We’ve talked a lot about hurricane activity, and for good reason. Hurricanes tend to be the primary event at the core of many cat bonds, given how much damage they can produce.
However, when we think about hurricanes, most people think of the Atlantic region, pointing to Florida and Southeastern states as the most at risk.
But is that changing? This year is an El Niño year, which typically means less activity across the Atlantic because increased vertical wind shear in the area makes it harder for thunderstorms to mature into hurricanes, or for storms to gather enough strength to be truly devastating. That said, it could produce unfavorable conditions that may make storm activity more likely in other areas, specifically along the Gulf Coast.
We’ve already seen one such example this year, with Tropical Storm Bertha making landfall in both Texas and Louisiana. While it may not have been a significantly devastating event, Bertha did leave damage in its wake. Before weakening over Texas, Bertha brought dangerous flooding to Southeast Louisiana. Of course, storm activity in this area is not new. Most people still readily remember how Hurricane Katrina devastated New Orleans in 2005, incurring over $125B in damages.
However, data supports that this activity is changing, or more importantly, ramping up. Nearly 300 hurricanes have made US landfall since the 1850s, and almost half (120) have hit Florida. That number drops to just over 50 when you consider Texas or Louisiana. But here’s where it gets interesting: since 2020, Texas has experienced four hurricanes, compared to one in preceding decade. And Louisiana experienced five hurricanes in the last six years compared to only three in the preceding 10 years. While the Southeast US will always be a hotbed for hurricane activity, there seems to be trends emerging in other areas as well, areas that insurance companies and reinsurers will most certainly be keeping a close eye on.
What does this have to do with cat bonds? We’ve talked about how cat bonds are a growing market as issuance reaches new highs year after year and insurers and reinsurers increasingly utilize them as a way to offset potential losses. We’ve also written about watching cat bond issuance expand and evolve to cover other, more secondary, events like wildfires. But what we can glean from this hurricane season is that cat bonds continue to adapt to cover the usual events – just in new places.
One prediction could be that we’ll see more cat bonds issued proactively to cover events that are becoming increasingly more likely. Instead of learning from a devastating event and putting financial protections in place to hedge against it happening again, it’s likely that we see issuers look at what hasn’t happened yet, but could. This approach would likely mean even more market growth and more opportunities to diversify across a wide range of cat bonds, or being able to invest in cat bonds that are wildly diverse themselves.
Insurance is all about safeguarding against an event you hope never comes. We do this for cars, our homes, and ourselves. As this El Niño season unfolds, there may be some great takeaways, and it could be a teachable season for what else cat bonds can help prepare for in the future.
Sources:
CBS News
Britannica
Universal Property & Casualty Insurance Company
Atlantic Oceanographic & Meteorological Laboratory - Hurricane Research Division