Could insurers get a reprieve from hurricane losses in 2023?
The 2022 hurricane season illustrated that even in a mild year, a single major storm can cause industry-shaking losses.
The current forecast for the 2023 hurricane season is for below-average activity.
However, the example of 2022 shows how little that might mean.
By this time in 2022, the season was looking as if it might be quiet. The forecasted higher-than-average season had produced few named storms. When the National Oceanic and Atmospheric Administration (NOAA) downgraded its forecast on August 4, there had been no tropical storm activity for over a month since Colin dissipated on July 2. There would be no further tropical storm activity for nearly another month until Danielle formed on September 1.
Despite this, 2022 would prove to be the third most expensive hurricane season on record. That’s because on Sept. 28, 2022, Hurricane Ian made landfall in the Tampa area.
As Elizabeth Harris, vice president of Modeling and Research at Ariel Re notes, “It only takes one major storm landfall in one of five or six places to make a very expensive season.”
Tampa is one of those locations, and Ian was a very major storm.
See also: The 10 most expensive U.S. hurricanes
History’s most destructive storms
Currently, NOAA lists Hurricane Ian as the third most expensive weather and climate disaster, responsible for more than $114 billion in estimated damage as well as 152 deaths.
Hurricane Katrina (2005) remains the most expensive storm on record, causing an estimated $192.5 billion in damage. Katrina also caused the second highest number of hurricane-related deaths on record (1,833). Katrina initially struck the Miami area but caused most of its damage as it hit the Louisiana and Mississippi coast. It caused storm surge in excess of 30 feet, leading to the failure of parts of the levee system in New Orleans. The resulting flooding and storm surge devastated the area, trapped many people, and caused an ongoing disaster. Many of the deaths from Katrina were recorded in the weeks after the storm.
Insured losses from Katrina were also high at about $58.5 billion in adjusted dollars. Although this accounts for less than a third of the total damage, it is a relatively high proportion, compared to some other major storms.
The second most expensive storm on record was Hurricane Harvey (2017), which caused an estimated $152.5 billion in damage. Harvey caused flooding that displaced more than 30,000 people and damaged or destroyed more than 200,000 homes and businesses. That’s due to the excessive rainfall from the storm: as much as 60 inches in some places. Harvey made landfall as a Category 4 storm in Aransas County, and the communities of Rockport and Port Aransas experienced high wind damage.
However, insured losses represent a fraction of the total cost of Hurricane Harvey. According to the Texas Department of Insurance, in 2019, insurers expected to pay a total of about $20 billion, which was a fraction of the total damage Harvey inflicted. This is because many homeowners in the impacted area failed to secure flood insurance.
Ian made landfall as a category 4 hurricane near Fort Myers Beach, brandishing sustained winds of 150 mph and storm surge of nearly 14 feet, the highest ever recorded in southwest Florida. The storm moved slowly northeast, dropping heavy rain and inflicting at least tropical storm force winds across most of the peninsula. Once offshore, the storm system reorganized into a category 1 hurricane, making landfall again near Caines, South Carolina.
Current estimates from Karen Clark & Co. say that privately insured losses from Ian may be close to $63 billion, more than half the total damages. This estimate gives Ian the biggest impact on the insurance industry of any major hurricane. The cost is based in part on the assumption that many Ian claims will be litigated.
Ian has already sent shockwaves through the industry. Higher-than-expected losses from the hurricane helped push United Property & Casualty Insurance Company into insolvency, leaving about 135,000 policy holders in limbo. United Property & Casualty follows six insurers placed into receivership in 2022, causing Florida to collect additional assessments to pay the up to $750 million it expects to pay out on behalf of UPC and other insolvent insurers.
What’s behind 2023 forecasts/?
Currently, there are several forecasts available for 2023. Colorado State University (CSU) predicted 13 named storms, of which six would be hurricanes, including two major hurricanes. This is slightly below the average (1991-2020) of 14.4 named storms, 7.2 hurricanes, and 3.2 major hurricanes. North Carolina State University (NCSU) predicted a more average season, with 11-15 named storms, six to eight hurricanes, and two to three major hurricanes. The NOAA released its 2023 forecast in late May.
The intensity of hurricane seasons has been generally growing. The current average only uses the last three decades to reflect this. However, even the 1990s had much lower hurricane activity than recent years. From 1990- 1999, the average number of tropical storms, hurricanes and major hurricanes were 11.0, 6.4, and 2.5, respectively. However, the averages from 2000-2019 were 15.3, 7.3, and 3.3.
In comparison to these figures, though, the 2020s have been much more active. The averages for the three seasons from 2020 to 2022 are 21.7, 9.7, and 4.3. Although the forecast for 2023 looks normal compared to the average, it is much less than this recent activity. Harris explains, “I am optimistic that we will have El Niño setting up and that this will lead to wind shear that breaks up tropical storms. It will fight with enormously warm sea temperatures to control the season’s activity.”
In April, the NOAA’s Climate Prediction Center (CPC) issued an El Niño Watch stating that there’s a 62% chance that the weather pattern will develop during May-July 2023. On May 11, they boosted those odds to 82%, with a 94% chance the weather pattern will develop by the end of the hurricane season. El Niño features warmer surface waters in the Pacific Ocean. This draws the Pacific jet stream south and strengthens it. The strong winds bring wet weather to the American South, and they can disrupt the cyclonic activity of storms forming in the Atlantic.
Better preparations
The 2022 hurricane season makes it clear: Even in a mild year, a single major storm can cause industry-shaking losses. In advance of the upcoming season, insurers can take steps to mitigate negative outcomes.
First, insurers can help develop better predictive tools. Although most predictions rely on sea surface temperature (SST) measurements, the true predictor of hurricane potential might lie below the surface. Harris notes, “you need a lot of hot water to generate a hurricane,” so a method that measures the volume of hot water present might give better predictions than simple surface temperature measurements. Her own work suggests that the depth of water at about 80° F or above might correlate better with seasonal hurricane counts than SST, especially in the early part of the season.
Second, insurers can better manage their risks by changing their products and better understanding the risks to individual properties. John Brown, Lead Underwriter for Property D & F at IQUW, says, “The most obvious mechanism to reduce insured loss is passing higher deductibles on to the client. A 5% deductible should mean no loss from a Category 1 or 2 windstorm.” Although unpopular, this can benefit clients: “Higher deductibles will increase the attention policy holders give to protection measures.”
Protection measures like hurricane shutters and metal seam roofs proved their value in Ian, dramatically reducing property losses. In the wake of Ian’s excessive storm surge, Brown also advises, “Underwriters can shape their portfolios to create a more predictable loss curve [by having] greater awareness of the amount of risk aggregating in surge zones.”
Finally, insurers need to put their houses in order by continuing to modernize and streamline their processes. Stan J. Clark, vice president of Sales for Tinubu North America, says, “A digital world allows for quick response after a natural disaster as well as better claims management, increased productivity across all departments, and less uncertainty around losses.”
Better claims management can help reduce litigation around claims after a major disaster. In addition, utilizing digital technologies decreases manual errors and gives the accurate information necessary to follow Brown’s bundling recommendations. The insurance industry is already making progress in these directions. Recent heavy hurricane seasons have lent a sense of urgency to these needs. If this year’s predictions for a mild season hold, it will also give welcome breathing room for making the necessary changes.
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