Lloyd’s Comments on ‘Quiet’ 2006 Hurricane Season

Munich Re isn’t the only major insurance organization to express the industry’s collective sigh of relief as the year 2006 expires with relatively few major catastrophe losses (See related article above). Lloyd’s notes that “the hurricane season came to an end just a few weeks ago, and it was officially a quiet one.” But, it also cautioned that “Lloyd’s insurers aren’t relaxing just yet.”

According to Lloyd’s figures there “were only nine named storms, two major storms, and a $500 million loss overall. Compared to 2005, when Katrina alone cost the insurance industry more than $40 billion, it wasn’t a bad year.” The report on the Lloyd’s web site (www.lloyds.com) attributed the relatively benign season, as did Munich Re, to the “Saharan sand picked up by strong winds over Africa that was transported across the Atlantic, drying the traditionally moist atmosphere and halting storms before they had the chance to form.”

However, Lloyd’s stressed that its “insurers are not counting their blessings, or indeed lowering their rates in hurricane-affected lines of business, just yet. Predictions for the 2007 Atlantic hurricane season would seem to back up their caution. Forecasters from the Colorado State University predict that it will be ‘above average’, with 14 tropical storms, seven strengthening into hurricanes, and three becoming ‘intense’ with winds in excess of 111 miles per hour [178 kph].”

Lloyd’s Franchise Performance Director Rolf Tolle commented: “The losses from the past two record-breaking hurricane seasons were so huge that most insurers have yet to recoup them. We are therefore seeing a tale of two markets. Rates have stayed strong or increased in catastrophe exposed US business, while in other areas business continues to soften. This makes good cycle management and underwriting discipline more important than ever.

“This is no time for complacency, and underwriters must be prepared to walk away from business if necessary. At Lloyd’s, we will continue our work to ensure that the Lloyd’s market performs well, whatever the market conditions, and whatever catastrophes the world might throw at us. We cannot know for sure how 2007 will turn out, but on balance it is more likely that hurricane activity will be greater next year.”

Ewan Gilmour, Chief Executive of Lloyd’s insurer Chaucer, also urged caution. He noted that “One quiet season has not dimmed our view that we are in the middle of a long-term period of increased hurricane activity. We are delighted that the market appears to be of a similar view, and is showing little sign of knee-jerk rate reductions.”

Andrew Carrier, an underwriter at Kiln, added that while brokers and clients may feel that the benign year warrants an easing of rates, risk carriers need to rebuild their balance sheets. “We’re not out of the woods yet,” he stated. “It would only take one freak storm to seriously impact those profit levels. That said, the benign year coupled with high rates will make it a bumper return for some.”

Tim Fillingham, Chairman of the Natural Resource and Construction Division at Aon, pointed out that the relatively claims-free hurricane season and the current high rates are attracting new capital to the market, and as such will increase competition. “In Monte Carlo and Baden-Baden we were told that reinsurers are standing firm,” he indicated, but the “lack of claims is already attracting new capacity and that may well bring with it increased competition.”

Brit Insurance chief executive Dane Douetil warned that the end of the hurricane season does not mark the end of catastrophe risk for underwriters. While he noted that the “events of 2004 and 2005 put hurricanes, and in particular Gulf of Mexico hurricanes, into the spotlight,” other perils, such as “earthquakes and other catastrophes in other areas of the world,” continue to pose risks.

Douetil also added some sage advice, noting that “at Brit we have taken the decision to underwrite a broad spread of risks. To have a situation where your profit or loss depended on whether the wind blows in the Gulf of Mexico is not a way to do business. I do not think that the lack of hurricane activity will have any great impact on the underwriting decisions for next year.”

In conclusion Head of Exposure Management Paul Nunn stressed; “I do not think 2006 is necessarily indicative of any change in the long-term trends. 2004 and 2005 were very busy seasons with a large number of land falling events. The medium term forecast remains for above average hurricane seasons over the next five to 10 years, and it would be my expectation that next year will see a return to that type of season.”