Hurricane Season Could Bring Rate Relief

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Property and casualty insurers craving respite from a long-running drop in prices eyed the start of the U.S. hurricane season on June 1 in the hope that summer windstorms will finally turn the market. The June 1 to Nov. 30 hurricane season could prove a tipping point for an industry that has been forced by stiff competition and excess capacity to cut or hold prices since 2008.

Insurers and reinsurers absorbed some $50 billion in catastrophe claims in the first quarter, more than they paid out in all of 2010, after an unprecedented run of disasters including the Japanese earthquake, according to data compiled by credit rating agency A.M. Best and reinsurer Swiss Re.

The industry has taken another multi-billion dollar hit from U.S. tornadoes in April and May, and analysts say an additional big hurricane loss could be the final straw that forces it to hike prices.

The pricing impact of the Japanese quake and other disasters this year has so far been confined to directly-affected markets such as catastrophe reinsurance, where the cost of cover is up by between 10 and 15 percent, analysts and brokers say.

But the industry’s weakened financial position means any big U.S. windstorm loss this summer is more likely to trigger a broader rise in prices than in previous years. While analysts estimated a year ago that hurricane claims would need to top $40 billion to shift prices, the threshold this year could be less than half that.

Storm Warning

Some analysts, however, reckon a loss of $50 billion or more would be needed to turn the market convincingly, as most insurers and reinsurers are still well capitalized, and many can raise fresh funds if necessary.

Even a $20 billion hurricane would be a standout event, ranking as the third-most destructive storm on record, according to Swiss Re. But with forecasters predicting a more active than usual hurricane season, it would be unwise to rule out a market-moving loss this summer, analysts say.

Forecaster Tropical Storm Risk said it expects four major hurricanes this year, compared with a long-term average of three, with a 59 percent chance of an above-average number of storms hitting the U.S.

Hurricane losses in 2009 and 2010 were negligible, but insurers’ luck is unlikely to hold for a third year. There has not been an unbroken run of three hurricane-free summers in the U.S. since the 1860s, according to Weather Services International.

Developments elsewhere in the industry mean that this year, even a moderate hurricane could have a bigger impact than usual on pricing. An update to risk modeling firm RMS’s hurricane model has led to sharply higher estimated losses, giving insurers an additional strong incentive to raise prices.

“Long-term you’re going to have pricing going up, maybe as early as the half year renewals. Natural disasters or any other capital-depletion event would be good for the industry,” said analyst Brett Horn at Morning Star.