Eye on the storm

What will be the cost to the insurance industry of climate change? Last year, natural catastrophes cost property insurers US$78 billion, shattering financial and meteorological records. Was this a freak year that will stay in the record books for decades? Or is it a sign of things to come?

Certainly, last year’s bill was the largest in insurance history and a significant increase on the US$48 billion cost of both natural and man-made catastrophes in 2004. Reinsurer Swiss Re believes the increase in hurricane losses is related to the warm phase of “Atlantic multidecadal oscillation” which began increasing surface temperatures in the North Atlantic in 1995 and is expected to last another 10 to 30 years.

Its analysis shows an average of two hurricanes a year making US landfall between 1943 and 1963. Between 1970 and 1994, this dropped to an average of 1.2 but it has nearly doubled again to 2.2 since 1995. Swiss Re says this “marks the return of the high-frequency, high-severity North Atlantic hurricane cycle.”

However, there is fierce disagreement among meteorologists about the extent to which climate change is affecting the hurricane season.

Dr Simon Brown, climate extremes research manager at the Met Office Hadley Centre, says: “This is one of the most hotly-debated issues in the market. There is no clear consensus. We had a record year in the Atlantic basin but other basins were average or below average.”

Accurate observations of ocean basins has only come about relatively recently through the use of geostationary satellites. Prior to that, meteorologists mostly learned about hurricanes by observing them when they struck land. Brown says this makes historical comparisons over long periods potentially unreliable.

Modelling is also complicated by difficulties in calculating and predicting wind shear: the effect that height has on wind speed. There is disagreement among meteorologists on how to project shear within their models.

This is important as wind shear has a huge effect on the incidence of tropical storms. In 1995, for example, 35 tropical storms were recorded but this fell to just 11 in 1997. The reason, says Dr Brown, was increased wind shear resulting from the El Nino phenomenon. Now El Nino has diminished, the number of storms has increased again.

Better progress has been made on modelling heatwaves and droughts, such as the unusually hot weather that struck Europe in 2003. “We have shown that the increased risk from climate change is at least a factor of two,” says Dr Brown. “Our best guess is that it has increased by a factor of four. Our current model suggests that something like 2003 in Europe will happen every other year by 2050 and could be relatively normal by 2070.”

One improvement over the next few years will be better data. The Intergovernmental Panel on Climate Change publishes its next review in January 2007. In the UK, the Met Office is conducting a separate project that will provide mapping of rainfall and temperature in every 25 km region
of the nation by 2008.

Dr Brown says such an undertaking was difficult in the past because of the computing capabilities needed. “This is the first time that anyone in the world has done probabilistic forecasting,” says Dr Brown. “We are due to deliver the results to the Government by 2008. There will be significant scientific interest and we hope it will be useful to business.”

Michel Lies, a member of Swiss Re’s executive board, believes that future models will show both a higher frequency and an increased severity of windstorms. “The insurance industry will charge premiums and tighten conditions for hurricane risks,” he says. But the question will be whether this will be accompanied by better preparations and increased quality of risk management.

Comment: Steve Loudwill, deputy reinsurance, Hiscox, says:
“As reinsurance is a global business the amount of available capacity can be affected by losses happening all over the world. A reduction in the amount of available capacity would lead to an increase in the price of catastrophe reinsurance and more restrictive terms and conditions, which in turn puts pressure on the pricing of the original business written.”

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