Reinsurance blogger is annoyed that mainstream media accounts try to link the hurricane forecasts to threats to the cat bond market:
Nothing makes me need to rush outside and light up quite like mainstream media coverage of the catastrophe bond market … especially when it’s paired with an outsider’s view of hurricane predictions. Bloomberg BusinessWeek led with:
As the U.S. enters this year’s hurricane season, the market for catastrophe bonds may face its biggest test since the collapse of Lehman Brothers Holdings Inc. in 2008 brought sales to a six-month standstill.
Shall we see if this adds up? The forecasts cited involve frequency — not severity. So, we could have a lot of tiny storms and not see cat losses hit attachment points. The specific prediction is:
The U.S. National Oceanic and Atmospheric Administration predicts 14 to 23 named storms during this year’s Atlantic hurricane season. The June-through-November period may be “comparable to a number of extremely active seasons since 1995,” and even reach a record, NOAA said.
I think he may have fallen prey to another mainstream media failing – inadequate reporting on the various hurricane forecasts.
The forecasters do discuss severity. My chart, of which I am so proud that I’ve reproduced it again, shows this pretty clearly.
This year promises to have around five bad boys, according to the forecasters, compared with two in an average year. And the Accumulated Cyclone Energy – basically the sum of all the windspeeds of all the storms – promises to be twice the long-term average. For a given number of storms, a severe season will have a higher ACE than the same number of storms in a mild season.
The forecasts also look at probabilities of hitting landfall. I’ve taken CSU’s data from this guy and turned it into a chart:
The larger point still holds. It is a year with a small number of truly nasty storms that would pose a threat to the cat bond market. I would think you’d have to have more than one default in a year to really get the market scared – as Zurich had defaults from Katrina and the market came back. Something would have to spook investors into believing that megastorms are far more likely than they presently do.