is that hurricane clustering is real, as was also the case during the 2004 hurricane season. At any time during a given season, prevailing wind currents that steer storms in a direction can get locked in place. This may cause storms to track repeatedly over or near the same area, triggering multiple storm losses in a given season. This storm clustering was also experienced in the East Pacific hurricane basin, which was exceptionally busy and produced a few hurricanes that impacted the Baja Peninsula and Mexico with either direct hits or leftover moisture. Three of these events, Norbert, Odile, and Polo, provide another great example of storm clustering. Storm clustering also occurred near the Hawaiian Islands and the south coast of Japan, which saw four typhoons this season.

Important insurance lessons also come from Hurricane Odile, a major hurricane that directly hit the resort city of Cabo San Lucas, Mexico. Although the overall wind swath and configuration of the Baja Peninsula seemed to minimize Odile’s impact, resulting in an industry event below $1B USD, there is a likelihood that the storm’s strength, with a preliminary pressure of 930 mb, will trigger the MultiCat 2012 cat bond, making it only the second cat bond to be triggered due to a tropical cyclone. This shows that alternative risk transfer products can work given the right insurance structure. The other insurance lesson learned from Odile is related to losses that go beyond basic building damage. There were numerous examples of looting in big box stores like Costco and Wal-Mart, as well as other small stores.

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Looting of Cabo San Lucas Wal-Mart after Hurricane Odile

The business interruption also was significant. I personally canceled a holiday in the beginning of October because of a lack of facilities, which adds up when thousands of others do the same, resulting in hundreds of millions of dollars in lost income to the tourism industry.

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Riu and Hyatt Hotel Damage from Hurricane Odile

While it’s too early to suggest what might occur during the 2015 Atlantic hurricane season, and although the current hurricane drought is exceptional, it is important to remember the long-term hurricane risk remains the same as it has been over the last century. BMS Analytics is here to help clients prepare for an active season by providing the newest tools and knowledge gained from past seasons, regardless of the overall low impact the past several seasons have had on the industry.