P/C industry set to weather 2013 hurricane season

In light of all the discussion regarding the recent Oklahoma tornado, it is important to note that the US property/casualty (P/C) industry experienced a sharp decline in catastrophe-related losses through the first three months of 2013. 

Respondents to a survey conducted by AM Best indicated that their US pretax, accident-year catastrophe-related losses, net of reinsurance and reinstatement premiums, totaled $2.0 billion during the first three months of 2013, down from $3.2 billion during the same period of 2012.

The personal lines segment suffered the largest portion of first-quarter 2013 cat losses.

With no major non-US events occurring during the quarter, cat losses in the reinsurance segment were negligible. 

The homeowners multiperil line of business saw the greatest benefit from the quiet cat quarter, as survey respondents reported a 7.6 point improvement in the homeowners loss ratio.

After a relatively benign first quarter of 2013, the recent Moore, Okla. tornado and increased weather-related losses in May will impact second-quarter results. 

In addition, forecasters are predicting a well above average 2013 hurricane season.

Until Superstorm Sandy hit the East Coast in late October 2012, the US P/C industry was on track to record a significant improvement in financial results following 2011’s substantial underwriting loss. 

The latest predictions for Atlantic Basin activity show that 2013 could follow a similar path (see table), with one high-severity storm shaping the results for the entire year.

During 2012, there were 19 named storms, 10 hurricanes and two major hurricanes (Category 3 or higher). 

The general consensus for 2013 seems to be fewer named storms than in 2012 and fewer total hurricanes, but an increased number of higher intensity hurricanes. 

In 2012, only 20 per cent of hurricanes were Category 3 or higher, whereas 2013 predictions are for 40 per cent to 50 per cent of hurricanes to be Category 3 or higher.

Colorado State University (CSU) also predicted a 72 per cent chance that at least one major hurricane makes landfall on the US coastline. 

Additionally, the CSU forecasters found a 48 per cent probability for a major hurricane landfall on the East Coast and a 47 per cent chance of a major hurricane slipping under the Florida peninsula to strike one of the Gulf Coast states, which includes the west coast of Florida. These probabilities are well above historical averages over the past century.

Superstorm Sandy tested the effectiveness of risk management efforts. 

Despite the storm’s impact, the industry’s balance sheet has held up well, with policyholders’ surplus increasing 6.3 per cent to a record $598.4 billion as of December 31, 2012. 

Superstorm Sandy

In addition, many P/C writers are beginning to use data collected from Sandy to revise underwriting practices and implement numerous risk management initiatives to address adjustments to catastrophe models. 

Although Sandy’s estimated insured damage of $25 billion hit commercial and auto lines the hardest, a significant number of downed trees caused homeowners multiperil losses to spike in directly impacted states. 

Still, the overall homeowners business proved quite resilient.

With 2013 forecasts calling for up to three times as many major hurricanes, there is the potential for increased losses. 

Regardless of the predictions for catastrophic activity and the associated uncertainty, the P/C industry continues to engage actively in risk management, which has been evident over the past several years.

Despite the volatile catastrophic activity witnessed across the United States, there have been a limited number of rating actions related to single, severe catastrophes. 

Conversely, the aggregation of losses from multiple events has had more of a rating impact.

Carriers continue to take action on underwriting, pricing and exposure throughout the country to address not only severity but frequency. 

As a result, AM Best believes the industry as a whole is well prepared to address catastrophic activity. 

However, as is often the case, implementation of risk mitigation varies and can differ considerably based on each company’s unique characteristics.