Karen Clark & Co. warns of potential U.S. hurricane losses exceeding $100 billion

Insurance carriers could develop a “false sense of security” if they rely on the probable maximum loss (PML) risk metric to predict hurricane losses in the southern United States, Karen Clark & Company suggested in a recent white paper.

“While the PML is a useful and important risk metric, it can give a false sense of security because it does not capture exposure concentrations that can lead to solvency-impairing losses,” the Boston-based catastrophe risk modelling firm stated in the paper, titled The 100 Year Hurricane: Could it happen this year? Are insurers prepared? 

“Analyses of dozens of actual portfolios have shown that there is typically a big difference between the 100 year PML and the largest losses from the 100 year event.”

The loss from what Karen Clark & Company calls a “100 year Characteristic Event ” can be “much greater” than those from 100-year PMLs, according to the white paper. The firm provides characteristic events in its RiskInsight loss modelling software.

“The CEs address a company’s ‘informal’ risk tolerance by highlighting where a company can have a larger loss, and perhaps just as importantly, a larger share of the market loss than expected,” Karen Clark & Company stated.

The white paper shows predicted losses for points along the U.S. coast, from the 100-year characteristic event, or the most intense hurricane that one could expect with about a 1% chance.

In Texas, losses were listed at points from Brownsville to Sabine Pass, including Galveston, just south of Houston. “If the 100 year CE makes landfall near Galveston, the industry losses are likely to exceed $100 billion,” according to the report.

“Insurers with only a one percent market share in this area will experience losses over $1 billion from this event, and companies that have not closely monitored and managed their market shares may not survive the 100 year hurricane.”

A similar graph for the Gulf Region goes Port Arthur, Tex. to Orange Beach, Ala. Losses are not as great because the largest population centre, New Orleans, is much smaller than Houston.

In Florida, the largest losses for a 100-year hurricane are in the Miami area, the company notes, adding there is a 100-kilometre stretch over which losses could exceed $200 billion. All figures are in U.S. dollars.

In the paper, Karen Clark & Company noted a Category 5 hurricane is one with wind speeds exceeding 155 mph (about 250 km/h). Three such storms have struck the U.S. coastline since 1900. Wind speeds “have been estimated between 165 and 180 mph,” according to the white paper, though the wind recording equipment failed during those events.

“In Southeast Florida, insurers should be prepared for a Category 5 hurricane that will travel clear across the state and likely make a second landfall along the Panhandle or in the Gulf region,” according to the report. “However, the intensity of the 100-year hurricane decreases when moving up the coast toward Jacksonville because of the lower probability of a hurricane in this area.”

The paper also analyses hurricane risk further north on the east coast, noting that no major hurricane is known to have made landfall in the mid-Atlantic region.

Losses in the U.S. from Hurricane Sandy — which had been downgraded to post-tropical storm status when it made landfall 200 km south of New York City in October, 2012 — “were driven primarily by the enormous size of the storm and the storm surge,” Karen Clark & Company noted in the white paper.

A table on the website of the U.S. National Climatic Data Center (a unit of the National Oceanic and Atmospheric Administration) lists three Atlantic storms that were category 5 when they made landfall either on the continental U.S. or a U.S. territory. The Okeechobee hurricane was still a category 5 storm when it made landfall in Puerto Rico Sept. 13, 1928. The same storm was category 4 when it made landfall again near Palm Beach, Fla. three days later, according to the U.S. National Weather Service.

Another category 5 hurricane made landfall in the Florida keys in September 1935. The third such category 5 storm was Hurricane Camille, which made landfall in August 1969 in Mississippi.