Moody’s warns of supply chain risks ahead of hurricane season

Companies in North America exposed to the Atlantic have been advised to redesign their supply chain network to avoid the damage and disruption of hurricanes this year.

The upcoming hurricane season, forecast to be particularly active in comparison to previous years, could have a profound effect on insurance and supply chain factors as well as general credit worthiness, according to a recent report from rating agency Moody’s.

Hurricanes have been a growing concern for insurers in recent years. Since 2017 and the end of a 12-year drought, more than $275bn has been paid out in insured losses.

This could increase significantly this Atlantic hurricane season with 22 named storms projected on average, an increase on the historical average of 14. As Moody’s senior regional economist Adam Karins stated: “The US avoided a truly catastrophic hurricane season last year, but if forecasters are correct, we may not be so lucky in 2024.”

The forecast is supported by a new update issued by UK-based insurer BMS Group which stated that a record hurricane season is anticipated even though there is likely to be a slow start, with activity not picking up until August.

The Moody’s report also comes on the back of the forecast issued by the US National Oceanic and Atmospheric Administration (NOAA), which predicted its highest-ever ranges for the upcoming, and likely “extraordinary”, Atlantic hurricane season.

While Karins highlighted the risk to property and human life, it also warned of the threat of business interruption and supply chain disruption.

The effect on global supply chains is of particular concern given that the forecast hurricanes come at a time when companies are trying to build more resilience into their supply chains, according to John Donigian, senior director, supply chain strategy, Moody’s.

“Port and airport closures, damage to key infrastructure, and clogged highways resulting from evacuations can slow logistics and impede the flow of goods. Facilities located in a hurricane path can suffer production halts and inventory losses,” said Donigian.

Companies on the east coast of the US and the Gold Coast are well experienced in mitigating the risks of hurricanes through measures such as positioning distribution centres outside of the expected hurricane path, said Donigian.

However, supply chain expenses could be adversely affected if a spike in insurance causes premiums to rise or if goods become scarce.

Rising costs could also lead to under-insurance, warned Natalie Ambrosio Preudhomme, associate director, commercial real estate (CRE), Moody’s.

“The upcoming hurricane season comes at a time that the CRE industry is grappling with challenges of affordability and availability of insurance,” she said. “Exposure to a strong storm could affect ongoing conversations around risk appetite and alternative risk transfer for lenders and borrowers.”

The Moody’s report also paints a bleak long-term picture when it comes to hurricanes, highlighting the heightened risk as a result of climate change. According to Chris Lafakis, climate economist at Moody’s Analytics, the long-term trend is “dire”.

“The combination of mounting temperatures and rising property values has resulted in 17 of the 19 costliest tropical cyclones in the US occurring in the last 20 years, even after adjusting for inflation,” said Lafakis.

“These costly storms also threaten to destabilise the insurance market, as an increasing number of private insurers abandon some or all parts of expensive property markets such as California and Florida.”