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Quiet Atlantic hurricane season puts downward pressure on reinsurance rates

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The 2013 Atlantic hurricane season ended last week like it began in June — quietly — and went down as the calmest U.S. season for major hurricanes in nearly 20 years.

The season produced only two hurricanes and minimal insured losses. One tropical storm made landfall on the East Coast.

The lack of hurricanes making U.S. landfall took meteorological and insurance experts by surprise because it was supposed to be an above-average season. Instead, the below-average season was an extreme statistical and weather anomaly, as well as a relief for insurers after a catastrophic 2012.

Reinsurers are bracing for downward pressure on rates at Jan. 1, 2014, renewals, in part because of the weak season that came and went with no major hurricanes.

Although 2013 did produce 13 named storms, in line with the lower end of the forecast range from the Climate Prediction Center of the National Oceanic and Atmospheric Administration, the two hurricanes that did develop were both weak storms. There were no major hurricanes of Category 3 or higher.

While the number of named storms was actually one more than the annual average of 12, the season was below normal in the severity and longevity of storms, said Gerry Bell, lead seasonal forecaster at NOAA's Climate Prediction Center.

This was the third below-normal season since 1995, when the Atlantic region entered an “active” era — a decades-long period characterized by climate conditions favorable to forming hurricanes.

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“It's quite rare in an active era,” said Mr. Bell, adding that 1994 was the last time no major hurricanes hit the U.S. for an entire season.

The lack of hurricanes was “almost shocking,” said Mike Halpert, acting director at the Climate Prediction Center. “An active era without (major) hurricanes is a very unusual occurrence.”

With the two hurricanes this season both rated as Category 1 storms, this year became the first since 1986 to produce no Category 2 hurricanes, said Phil Klotzbach, a research scientist in the department of atmospheric science at Colorado State University.

Several experts have suggested that cooler, drier air from the midlevel of the atmosphere —10,000 to 25,000 feet — may have curtailed the environment that is needed to form hurricanes.

“Hurricanes need a moist, unstable environment, and we just didn't see this in the Atlantic development region in 2013,” said James Waller, Philadelphia-based research meteorologist with Guy Carpenter & Co. L.L.C.

“This year, we think we have a primary culprit. Abnormally dry air in a sinking motion in the middle levels of the atmosphere tends to choke out thunderstorms so they can't merge and become hurricanes,” Mr. Klotzbach said.

Wind patterns also could have helped suppress hurricane activity. “Wind shear and wind from Africa” can influence the formation of storms, Mr. Bell said.

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“If something happens to the monsoons in Africa — that's where many depressions begin — it can cause fewer hurricanes,'' said Jenni Evans, professor of meteorology at Penn State University. “The monsoon has not been as strong as it used to be in terms of amount of rain.”

While the cause of the mild 2013 hurricane season continues to provide fodder for debate, the insurance sector is assessing it from a loss perspective.

“Insured losses from hurricanes are not driven by frequency; they are driven by severity,” said Karen Clark, president and CEO of Karen Clark & Co. in Boston. She pioneered catastrophe modeling in 1987 and is developing the next generation of catastrophe management tools.

With no severe hurricanes, insurers got a big break this season, which officially ended Sunday, after paying billions in claims in the previous two years from Sandy and Irene, respectively.

Dave Finnis, property practice leader at Willis North America Inc., said he doubts insured losses from the 2013 hurricane season would exceed $200 million.

This season alone should not be viewed as a reason to allow reinsurance rates to slip too far, industry experts say.

“Absent any other reasons, a slow storm season in not an excuse for reinsurers to lower rates and have those rates fall off the table,” said Phil Campbell, Edina. Minn.-based executive vice president at BMS Intermediaries Inc. “One or two low hurricane seasons does not a trend make.”

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Indeed, the long-term average of catastrophic Atlantic hurricane losses comes to about $12 billion annually, but that is driven by years in which there was an Andrew or Katrina racking up $30 billion or more in insured losses and includes calm years such as this year, Ms. Clark said.

“Eighty percent of long-term annual losses come from 20% of storms,” Ms. Clark said.

The lack of a significant loss event this year has allowed talk of abundant alternative reinsurance capital to dominate negotiations for Jan. 1, 2014, reinsurance contract renewals.

“That conversation overshadows everything, but that is partly because there has been no mega event to focus attention elsewhere,” said Lara Mowery, Minneapolis-based global head of property specialty for Guy Carpenter. “Any time you have excess capacity, it impacts transactional economics, especially in the absence of additional loss to highlight that exposure.”

Abundant capital flowing into reinsurance markets from private investors is having a softening effect on reinsurance renewals, especially absent a big weather event.

Looking ahead to 2014, NOAA forecaster Mr. Bell said: “Every indication is that we remain in a high-activity era.”