A quiet hurricane season ahead but one big hit could be fatal

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The UK Met Office has released it’s forecast for the 2009 Atlantic hurricane season. Interestingly they have come forth with the tamest prediction I have seen for many years. The Met Office have predicted only six named tropical storms in the 2009 season. That’s lower than any other recognised forecaster and is less than half the long term average. They don’t give any indication of how many could reach hurricane force though.

That’s where the problems for the insurance and reinsurance markets lie. No matter how low the forecasts are becoming for the season ahead, the reinsurance industry is in a position now where one really big storm (another Andrew or Katrina) could prove to be fatal for many of the companies with coastal or offshore exposure. EMB, a global actuarial consulting firm, has issued a press release on just this topic, stating that a number of factors now conspire to make property and casualty insurers extremely vulnerable to large storms.

The factors they highlight include the rising costs of damages caused by natural disasters, increases in population in areas prone to hurricane landfall, lower levels of capitalisation in the insurance industry, declines in invested assets and declines in investment income. Combine this with the less than perfect global financial climate which makes it much harder to raise additional capital quickly and you can see that no matter how tame the forecast the 2009 hurricane season poses as significant a threat as ever.

This also highlights the need for insurers and reinsurers to tap the capital markets for extra capital through the use of alternative instruments such as catastrophe bonds and derivatives. Preparing up front for disaster by ensuring you will have the capital necessary to pay your claims is far preferable to being forced to attempt to raise additional capital during times of financial uncertainty after a hurricane has hit.

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