Tuesday 30 July 2013 – With severe hurricane acitivty predicted for 2013, we explore the makings of the perfect storm, the risk factors at play and what insurers can do to mitigate the impact of extreme hurricane events (source: Lloyd’s of London)
Professor Mark Saunders and Dr Adam Lea of Tropical Storm Risk.com (TSR) at University College London have an enviable reputation for forecasting tropical storms. In April 2005, their predictions for the coming hurricane season were sent to a contact in the British Consulate in Houston, Texas. The Consulate later earned praise for its preparedness to help British citizens during Hurricane Katrina, one of the strongest storms to impact the coast of the United States during the last 100 years, and which caused devastation along the central Gulf Coast states.
This April, TSR said: “Based on climate signals, Atlantic basin tropical cyclone activity is forecast to be about 30% above the 1950-2012 long-term norm.”
Their announcements have since been followed by alerts from Weather Services International, which predicts “16 named storms, nine hurricanes and five intense hurricanes” for 2013, consistent with TSR predictions.
What can insurers do?
Help build more resilient communities by working with policymakers to encourage customers to adopt risk mitigating measures such as ‘code plus’ standards for new building and retrofits.
Incentivise policyholders to take risk mitigation measures through reduced premiums – for example, lower premiums could be offered to home owners who install fire-resistant, non-wood shingles in fire-prone areas.
Insurers could also encourage policyholders to share a greater proportion of risk by offering policies with higher deductibles. This will provide a financial reason to implement risk mitigation measures in order to keep losses as low as possible.
Explain to customers the advantage of retrofits in hazard-prone areas and consider offering home inspections / retrofit recommendations.
Share findings on weather-related catastrophe risks more widely with government researchers, and advocate additional data collection and development of tools that will benefit underwriting, risk mitigation and adaptation planning.
Work with policymakers to improve hazard mapping and data quality.
One thing all researchers seem to agree on is that windstorm hazard is likely to become more severe. When assessing any type of physical risk, it’s crucial to remember that hazard is just one component. The others – exposure and vulnerability – are as important.
Both Sandy and Katrina affected areas with high exposure in terms of population density and property value. Sandy affected nearly 1, 000 miles of coastline, a bigger area than any previously recorded hurricane in the US. Not only that, but it produced a record storm surge of 4.2 metres in central Manhattan. The surge also affected expensive real estate in New Jersey and Long Island – not to mention the disruption caused by the closure of a major airport. As with Katrina, much of the damage was due to flooding in the low-lying coastal zones.
Even where exposure remains high, risk can be reduced by reducing vulnerability. Hurricane Andrew in 1992 generated a sea change in attitudes to vulnerability in the US. In its day, it was the costliest storm ever, but it is now ranked fourth. Thanks to an effective warning system, the death rate was low at 43 people, but so many houses lay in its path that a sustained wind speed of 145mph and a 5-metre storm surge caused more than $26bn of damage at 2012 prices. More than 200, 000 homes and businesses were damaged or destroyed.
After Andrew, steps were taken to make Florida’s buildings more resilient to windstorm by raising standards and giving better training to building inspectors.
Human vulnerability can be reduced by effective early warning systems. However these are very dependent on a good communications infrastructure and this is not always available in less developed countries. For example, Hurricane Mitch struck Honduras in 1998 with very little warning to the people living there. Conservative estimates suggest that 20, 000 people died, and a further two million were left homeless. Yet the hurricane is estimated to have cost only around $2bn at 1998 prices.
It has also been suggested that underwriters should beware a ‘black swan’ event, defined by Nancy Green, Executive Vice President of AON Risk solutions, as “a highly improbable occurrence with three characteristics; it is impossible to predict; it carries a massive impact and its shock value is stunning because people could never conceive of such an event occurring.” Green’s examples include the September 11 attacks, the 2008 credit crisis, the BP Gulf oil spill in 2010 and the 2011 Japan earthquake.
The US remains the region most vulnerable to hurricane damage. Of the 40 biggest insurance losses recorded since 1970, 20 were from hurricanes or tornadoes that struck the US.
Aon’s Global Risk Management Survey currently ranks weather and natural disasters at 16 on its list of risk concerns facing companies, but projects this will jump to ninth place in the next three years.