ACE Fires Two In Bid Scandal

Catastrophe models have not only made insurers better prepared to face hurricane seasons like the current one, but also provide the ability to answer this type of question.

As can be seen in the accompanying chart, there have been many years in which more than one hurricane has made landfall in the United States. It is also clear that 2004 is by no means a record year. In fact, there have been six yearsincluding this onein which at least four hurricanes made landfall somewhere along the U.S. coastline.

The 2004 season currently consists of four landfalling hurricanes in the United Statesthree in Florida. Based on information generated by the AIR Tropical Cyclone Model, four or more hurricanes are expected to make landfall in the United States, in a single season, approximately once in 12 years, while three or more hurricanes will likely make landfall in Florida about once every 40 years.

Neither number should be considered particularly unusual. Even the estimated frequency that four hurricanes will make landfall in Florida in a single seasonabout once every 200 yearsis still within the range to which most insurance companies manage their catastrophe risk.

The AIR Tropical Cyclone Model can also be used to estimate the insured losses from these historical storms had they occurred at current exposures and property values. This analysis shows that 2004 is one of eight years in which losses would have exceeded $20 billion. The worst year would have been 1926, in which a Category 4 storm hit the Miami area.

So from an aggregate-loss perspective, 2004 is an above-average but not extremely unusual season.

What is a bit unusual about this season is that the total loss has been fairly evenly divided between the four landfalling events. That is, there is no single dominant event that produced most of the loss, as is common in other above-average loss years.

Using the AIR Tropical Cyclone Model, insurers should expect to see a single season aggregate loss exceeding $20 billion about once every 13 years for the United States and about once in 24 years for Florida only. Clearly, losses of this magnitude should not be considered rare.

While the 2004 season has been an active one, it is not extraordinaryand insurers should certainly be prepared for such seasons in the future.

Fortunately, tools are available to enable insurers to effectively manage the risk from seasons such as the current one. Catastrophe models can provide the probability of multiple-event seasons and estimate the return periods for multiple event losses.

Moreover, they can help insurers estimate the return periods for multiple event losses for their individual portfolios and the industry to protect their business from multiple event seasons.

Atul Khanduri, Ph.D. is AIRs manager of wind risk modeling and is responsible for AIRs tropical cyclone models worldwide. Mr. Khanduri also leads AIRs post-disaster survey teams for hurricanes. He can be reached at akhanduri@air-worldwide.com.

Reproduced from National Underwriter Edition, November 4, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.