Looking back, this time last year the catastrophe bond market was noticeable only for the tumbleweed – it was deathly quiet. This year the level of activity has picked up. Guy Carpenter has released their Q3 update, which provides a really useful summary of recent activity. Over the last quarter there were two new issuances, resulting in $412m of new capital in the market. Despite this relative calm – the issuance was up by a third when compared to the same quarter last year. This takes the total so far this year to 11 (with MultiCat Mexico 2009 coming soon), that makes $1.79bn in risk capital.

However, the fourth quarter is upon us and broader market conditions appear to be more conducive for more activity. The pipeline looks healthy right now, and historically, Guy Carpenter say the fourth quarter is the second most active of the year. GC’s consensus estimate for the year remains $3bn to $4bn, implying a strong fourth quarter for primary issuance.
One of the other features of this sector, as it begins to mature, is that there is a slug of outstanding risk capital that has matured. In the third quarter of 2009, $300m in catastrophe bond risk capital matured, bringing the year-to-date total to $2.5bn. Another $660m is scheduled to mature in the fourth quarter of this year.

Tags: catastrophe bonds

Monday morning, Tropical Storm Grace appeared as a surprising addition to this year’s named storms. Grace formed at 41.2degN near the Azores Islands. According to some reports this is notable in that Grace could well be the farthest northeast that a tropical storm has formed since the inception of satellite monitoring in the 1960s.

(Tropical Storm Alberto in 1988 formed slightly further north at 41.5degN). Grace is also unusual in that the storm formed over sea surface temperatures of only c23degC. Normally, tropical storms require temperatures in the region of 26-27degC to form and be self sustaining.

Grace looks as though she will bow out today, and transition into an extra tropical storm.

Tags: Atlantic, Grace, Tropical Storm

The Atlantic Tropical Storm and Hurricane Season officially begins on 1 June. With less than two weeks to go we thought this an opportune time to give you an update on how some of the most respected forecasters see the 2009 season.

In recent years the first named storm of the season has actually begun outside of the ‘official’ season. Last year Tropical Storm Arthur formed in the Gulf of Mexico on the 31 May. In 2007, Subtropical Storm Andrea and Tropical Storm Barry both formed before 1 June.

It’s time to turn our attention to 2009 activity, and again, sooner than perhaps we had originally anticipated—Dr Jeff Masters’ Weather Underground blog  flagged up one storm to keep an eye on from the morning of 19 May.  The storm didn’t develop into a tropical storm, however, an interesting precursor to the season, as some areas in Florida are deluged by rainfall.

Historically, we’ve seen how forecasters have changed their forecasts over the season, and we’ll look to provide an update on this situation later this summer. However, as the season begins, here’s the latest from some of the more highly respected forecaster organisations:

The hurricane forecasters are predicting an average season, with an average/slightly above number of tropical storms and hurricanes forming when compared to the 1950-2000 baseline.

With reference to the heightened activity observed from 1995-2008, we may well be looking at an average season.

Just because the forecasts predict an average season, it doesn’t mean that the (re)insurance industry should sit back and relax: it’s not the number of storms that count, it’s the intensity and also if landfall is made.

So as ever, insurers and reinsurers need to keep a close eye as the season progresses. And let’s not forget that although we may have a focus on the Atlantic season, the Pacific Typhoon season  is also in progress—and from a nat cat perspective, every day is earthquake season…

Tags: Hurricanes

A spurious (yet timely) titled lead into an area of the catastrophe bond market that is often over looked—namely, the mortality catastrophe bond market.

The recent incidence of Swine flu has brought some attention to the mortality bond market, and cat bond market issuers and investors will doubtless be keeping a watchful eye on the development of the outbreak with some interest.

Artemis.bm  reports that there are currently somewhere between USD1.5-2bn of outstanding mortality bonds in the cat bond market. The majority of these bonds have been issued by Swiss Re (via the Vita Capital Series), and most recently by Munich Re in February 2008, with USD100m of risk transferred to the capital markets. Other notable issuers include Axa and Scottish Life.

How material an issue is the current outbreak for bond investors and issuers?

It is clearly far too early to state, given that we are in the early stages of the pandemic. However, it may be useful to provide some context. An extreme mortality bond pays out to the sponsoring insurer if the mortality index to which it is linked exceeds a certain rate, typically 20% or more above what is expected for a given population.

The 1918 Spanish influenza pandemic, in which more than 50m people died, is the benchmark by which all modern pandemics are measured. And for any bond to be triggered, we would expect to see mortality rates of this order (ie millions not hundreds or thousands). The early news stories around the current Swine flu has some interesting characteristics, including a higher mortality rate when compared to 1918, although as at 30th April, only one fatality has been reported outside of Mexico.

The Insurance Information Institute estimated in 2006 that even a moderate avian flu pandemic could cost the US life insurance industry $31bn in additional death claims, while a pandemic on the scale of 1918 could cost $133bn.

The market has yet to see any impact on bond pricing – primarily due to a) the magnitude of the fatalities to date, and b) the geographic areas impacted (ie limited to Mexico). There may be far more concern if the number of reported cases increases exponentially and begins to impact the US and western Europe in particlar.

So the market will continue to watch the developing situation with interest, as will we all…

Tags: Bonds, Flu, Natural catastrophes, Pandemic

2008 will be remembered as a year of significant natural catastrophe losses. Munich Re and Swiss Re have suggested industry losses of between USD40-50bn for 2008 alone, with PCS (Property Claim Services) reporting US losses of around USD25bn. Much of the focus has been headline losses, including Hurricanes Ike and Gustav, and these events have merited special mention in a number of recent (re)insurance year end financial reporting statements.

But there are two more issues worthy of consideration.

The first is that of large/single risk losses. Guy Carpenter has produced a report entitled Man-Made Cats hit USD7bn in 2008 (18th February, 2009) which highlights just how significant large losses have been in the past 12 months, both in respect of size and frequency.

In summary:

“Man-made and technological catastrophes caused around USD7bn in insured losses last year. This put 2008 losses around 46% higher than the annual average of USD4.8bn, according to data from Swiss Re. Nineteen known events resulted in insured losses of more than USD50m each, according to publicly available information. These events occurred in 11 countries, with losses ranging from USD80m to nearly USD2bn”.

Within these losses are significant contributions from business interruption losses – eg USD1.5bn from BHP Billiton and the Apache Varanus Island explosion (all in a USD1.8bn loss). A stark reminder to the insurance community of the requirement to manage these types of large risks, and to maintain control over large  business interruption loss potential.

The second element relates to balance sheet value erosion/deterioration. Swiss Re pre-announced (9th February, 2009) that they had taken a CHF6bn loss on their balance sheet. Swiss are not alone in this regard and year end statements have been punctuated by declining shareholder equity values. Many publicly listed companies have also suffered the ‘double-whammy’ of declining stock values.

Whilst the insurance industry has fared relatively well in comparison to counterparts in the banking sector, again the requirement to rebuild balance sheets and financial robustness will have a marked impact in determining the rating environment going forward. And it is important to note the different dimensions of potential losses that insurance companies are exposed to.

Tags: Financial, Hurricanes, Ike, Large Loss

Insurance Linked Security (ILS) triggers have long included indices based upon industry surveys and loss estimations. In the US the PCS (Property Claim Services) has become the industry benchmark for many Industry Loss Warranty (ILW) and some index traded insurance products. Outside the US, Swiss Re’s Sigma publication has been the recognised index. However, these loss notification media were not designed for this purpose.

There is a new toy in the ILS toyshop.

As the ILS market has rapidly expanded over the past decade, a number of, predominantly European, (re)insurers acting under the auspices of the Chief Risk Officers’ Forum have been investigating the development of a bespoke European loss index. Yesterday Perils AG was announced. Perils’ founding shareholders, who hold equal shares in the firm, include Allianz, AXA, Groupama, Guy Carpenter, Munich Re, PartnerRe, Swiss Re, and Zurich. The company will be fully operational in the latter part of this year, and will offer two main products ‘to subscribers’, which are likely to include insurers, reinsurers, brokers, risk modellers, banks and other insurance industry stakeholders.

These two products are:

1. Aggregated industry-wide insurance exposure data (insured values), which will be catalogued by risk type and CRESTA zones (defined European geographical zones for natural catastrophe insurance). The data will be provided on an annual basis;

2. Industry loss estimates per risk type and CRESTA zones, following large natural catastrophe events.”

The development of this index will remove any perceived ‘moral hazard’ from Swiss Re. Swiss Re have been actively engaged in the ILS space, facilitating trades, buying/selling ILWs, and so forth. By removing the reliance upon a Sigma trigger will ease the reporting burden on Swiss Re, and increase the transparency around the index itself.

 This initiative is to be welcomed and will have some beneficial impacts upon the European insurance industry. But will it be industry-changing? The timing of the release of this product, given the current economic backdrop, will make it challenging for ILS providers to test the water with this index—as this has not been tested in a real cat scenario.

There are associated issues of basis risk given that the index will be based upon a large set of extrapolated exposure/inventory and loss date. The quality will be driven by the information provided by respondents to the questionnaire issued by Perils. The big question remains as to how forthcoming, and timely, this information will be. Improving data quality and maintaining the integrity of the underlying databases will be a significant challenge, and an ongoing issue – as the catastrophe modelling agencies have already found.

I look forward to seeing how this index develops, how widely it will be used (given that this is on a subscription basis rather than ‘free’), and whether it will indeed help to revive the ILS space in Europe this year.

Tags: ILS, ILW, Reinsurance, Swiss Re

 by Dishni Payagalage-Don 

Reaching the end of the Atlantic Hurricane season we can stop and reflect at what has been an eventful and record breaking year; five major hurricanes, eight tropical storms and a total of 16 named storms. Pre-season forecasts in December 2007 suggested that we should expect an ‘above average’ season (ie relative to the 1950-2005 baseline) and the consensus view as the season developed was for this situation to become well above average through 2008.

Image courtesy of Jeff Master's Wunder Blog at wunderground.com/blog/JeffMasters

The Season in review
The season began at the end of May two days earlier than the official start date with Tropical Storm Arthur making landfall on Belize.

Arthur was the first tropical storm to form in May since Tropical Storm Arlene in 1981. Arthur was an interesting transitional storm—having formed from the remnants of tropical storm Alma. Arthur was also unusual in that the first advisory position for the storm was inland over northern Belize, about 30 miles from the ocean.

The storm’s maximum sustained winds were near 40 mph (65 km/hr), with higher gusts, mainly over water east of its center. Hurricane Arthur rapidly intensified when it hit Belize causing torrential rain and flash floods. The storm claimed five lives and damages were estimated at $78million.

The rest of June was quiet, but was followed by the first major hurricane of the season – Hurricane Bertha (Category 3). Hurricane Bertha became the longest-lived named storm on record in July in the Atlantic Basin (17 days).

Bertha also formed farther east than any other on record so early in the season (east of 250W as a storm and 500W as a hurricane). It began its journey on 3rd July over the Atlantic Ocean and peaked at 120mph sustained winds on 7th July.

It did not make landfall and weakened as it approached Bermuda but produced rain and tropical storm winds. No losses were reported.

August proved to be an active month with Tropical Storms Eduoard and Fay, and Hurricanes Gustav and Hanna. All four made landfall with Tropical Storm Fay bringing heavy rain and wind to the island of Hispaniola. Tropical storm Fay stuck Florida a record four concurrent times claiming 36 lives and an estimated $180million damage.

Of these four windstorms, August produced the second most devasting and significant hurricane to the insurance industry of the season with Gustav. At its peak it was a Category 4 storm before making landfall in Cuba. It made landfall at the Island of Hispaniola and Jamaica but at this point it was still only a tropical storm.

It was then upgraded to hurricane status on 29th August where it caused most of its damage having been labelled as Cuba’s worst hurricane in 50 years. After Cuba, Gustav then moved across the Gulf of Mexico towards the US where the biggest evacuation in US history of 2 million people took place in Southern Louisiana including many from New Orleans as fear of a potential repeat of Hurricane Katrina in 2005 loomed. 

Estimates of economic damage from Gustav were placed at $18billlion and 138 deaths. Insured industry losses are estimated at $4 billion (Sigma).

Ike will be remembered for being a strong Category 2 storm at landfall in the US; however, it wrought much damage in the Caribbean as a Category 4 hurricane.

Ike’s impact was sufficiently significant. $6.3million was called upon by the CCRIF to help satisfy the short term financial needs of Grand Turk, where 85% of buildings were damaged or demolished (Source: CCRIF).

Ike weakened significantly as it passed over Cuba, but gained strength as it moved westward across the Gulf of Mexico.

There were some interesting similarities with Katrina. Ike passed over a warm pool eddy that helped to strengthen the storm, and underwent an eye-wall replacement before landfall on Galveston Island on 13 September.

At landfall Ike was a strong Cat 2 storm (with wind speeds just shy of the next category on the Saffir-Simpson scale), but had pressure and wind field dynamics analogous to a Cat 3 or 4 storm.

The physical extent of the storm was greater than that of Katrina. This is evident by comparing the statistics of Ike at the time and Katrina as Ike travelled over the Gulf of Mexico. Ike had a tropical storm force winds radius of 275 miles compared to Katrina’s 230 miles, and hurricane force winds radius of 115 miles compared to Katrina’s 105 miles.

Ike impacted downtown Houston and Galveston in Texas when it made landfall. Galveston suffered much of its damage through flooding resulting in an outage of power.

PCS released an initial insured US property loss estimates for Hurricane Ike at $8.1 billion (30 Sept) which was subsequently readjusted to $10.7 billion (5 Dec) not including offshore.

The overall damage caused by Ike included power outage, storm surge, wind damage and property damage to Ohio, Texas, Kentucky, Indiana and Illinois amongst others (Source: PCS).

Ike was particularly devastating due to the unusual introduction of an extra tropical front as it made landfall resulting in Ohio facing high force winds.

Records broken by Ike: The diameter of the tropical storm was 275 miles. This makes it the largest Atlantic hurricane recorded. It also had the second highest integrated kinetic energy at 5.2 (IKE = scale 1-6) of any Atlantic storm (Source: Weather Underground).

Just as we expected Hurricane season to be reaching its nadir, Hurricane Paloma (Category 4) closed in across the Cayman Islands and Cuba in November forcing 1.2 million people to be evacuated (Source: USA Today). The storm ended on the 9th November to draw a close to Hurricane Season 2008. Hurricane Paloma is only the 4th “P-named” hurricane since records began.

The 2008 season closed within the traditional end of November timeframe.

Records set  in 2008
• Fourth costliest hurricane season on record ($21billion dollars in U.S. damage, according to ISO’s Property Claim Services)
• First time major hurricanes have been observed in five separate months (Bertha, Gustav, Ike, Omar, Paloma occurred in July, August, September, October, and November, respectively)
• First time six consecutive storms made U.S. landfall (Dolly, Edouard, Fay, Gustav, Hanna, and Ike)
• First time three major hurricanes have hit Cuba (Gustav, Ike, Paloma)
• Costliest hurricane in Texas history (Ike, estimated onshore industry loss $15bn)
• Second deadliest US hurricane since 1972, and 26th deadliest in history (Ike, with 82 dead)
• Highest wind gust ever measured in a hurricane over land (Gustav, 212 mph in Pinar del Rio, Cuba)
• First storm ever to make four landfalls in one state (Fay, in Florida)
• Second strongest November hurricane (Paloma, 145 mph winds)
• Smallest tropical cyclone on record (Marco)
• Longest-lived July hurricane on record, longest-lived hurricane so early in the season, longest-lived tropical storm in July and so early in the season (Bertha, which was a hurricane 7.75 days, eclipsing the previous record of 7 days held by Hurricane Emily of 2005. Bertha was at tropical storm strength or greater for 17.25 days)
• Farthest east forming tropical storm and hurricane for so early in the season (Bertha)
• Hurricane Ike had the highest integrated kinetic energy in history

Hurricane season Average 1944-2002 vs 2008

Links

• 30 Deadliest US Hurricanes
• 30 Costliest US Hurricanes
• 30 Deadliest Atlantic Hurricanes
• Top 10 Most Active Hurricane Seasons

Sources

• BBC Weather 
• The Weather Channel
• Hurricane Central
• Earth observatory, Nasa
• Jeff Master’s Wunderblog
• Klotzbach and Gray, Tropical Meteorology Project
• TSR

Tags: Atlantic, CCRIF, Gustav, Hurricanes, Ike, Season, TSR

by Dishni Payagalage-Don
The US has faced the reality of dealing with large natural catastrophes in recent years – most of them windstorm related. But what about earthquakes? At 10 am, 13 November 2008, millions of people in Southern California participated in ‘The ShakeOut’ drill, a practice drill to test the preparation and ability of the area to cope if such an event occurred.

Read the rest of this entry »

Tags: California, Earthquake, Insurance loss, RDS, Shakeout