The hurricane season is not quite a month old, yet forecasters and meteorologists are sticking with their general hurricane prediction that the 2023-24 season will probably be a “normal” one, with a 25%-30% probability of above normal.
In terms of real numbers, the likelihood is there will be 12-17 named storms, four or five of which could become major category 3 or higher hurricanes.
Hurricane predictions bring little solace
But property and casualty insurers, plagued by years of intensifying storms, burgeoning insured losses, and rising reconstruction costs, don’t find a lot of solace in a hurricane prediction of a handful of major storms. It only takes one.
“We’ve seen the top 10 catastrophes that the industry has had to deal with – with the exception of Sept. 11 and the Northridge Earthquake – have all been hurricanes,” said Steve Clarke, vice president of government relations at Verisk, the New Jersey insurance rating bureau and risk analysis company. “And last year, Hurricane Ian leads the hit parade approaching $50 billion in insured losses. And globally, we’ve seen the numbers rise.”
It doesn’t matter to the industry if there’s dozens of named storms. All that matters is to have one major landfalling hurricane to cause the kind of disasters experienced over the past several years. And when it comes to making hurricane predictions, no one can really predict if a major catastrophe is coming.
“All you need is just one hurricane to actually make landfall and create the kind of havoc that we have been seeing for the last six or so years,” said Dr. Karthik Ramanathan vice president and principal engineer in the research and modeling group on the extreme event solutions team at Verisk. For example, “1992 was supposed to be an inactive year, and we got probably the most important hurricane in modern history – Hurricanes Andrew – that left major disruption in Florida communities but also to the entire insurance market.”
But it’s not just the increasing strength of storms that’s driving insurance losses. At a recent media briefing on the hurricane season, Verisk experts looked at how losses from natural catastrophes are on the rise and what more can be done to bring them down. Noting that every year since 2020 has seen global natural catastrophe insured losses hit $100 billion with last year marking $132 billion.
Building in high hazard areas cited
“I would say the first and most significant factor to the increasing losses is the rise in exposure and replacement costs,” said Ramanathan, “This continued desire to build in high hazard areas, combined with high level of inflation driving up repair costs is what’s mostly driving insured losses.”
For that reason, he said, it is important for companies to constantly reassess their exposure data quality, and also the soundness of the replacement cost estimates in their portfolios. Even a 5% undervaluation of those exposure values or the repair costs can lead to a 12-fold increase, or 60% increase, in expected capital losses over a decade, said Ramanathan.
“As a society, we love to live at the beach, we love to live up in the wild land urban interface, and we love to live in areas that are stunningly beautiful,” he said. “But these areas subject to some of the greatest perils.”
Nevertheless, it’s mostly the steady inflationary increases in building materials and labor that are most dynamically adding to insurance losses. Residential reconstruction costs, for example, in Florida and South Carolina, year over year from October of 2020 rose 13%. Rising costs of legal and regulatory issues are also contributing to the insured loss tallies.
The briefing panel agreed that building codes nationally need to be strengthened to help prevent total disaster losses.
“The quickest and most effective way to learn from a disaster is to make sure that you plug the holes in the building codes that can at least try and prevent the same kind of damage mechanisms from happening in the future,” Ramanathan said. “I would say it is the easiest thing for people to do, and I think the society should move in that direction.”
Unfortunately, he said, most advancements made to building codes occur in the aftermath of a disaster.
Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at email@example.com.
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