As Matthew strikes Florida coast still difficult to forecast losses

The risk of a major insurance and reinsurance industry loss seems to have decreased with the last few forecast updates for hurricane Matthew, as the path looks more likely to remain offshore of the Florida and southeast U.S. coastline.

However, uncertainty does still remain high, as any shift further westward could bring hurricane Matthew much closer to landfall, amplifying the potential for economic and insured losses.

The latest update has hurricane Matthew as a slightly weakened Category 3 storm with 120mph sustained winds and higher gusts. Threats remain from both wind and storm surge for the Florida and U.S. coastline, but if Matthew follows the forecast path the size of the loss may be lower than had been anticipated yesterday.

Uncertainty is a word we’ve used a lot in recent days and hurricane Matthew’s path has been full of it, for more than a week. As soon as the storm formed there was uncertainty over its path. Then it was forecast to strike Jamaica, but shifted and missed and now the track towards Florida which saw the outlook worsen yesterday morning, has seen it improve in the latest forecast.

Look at the latest forecast path for hurricane Matthew from the National Hurricane Center (NHC) (here or the image above). At 08:00 BST (03:00 ET) it shows Matthew hugging the coast but remaining just offshore.

However, now look at the last 30 minute radar loop below, which comes from forecasting company WeatherBell. This shows you just how close the eye of hurricane Matthew is to Florida, which is why any deviation west could ramp of the industry loss dramatically.

Hurricane Matthew radar loop (last 30 minutes) - Source: WeatherBell

The eye of hurricane Matthew is currently just 50 or so miles offshore of Florida. The margin between a relatively minor financial loss and a major one is that slim.

This makes forecasting the storm hard both for meteorologists and risk modellers, while predictions of industry losses are prone to error margins that are particularly wide with hurricane Matthew.

Industry loss forecasts have ranged from as low as single digit billions of dollars, to $30 billion and everything in between. As it stands right now, it looks like the reinsurance, insurance-linked securities (ILS) and catastrophe bond markets may (stressing the word may, as it remains very uncertain) avoid the worst.

Insurance and reinsurance industry loss estimates published by news outlets yesterday should be treated as purely indicative of a potential scenario that could have emerged, based on the data and forecast track at the time.

In fact, most of these estimates are based on model runs, showing potential outcomes. When modelling companies make these industry loss estimates they tend to make many model runs and either average the results of all the scenarios or, as in the case of one loss estimate published yesterday, the figure in the press is based on a single modeled potential outcome.

Hurricane Matthew has been a very difficult storm for meteorologists and risk modellers to predict, even harder to forecast its potential impact and cost to the insurance and reinsurance industry.

This uncertainty remains high, as hurricane Matthew moves up along the Florida peninsular just offshore. Any wobble to the west could take the eye closer to land or even ashore, in northern Florida or the southeastern U.S. states and would dramatically raise the loss potential.

But if hurricane Matthew remains just offshore, as the latest forecast shows, the impact could be more manageable for Florida, the insurance, reinsurance and ILS industry. In fact there is even now a chance that Matthew’s impact is more of an insurance impact than reinsurance, if losses do turn out to be lighter than feared.

If however Matthew doesn’t remain as far offshore, or the eye comes very close to landfall and tracks along the coast, then all bets are off and the loss potential rises dramatically once again.

Forecasting losses before an event hits is extremely difficult. In the case of hurricane Matthew it’s been particularly so.

It remains to be said that at this time, as hurricane Matthew is making its closest pass to Florida over the coming few hours, we hope evacuation advice has been heeded and impacts to lives and livelihoods are lower than had been anticipated.

Also read our previous articles on hurricane Matthew:

– S&P: 15 cat bonds at risk from hurricane Matthew. We add a few more.

– Matthew could drag down re/insurer returns, but fail to increase rates: Peel Hunt.

– Hurricane Matthew has potential to trigger cat bonds & ILS: RMS.

– Barbados to see $975k from CCRIF parametric payout for Matthew.

– Hurricane Matthew hits Bahamas, to intensify – Florida outlook worsens.

– Matthew could hike aggregate cat bond attachment probabilities: RMS.

– Hurricane Matthew threat awakens live cat market.

– Cat bonds in holding pattern, Florida on watch for hurricane Matthew.

– Florida, U.S. east coast now face risk of hurricane Matthew landfall.