JOHNSTON – As Hurricane Bill gathers force over the Atlantic Ocean, commercial property insurer FM Global is figuring out what impact the storm will have on the insurance market after an abnormally quiet start to the hurricane season.
Bill, the first hurricane of the June-to-November season, strengthened into a Category 4 storm on the Saffir-Simpson scale with top winds near 135 miles per hour, the National Hurricane Center said today in an update issued at 11 a.m. It is expected to strengthen further over the next 24 hours.
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The hurricane was located about 1,000 miles southeast of Bermuda and is likely to pass the island’s west side by Saturday, according to the National Weather Service division. It is expected to bypass the East Coast on Sunday afternoon or evening but may hit land in Canada’s Nova Scotia or Newfoundland provinces, said Jeff Masters, a meteorologist at Weather Underground in Ann Arbor, Mich.
“A few rain squalls may affect coastal Massachusetts, but the main impact of Bill on New England is likely to be coastal erosion from high waves,” Masters wrote this morning on his blog.
“This is a very dangerous Category 4,” added Jim Rouiller, a senior energy meteorologist at Planalytics Inc. in Wayne, Pa., in an interview with Bloomberg News. “The East Coast is lucky.”
Meanwhile, FM Global and other insurance firms are tracking the storm’s progress. A failure to make landfall is not necessarily good for them, because although they can face billions of dollars in claims after big hurricanes, they can make much more back within a few months when they renew policies at higher rates, according to Reuters.
“If there are no major storms, more capacity will become available and prices will start to come down,” Shivan C. Subramaniam, FM Global’s CEO, told Reuters.
Insurance prices have already fallen significantly over the past three years, and insurers’ capital cushions took major hits over the past year from investment losses caused by the credit crunch.
“The economics all indicate that prices need to go up,” Subramaniam said. He estimates that a storm needs to incur $9 billion to $10 billion in insured losses to convince customers to pay more for coverage.
Risk Management Solutions, a catastrophe risk-modeling firm, said today Bill is unlikely to be as damaging as the huge hurricanes that hit the U.S. in 2004 and 2005, Marketwatch reported.
The calmer season also has led investors to bid up the price of catastrophe bonds – investments that pay out if there are no major natural disasters – on speculation that the weather could mean fewer payouts, Bloomberg News reported.
Insurers sell so-called “cat bonds” to cover themselves as an alternative to reinsurance. If a major storm hits, the insurers use the bond money to cover claims, and bondholders lose their investment. But if no storms come, cat-bondholders can get double-digit returns from the insurers.
FM Global, which until recently had $600 million in catastrophe bonds on the market, opted not to renew a three-year bond that protected against earthquakes in the Northwestern United States when it expired last month.
“We’ve gone to zero,” Subramaniam told Bloomberg last week. “Cat bonds are more expensive than they were before.”
FM Global, which ranked No. 766 on this year’s Fortune 1000 list, is in the process of building a new $60 million headquarters in Johnston and also plans to spend $38 million on an expansion of its research campus in Glocester.
Additional information is available at FMGlobal.com.
