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Insurers well-positioned to withstand hurricane season

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U.S. insurers should have the capacity to handle the average activity predicted for this year's Atlantic hurricane season.

Capitalization is high following several years of low catastrophe losses. But a single event, such as 1992's Hurricane Andrew, could have a significant negative impact on insurers, particularly during a time of low rates.

Several forecasters are calling for nearly average hurricane activity this year.

“We continue to anticipate that the 2016 Atlantic basin hurricane season will have approximately average activity,” said the Tropical Meteorology Project at Colorado State University in Fort Collins, Colorado, in an analysis released June 1, opening day of the Atlantic hurricane season. “The current weakening El Niño is likely to transition to weak La Niña conditions by the peak of the Atlantic hurricane season.”

The forecast calls for 14 named storms this hurricane season — including tropical cyclones Alex and Bonnie that occurred before the official start of the season. That compares with a median 12 named storms in the period 1981-2010. The Tropical Meteorology Project projects that six hurricanes will develop during the season, down slightly from the 6.5 median during 1981-2010. Two will grow into “major” hurricanes packing sustained winds in excess of 111 mph, according to the Colorado State researchers.

Likewise, the federal National Oceanic and Atmospheric Administration in Silver Spring, Maryland, said that it expects a “near-normal” Atlantic hurricane season. NOAA cautioned, however, that “forecast uncertainty in the climate signals that influence the formation of Atlantic storms make predicting this season particularly difficult.”

NOAA predicted a 70% likelihood of 10 to 16 named storms, of which as many as eight could grow to hurricane strength — those with sustained winds of 75 mph — with as many as four of those becoming major hurricanes.

“While a near-normal season is most likely with a 45% chance, there is also a 30% chance of an above-normal season and a 25% chance of a below-normal season,” said NOAA in an analysis released in late May. It noted that its outlook included Hurricane Alex, a pre-season storm that formed over the far eastern Atlantic in January.

Aon Benfield Group Ltd., for one, has forecast the Atlantic hurricane season could be the most active in four years, while the eastern Pacific basin could see a near-normal season.

In its May forecast, Tropical Storm Risk, part of Aon Benfield Research's academic and industry collaboration, called for 17 named storms, nine hurricanes and four major hurricanes between June and November.

This projected activity is expected to be 30% higher than the long-range norm computed since 1950, and 40% above the 2006-2015 norm, according to the report. There is an 80% chance that this will be the most active Atlantic hurricane season since 2012, the forecasters said.

Despite the uncertainty, insurers should be in good shape. “Their capitalization continues to grow, and they're managing their exposures very well, whether through reduction in risk and through reinsurance,” said Brian Schneider, a financial analyst at Fitch Ratings Inc. in Chicago, which issued a special report on this year's U.S. hurricane season last week.

The industry is in a good position to withstand a season of average hurricane activity, Mr. Schneider said.

“Given the current substantial level of industry capitalization, it would likely take a record individual storm loss or a series of significant losses equal to 15% or more of industry aggregate surplus” to switch the property/casualty sector outlook to negative based on catastrophes, said Fitch in its report, “U.S. Hurricane Season 2016: A Desk Reference for Insurance Investors.”

Mr. Schneider said the fact that “we haven't had a major storm in a while” creates a risk that policyholders will be become more complacent about the potential threat they face. “People haven't been tested in a while.”

The conflicting signals could have a considerable effect on the season, said Tom Sabbatelli, product manager with the model product management team at catastrophe modeler Risk Management Solutions in London.

“This season's activity will be highly sensitive to the exact timing of expected transitions in the El Niño-Southern Oscillation and Atlantic sea surface temperatures,” he said in an analysis released June 1.

Mr. Sabbatelli added that increased activity does not necessarily mean an increased number of landfalls.

“But you also had Andrew,” he said, of the Category 5 storm that produced an estimated $15 billion in insured losses in 1992. “It only takes one large event” to significantly affect insurers, he said.

In addition, noted Mr. Sabbatelli, insurers have been saying that property rates cannot go much lower.