Hurricane Earl taking aim at east coast catastrophe bonds

by Artemis on September 1, 2010

The United States east coast is watching nervously as hurricane Earl approaches. Currently Earl is heading straight for the Carolinas coast, it is predicted to make a turn to the north-northeast prior to reaching the coast and then skirt the coastline as it heads towards Canada. That forecast track doesn’t leave much room for change. What if Earl doesn’t turn? What if it comes ashore as a Category 3 storm?

Hurricane Earl as seen from the International Space Station

Hurricane Earl as seen from the International Space Station

Scary questions indeed. The prospect of Earl making landfall anywhere on that eastern seaboard as a Category 3 hurricane with winds of 130mph+ would be devastating for both the local communities and the re/insurance industry. Catastrophe bonds would be tested to their limits and the impact on the market is very uncertain.

There are many catastrophe bonds in hurricane Earl’s path. For example Assurants Ibis Re II transaction has some east coast exposure, Residential Reinsurance 2010 Ltd. covers North Carolina and other east coast states, Johnston Re Ltd. issued by Munich Re on behalf of the North Carolina Joint Underwriting Association and the North Carolina Insurance Underwriting Association is solely an east coast deal, Travelers Longpoint Re Ltd. has exposure on the east as does Swiss Re’s Successor series of deals. That’s a lot of transaction value sitting in the path of what is currently a Category 4 hurricane. Nervous yet?

North Carolina has approximately $133b worth of coastal property covered by insurers, Nationwide, State Farm and the North Carolina Farm Bureau Insurance Group are the most exposed P&C insurers it’s said. Massachusetts which is also at risk boasts a whopping $770b+ in insured coastal property.

Here’s what the catastrophe risk modelling industry says about the prospects for Earl. Risk Management Solutions expects Earl to pass perilously close to the U.S. east coast on Friday 3rd September, at which time it is expected to still be a Category 3 storm. Instrat, a unit of Guy Carpenter, says that the storm could impact the east coast a little earlier on Thursday. Tropical Storm Risk put the chances of the U.S. experiencing hurricane force winds at 10% and tropical storm force winds at 60% during the next three days. AIR Worldwide say that a U.S. landfall for Earl remains a possibility while deviations in its track are still uncertain, they say that based on historical climatology, storms in the vicinity of Earl’s present location have posed a significant threat to the U.S.

If Earl sticks to its forecast path it could make landfall in Canada after skirting the eastern seaboard, the question there is whether it will have weakened sufficiently due to passing over colder waters to have little impact once it arrives. All eyes are on Earl this week.

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