After one of the most extraordinary and expensive hurricane seasons in U.S. history last year, experts say the forecast for the 2018 season is likely to be more normal due to cooler waters in the Atlantic. And, despite such a destructive year in 2017, the insurance industry remains in good shape heading into the 2018 storm season, which gets underway Friday, offering some much-needed reassurance for businesses and homeowners.
However, before anyone gets their expectations up too high, experts warn that predicting Mother Nature is an unreliable science and the outcome of the 2018 season lies in the hands of Lady Luck.
For example, the 2017 season far exceeded forecasters expectations. Before the season began, the National Hurricane Center (NHC) forecast an "above average" season of between 11 and 17 named storms, with six becoming hurricanes. The season ended up well above average with 17 named storms, with 10 were hurricanes, and six major hurricanes (Category 3 or stronger). That included two "catastrophic" Category 5 storms - Irma and Maria - which both made landfall in Florida and Puerto Rico respectively. In fact, last year ended up having three of the top five most destructive events in U.S. history, with Harvey causing $125 billion in damage in Texas, second only to Katrina in 2005.
As a point of reference, the 30-year historical average for the Atlantic region is 12 named storms, six hurricanes and three major hurricanes. The NHC forecast for 2018 has predicted 10 to 16 named storms, of which 5 to 9 could become hurricanes, including 1 to 4 major hurricanes.
Harvey, Irma and Maria combined caused an estimated $250 billion in damage. But the insurance industry survived relatively unscathed largely because Harvey's damage was mostly from flooding which is covered by a federal program, not by private insurers, and most Puerto Rican homeowners don't carry hurricane insurance. Irma did cause extensive damage on the gulf coast of southwest Florida but could have been much worse had it hit Miami and the more densely populated east coast.
"We were very, very lucky in Florida that Irma didn't hit the east coast as was originally forecast," said Gavin Magor, 54, a senior analyst at Weiss Inc, an insurance ratings agency, who lives in Palm Beach County. "We were spared a full- frontal attack on the east coast which would have been a different story," he added, noting that by jogging further west over the Florida Keys and the city of Naples in southwest Florida, Irma missed the more densely populated counties of southeast Florida, Miami-Dade, Broward and Palm Beach.
Irma killed 84 and forced the evacuation of 5.8 million people, causing $50 billion in damage to homes, businesses, and agricultural crops, as well as leaving a massive bill for storm debris collection.
"The insurance industry is in good shape," said Robert Hartwig, professor of Risk Management and Insurance at the University of South Carolina. "There was some slight cost last year, which provided a wakeup call for hurricane risk in the U.S. But it was well within the events insurers plan for, so it did not overstress the system."
But experts say climate change is likely to drive up the cost of storms in future years, due to warmer seas creating more intense hurricanes and more rainfall. The 2017 hurricane season provided a taste of that, only the second time in recorded history that two Category 5 storms have struck in the same year. "Hurricanes will reach intensities never seen historically," says Tim Hall, a Senior Scientist at NASA's Goddard Institute for Space Studies in New York.
As an example, Harvey witnessed record rainfall over the Houston area, causing massive flooding. Studies show that that between 20% - 38% of that rainfall was due to warming of the water in the Gulf of Mexico causing greater moisture that was sucked up by the storm, Hall said in a webinar organized by the Southern Alliance for Clean Energy.
While oceans are warming it is an uneven pattern that occurs in "splotches," he added. Sea surface temperature maps show that the main hurricane development region in the Atlantic is likely to be cooler this year than it was last year, one of the reasons why 2018 is expected to be a less active storm season.
But Hall issued a caveat popular with severe weather experts, that it only takes one big storm to make landfall to cause havoc. The 1992 hurricane season was notoriously inactive with only six named storms, but still managed to produce the most expensive Category 5 storm in history up to that point - Andrew - which hit south Miami causing massive destruction.
Insuring against catastrophe
In Florida's case, despite losses from Hurricane Irma, estimates show the state's rainy-day fund that helps private insurers pay out claims after a hurricane, known as the Florida Hurricane Catastrophe Fund, has $17.3 billion in the bank, enough to cover damage from most major storms.
The fund, which was created after Hurricane Andrew devastated the state in 1992, wiping out private insurers, built up its reserves during a lengthy period between 2005 and last year when no storms made landfall in Florida. Andrew was the first major hurricane to hit Florida in 27 years, resulted in $25 billion in losses, wiping out at least 10 insurers. All major insurers abandoned the state, leaving one million homes without insurance. As a result, the state created its own “insurer of last resort insurer,” Citizens Property Insurance Corporation.
All 160 insurance firms in Florida are required to pay a premium to the 'Cat fund' which operates as a tax-free safety net, effectively reducing the need to go to the costly private reinsurance market. Companies can seek reimbursement when damage from a storm exceeds their deductible, like most insurance policies. If the fund gets depleted, as happened during two back-to-back busy hurricane seasons of 2004 and 2005, the state can impose a "hurricane tax" surcharge on most insurance policies to replenish it.
Irma was the first hurricane to hit the state in 12 years, causing losses estimated at about $8 billion, triggering payouts by the Cat fund estimated at about $2 billion to cover claims after deductibles are met. "It has really lessened our need to go to the private financial markets," said a spokesperson for the Cat fund. "It has put us in a much better situation."
One of the biggest concerns, besides climate change, is the continual increase in insurance exposure from new property construction along the entire South Florida coast where the population has grown by 60% since 1990 with the total insured property value now worth about $2.1 trillion (up from $1.3 billion in 2004).
Even in the event of a major storm some experts say Florida's insurance system should be able to cope. "I would imagine a capital draining event, forcing some reinsurers to raise fresh capital ... and increase rates afterwards," said Steve Evans, editor-in-chief of Artemis, an insurance news site . "So, I wouldn’t expect there to be a lack of available reinsurance capital after the two events. Maybe a dip in the size of the market, but not for long."
Flooding is a separate issue. The federal government holds a monopoly for insurance of homeowners and businesses, known as the National Flood Insurance Program (NFIP) though it is laden with debt, owing roughly $25 billion to cover damage claims.
After last year's hurricanes, President Trump signed a $36.5 billion disaster relief bill that forgave $16 billion in debt owed by the flood insurance program.