The shifting foundations of the Atlantic hurricane season

With widespread flooding hitting several European countries and Hurricane Ida wreaking devastation along the southern coast of the US in recent months, climate change continues to dominate the public agenda as more countries are becoming aware of the immediate threat from the issue.

For the re/insurance industry, the shifting nature of the climate provides an existential threat to long-established risk models and assumptions about weather patterns and related losses, throwing into doubt once-reliable forecasts and prompting wholesale changes in the way that such risks are evaluated.

Nowhere is the risk of climate-related volatility more relevant than in the Atlantic hurricane season, where changing weather patterns, the timing of storms and their eventual paths are prompting serious questions about the efficacy of the market’s current approach.

In this discussion with the Re/insurance Lounge, Intelligent Insurer’s online, on-demand platform for interviews and panel discussions with industry leaders, market participants addressed how climate change is changing the sector and what can be done to address the issue.

While the immediate reaction to climate change and the images broadcast of the devastation wrought by Hurricane Ida could prompt the conclusion that storms are becoming both stronger and more frequent, the reality of the long-term picture is more nuanced.

Number of storms could fall

Dan Ward, senior meteorologist at catastrophe modelling specialist Karen Clark & Company, argues that while the scale of storms is indeed increasing across the world as the base of the climate shifts, over a longer period current predictions suggest that the overall number of storms could fall.

“It comes down to warming sea-surface temperatures. This is driving an increase in the intensity of hurricanes, globally but also in the Atlantic. We know this partly from observations, but also from other results of analysis,” he said.

“What those models are telling us is that we don’t expect to see an increase in the frequency of tropical cyclones. In fact, a lot of model ensemble members show a decrease in the future, although we do expect to see a shift in intensity from weaker to stronger storms. That obviously has major implications for catastrophe modelling and for the insurance industry.”

However, Steve Bowen, managing director and head of catastrophe insight at Aon, believes that the overall number of storms may not be the most relevant metric for the re/insurance industry to focus on when it comes to planning for the Atlantic hurricane seasons of the future.

Bowen said that while looking at the number of such events is important, the pre-eminent metric for the risk world is always how much damage the storms cause on a socioeconomic scale.

For more content like this visit the Reinsurance Lounge 

With the climate changing and uncertainty rising over exactly how and when these storms can make landfall and cause significant losses, Bowen said that the industry needs to focus on the intensity of the storms that do arrive.

“The biggest takeaway is not to put so much focus on the frequency of the events. Instead, behaviourally, we are observing stronger storms, events that are intensifying more quickly, with rapid intensification closer to land—which of course is something you never want to see,” he added.

“On top of that, there is more heat and more moisture in the atmosphere, which is going to lead to heavier precipitation on the surface. Then, as if things couldn’t be more fun, we’re also talking about sea levels rising and the risk on top of that.

“When events do occur, they end up being more impactful from wind and water perspectives—plus any other socioeconomic factors that are also a huge part of this scenario.”

A new approach needed

While underlying environmental factors will be one of the main drivers defining how the industry will approach the risk market in the future, another major issue will be convincing clients that their approach needs to change.

John Dickson, chief executive officer and president at specialist flood insurance agency Aon Edge, believes that despite the nature of the underlying risk, the buying behaviour of insureds has not demonstrated any significant shift.

He said that it is vital for the industry to effectively explain to its customer base that without changes in buying behaviour or improved understanding of the shifting nature of the underlying risk the losses will continue to pile up.

“Last year, the number of storms was not a record number of insured losses. It wasn’t even in the top five years for insured losses. That’s because insurance purchasing behaviour hasn’t changed while the climate has changed,” he explained.

“That’s our biggest struggle. How do we get communities of homeowners to rethink their purchasing decisions, because what they used yesterday to decide whether to buy—say, flood insurance—doesn’t apply today? Purchasing behaviour has to change as the factors in our climate and our environment change.”

To view the full Re/insurance Lounge session click here