Hurricane season and the cat bond market

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.

My graphic: Taking another bow.

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:

Another depressing view

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.


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