July 15th, 2009

Beware the Benign Hurricane Forecast

Posted at 1:01 AM ET

harnick_michelle_photoMichelle Harnick, Managing Director

The 2009 hurricane season is expected to be moderate, but that’s no reason to let your defenses down. In setting your expectations for the coming months, it pays to consider severity as well as frequency. Most major forecasts address the number of storms anticipated — but they don’t account for severity. A mild Atlantic hurricane season could still trigger outsized insured losses, and an exposed (re)insurer could feel the shocks on its bottom line, return on equity (ROE) ratio, and even market capitalization.

The notion of preparedness is part of the fabric of the risk management business, but there are times when a storm is bearing down on a high accumulation of property risks and action is needed. A livecat purchase can reduce losses, but without an accompanying analysis, this cover is at best suboptimal and at worst a wasted roll of the dice.

GC LiveCat brings discipline to the last-minute reinsurance purchases that are sometimes necessary. With 10-day forecasts — double the warning time afforded by the National Hurricane Center (NHC), it equips carriers to take early and informed measures to preserve capital, stabilize earnings, and protect shareholder value.

Manage to Severity

Whether a storm is extremely strong or simply headed for a densely populated, highly insured length of coastline, insured losses may become higher than anticipated. An accurate prediction of the number of hurricanes that will form in a given year offers little remedy, as a below-average storm season could still wreak havoc on (re)insurer balance sheets, rendering reliable forecasts of storm volume almost most. This is effectively what happened in September 2008.

Hurricane Ike made landfall only as a Category 2 hurricane, but it struck Galveston, Texas before moving well inland. In its wake, approximately USD24 billion in damage was left, with more than USD11.5 billion in insured losses. The impact was far worse than expected, and (re)insurers spent the next six months revising their estimates upward. Many saw Hurricane Ike-related losses as a percentage of shareholders’ equity exceed 20 percent — for some, it topped 40 percent.


An earlier warning, along with an accurate projection of Ike’s path, would have made a profound difference for risk-bearers and their balance sheets. Targeted livecat coverage could have helped them lay off considerable amounts of risk and prevented capital from being depleted. Both aspects — early notice and an accurate trajectory — would have been necessary to optimize last-minute risk-transfer efforts.

Guy Carpenter’s GC LiveCat solution addresses this type of situation. By providing the earliest forecasts in the industry and storm path projections, it equips (re)insurers to identify key risks and move them out of their portfolios quickly.

GC LiveCat: A Real-Time Solution

Developed in coordination with WSI Corporation, GC LiveCat supplements WSI’s livecat forecast with probabilities of landfall by gate and conditional exceedance probability curves which are updated every twelve hours. WSI’s LiveCat forecast also offers uncertainty estimates. Predicated upon state-of-the-art meteorological models to predict the track and intensity of hurricanes, these unique forecasts contain features previously unavailable to the marketplace, including hurricane predictions up to 10 days prior to landfall - several days earlier than what is currently provided by the National Hurricane Center (NHC) and other tropical forecasting organizations.

Four regional hurricane indices are at the heart of GC LiveCat: Northeast, Southeast, Florida, and Gulf. Guy Carpenter created these indices in response to the (re)insurance industry’s questioning the credibility of the catastrophe models after the 2004 and 2005 hurricane seasons — and (re)insurers’ requirements to better understand and manage their catastrophe risks.

Unlike most indices which do not differentiate by geographic location (and only take into account frequency or severity and historical climatologic information), the Guy Carpenter Hurricane Index not only addresses all the aforementioned information, but also takes into account current meteorological information and forecasts about live events, the forecast landfall location, and the forecast landfall probability and the conditional severity.

The creation of regional indices allows risk-bearers to use targeted insights to gauge and transfer property-catastrophe risk. Forecasts reflect a 10-day time horizon — double what was available previously — enabling carriers to plan farther ahead than ever before. Further, the index values are updated every 12 hours as a storm develops and moves. As a forecast is refined, (re)insurers can fine-tune their assumptions and actions, identifying key risks and securing the appropriate cover.

The GC ForeCat and GC LiveCat indices provide a comprehensive view of a real and imminent threat to carrier capital that provides a foundation for decision-making that minimizes a (re)insurer’s losses at a time when others may simply brace themselves for balance sheet damage. Ultimately, the point of using GC LiveCat is to take action — to transfer risk accurately and quickly.

Make the Most of the Worst

This year’s Atlantic hurricane season ostensibly offers little cause or alarm, but this is no reason for complacency. The number predicted does not account for severity, and a large hurricane making landfall at a highly insured location could have a devastating effect. Preparation includes securing the tools necessary to make the last-minute decisions that can stem the tide of capital from a portfolio following a mega-catastrophe. With GC LiveCat, (re)insurers can transfer risk even as a storm hits land — minimizing losses and preserving capital.

The upside to remaining vigilant, even with benign forecasts, becomes tangible when expectations are thwarted. Market leaders will be defined by the decisions that keep losses contained — the rewards will take the forms of earnings stability and market capitalization maintenance (or perhaps growth). GC LiveCat is designed to help (re)insurers cope with the uncertainty of the property-catastrophe market and exit unanticipated events with their balance sheets intact.

Download the GC LiveCat fact sheet >>

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