The official start of the Atlantic hurricane season begins today and property/casualty insurers and insurance investors would surely benefit if the consensus forecast for a lower number of named storms in 2012 holds true. Catastrophe losses have been the greatest source of recent underwriting volatility, and a tamer catastrophe season would promote a rebound in earnings and a return to stronger capital formation following a modest decline in industry capital in 2011.
Over the past five to 10 years, a cyclical warming of sea surface temperatures in the Atlantic Basin has served as a barometer of hurricane frequency.
Forecasts for 2012 call for a below-average hurricane season as a function of anomalous cooling of those sea surface temperatures recorded over the past several months. Based on research provided by Colorado State University, the total seasonal probability of storms making landfall is a function of varying climate conditions. Forecasters at CSU believe there is below-average probability of a major hurricane making landfall in the U.S. or Caribbean in 2012. In addition, the observance of El Nino conditions will help to dictate hurricane activity level.
While the forecast for lower than average storms is notable, we also feel insurers that write catastrophe exposed business need to remain prepared for sudden and unpredictable events. To be sure, large loss events are inevitable, even if the likelihood is less so this year versus previous years, and the intensity and location of storms that do make landfall remains the most critical variables.
A compilation of tables that provide direct market share statistics of companies property insurance premiums by state contained in our special report entitled "Hurricane Season 2012" (available at www.fitchratings.com) provides a quick, simplified method for estimating insurers' potential for catastrophe losses for a given event. For example, in the event of a hurricane landfall directly hitting a coastal state such as Louisiana, policyholders and investors could assess which companies have potential exposure to a large loss in that state based on direct premium market share.
In response to the large catastrophe losses of 2011 and recognition of increased modeled loss estimates from catastrophe model updates, property insurance and reinsurance pricing has trended upward. We do not believe that these rate increases are a reflection of reduced market underwriting capacity. In fact, there has been an uptick in 2012 of catastrophe bond issuance and creation of sidecars and other reinsurance facilities. We note that growth in securitizations, side cars, and other alternative reinsurance products help supplant markets property reinsurance needs, but further expansions of capital provided to cover catastrophe risk will ultimately dampen pricing momentum.
Additional information is available on www.fitchratings.com.