After week one of the Copenhagen climate summit disagreement still remained as to the overarching objective of limiting global warming to 1.5° or 2°C? While G8 and major developing nations endorsed 2°C as a target in July this year, Tuvalu, a small island in the Pacific with very real existential concerns, led the charge for members of the Alliance of Small Island States (AOSIS) calling for a legally binding agreement along with a target of 350 ppm of CO2 and 1.5° of warming with the backing of over 100 delegations.

Neither target is going to be easy according to the UK Met Office which released analysis showing that 1.5°C would be “almost impossible” to meet without implementing measures to take carbon dioxide out of the air, and that even if emissions peaked by 2020 there was only a 50:50 chance of holding temperatures to 2°C.

On a positive note, some progress has been made on short-tem funding commitments to help developing countries adapt, with the EU making up a large part of a $10bn annual global package. On longer term finance a consensus is emerging among developed countries around $100bn per annum, although developing countries say it needs to be more.

So the stage is set for Week 2 of the Conference of the Parties, with heads of state descending on Copenhagen for the final stages of negotiations. Optimists still hope for historic agreement. With President Obama set to join the fray later this week let’s hope that negotiators can “put their hands on the arc of history and bend it once more toward the hope of a better day.”

Notwithstanding the ambiguities surrounding Climategate, which is put nicely in context by George Monbiot here, the majority in the insurance industry are inclined to believe the climate is indeed changing. Under a warming world clearly weather patterns are likely to change, but for the reinsurance sector, key questions revolve around the impact on catastrophe events and losses:

• Will we see more (and more intense) hurricanes in the future than in the past?
• Will rising sea-levels mean worse coastal surges?
• Can we expect more flooding due to extreme precipitation events?
• Will heatwaves increase wildfire events and exacerbate crop insurance losses?

The IPCC report in 2007 says Likely, Likely, Very Likely, Very Likely in answer to the above questions, and the large majority of subsequent research supports this view. Given that (re)insurers will pick up much of the cost of additional losses, it’s no surprise that a substantial amount of effort is going in to translating the emerging science of climate change into insurance loss impacts.

A useful recent addition to this work was published by the ABI (pdf here) supported by AIR and the UK Met Office, and includes impact analysis of 2, 4 and 6 degrees of warming on UK Flood risk.

Two flavours of El Niño
Recent research about El Niño (widely credited with helping suppress Atlantic hurricane activity in 2009) under warming conditions, suggests that in future we may experience more central Pacific El Ninos, rather than the typical eastern Pacific ones. Bad news is that the central Pacific ones may not suppress Atlantic hurricanes to the same degree. [link]

While there is still uncertainty and disagreement in the scientific community around how global warming will influence hurricane formation, it’s worth remembering that we have already seen anomalous Atlantic hurricane activity this decade in terms of geographical extent (north east and south Atlantic) and duration of the ’season’ which saw the official close (30th Nov) of the 2005 season extend into the following January.

Clearly much uncertainty remains as to how exactly climate change will \ is already influencing catastrophe risk, and it is vitally important that the insurance industry continues to follow the academic research and reflect emerging trends into our risk frameworks.

Against the backdrop of economic malaise, the preservation of capital is critically important for insurance companies. Capital is precious and post-event reloads are much harder than they used to be. Add to this poor investment returns, currency volatility & recessionary claims inflation and it’s easy to appreciate the importance of robustly managing catastrophe risk profiles to within insurer’s risk appetites – surprises are certainly not welcomed by boards of directors, shareholders, rating agencies nor regulators.

The Exposure Management team at Lloyd’s is tasked with understanding and managing the aggregation of risks both within syndicates and across the market, and we are currently looking for an experienced  new colleague to bring the team up to full complement.

If you have the right experience and are interested in joining a dynamic team, more details about the role can be found at jobs.lloyds.com (Ref: 441).

Tags: vacancy

Whenever disaster strikes there is a natural desire to understand the extent of damage and cost implications as well as the scale of human tragedy.

While it may take many months before the full extent of insurance claims are known, the (re)insurance industry, analysts and regulators are keen to know asap how badly each company has been impacted. To fill the information void, the big three catastrophe modelling companies scramble to publish real-time loss estimates based on their proprietary model technology and their view of industry exposure. 

But why? Why do they take the enormous downside risk of getting it wrong when there is so much uncertainty pre-landfall and in the first few days following a hurricane event? There is a grave danger of misinforming clients as well as giving cynics license to engage in a bit of model-bashing if they miss the mark.

The answer: they have to. 

First, Real-time loss estimation has been sold as a product feature, targeting both buyers and sellers of Live Cat protection.  Also, supporting certain Insurance Linked Security (ILS) transactions commits model vendors to developing event windfield footprints, damage and loss estimatesto synthetic industry data.

So how well do they do? Naturally all will tell you that they do better than the others! AIR Worldwide feel sufficiently pleased with their performance in Ike that they have released a report comparing their model estimates with the latest figures from PCS. 

Personally, I think Ike demonstrates precisely why model companies should resist the rush to publish early loss estimates.

First, damage to offshore energy interests was unusually high considering the Saffir Simpson cat 2 classification that Ike had, not to mention the enormous scale of the windfield. We have learned from Katrina and Rita that it also takes a while to fully appreciate the extent of claims for damage to subsea interests.

Second, none of the ‘hurricane’ models extend far enough inland to generate meaningful losses to Ohio in the way that Ike did (over $1bn and counting).

Unlike some of the experience of model usage in the banking world, the insurance industry  has benefitted enormously from disciplined adoption of catastrophe modelling technology to support portfolio and capital management. Unfortunately real-time loss estimation is not where the models add real value.

Tags: AIR, cat models, Ike, PCS

Given the ’special relationship’ enjoyed between the UK and the US, key communication advances have helped support growth and development in political, social and commercial relations. In Pocahontas’ time, in the early 17th century, information would have had to travel by ship to cross the Atlantic. Transatlantic telegraph (1858), radio (1901), passenger flight (1927) and now the ubiquitous internet have all, in their own ways, represented paradigm shifts in transatlantic communication.

Today’s computing power, analytical techniques and email technology, make us increasingly hungry for information to support the significant volume of transatlantic business written in London, but we’ve often struggled to communicate effectively with our colleagues ‘across the pond’. Why? Because as an industry, we have failed to agree on which data elements are important and how best to structure the data. Until now, that is.

Just in time for Christmas, ACORD (the standards organisation) have published the first set of data standards for communicating US Property exposures between underwriters in the US and the London market. Specifically aimed at Delegated Undewriting contracts, where exposure information is reported on a monthly basis throughout the lifetime of a contract, the establishment of data standards presents significant opportunities for streamlining business processes, and trimming expenses, on both sides of the Atlantic. Clearly welcome given the economic climate.

The new US Property reporting template is part of a wider ACORD initiative that is global in scope and already has the support of over 70% of Lloyd’s underwriting capacity in this class. Simply developing a standard may not be as momentous as Marconi’s first transatlantic radio communication and doesn’t instantly deliver the anticipated business benefits – but it is a necessary and important first step.

More information about the data standards, and supporting companies can be found in the ACORD document: ACORD standards guide (pdf, 155kb).

Tags: ACORD, Data, Standards

Today is generally considered to be the midpoint and peak of the Atlantic Season in terms of activity and the last two weeks have certainly helped to remind us. So far we have seen 10 named Tropical Storms, 5 Hurricanes and 3 Major (=Cat 3+) Hurricanes. Seasonal forecasters have responded by adjusting their estimates of activity levels upwards (NOAA , Klotzbach ).

The season kicked off early with Arthur, the first Tropical Storm to form in May since 1981. In July, after hitting the Yucatan Peninsula and causing 17 deaths in Guatemala Dolly made Cat 2 landfall in Texas, dropping nearly 16 inches of rain over South Padre Island.

August saw a busy month with Tropical Storms Edouard, Fay and Hanna and Hurricane Gustav all finding land. While Gustav could easily have cost much more, insurers move into September with Hurricane Ike the next threat. Ike has already made a direct hit on the Turks and Caicos Islands as a cat 4 on Sunday 7th September, weakening to a Cat 3 to hit Cuba later the same day. By Monday afternoon Ike had weakened along the country’s southern coast, 1.2 million Cubans had evacuated, and at least four people had died. Currently Ike has emerged into the southern Gulf of Mexico as a Cat 1 hurricane with 80 mph winds, but likely to strengthen to a Cat 3 as it tracks towards a central Texas landfall later in the week.

Texas Governor, Rick Perry, has issued disaster declarations for 88 counties to help preparation for Ike. Having only just returned to offshore installations following Gustav, evacuations ahead of Ike are in full swing (10 rigs and 202 production platforms have been evacuated), and US oil and gas production in the western Gulf will be shut-in for at least two weeks.

Ike killed a further 66 Haitians, taking the total storm toll to over 1,000 deaths – much of which resulting form flooding associated with Hanna. As many as 600,000 people may need assistance, according to United Nations humanitarian affairs chief John Holmes.

Lloyd’s are releasing regular KML file updates (to Managing Agents) detailing TSRs latest Ike track forecasts and historical wind swaths enabling them to quickly assess the extent to which syndicate portfolios might be affected. Contact the Lloyd’s Exposure Management for more details.

Graph to show 2008 Huricane Season vs 1944-2002 Average

Table to show 2008 Huricane Season vs 1944-2002 Average
 

Tags: Arthur, Dolly, Fay, Forecasts, Gustav, Hanna, Hurricanes, Ike, TSR

What a difference a day (or two) makes. Having seen the devastation that Gustav wreaked on Cuba (and Haiti), I watched the forecastors’ projections on Sunday morning with a sense of foreboding and déjà vu. Almost three years to the day after the devastation of Katrina, Gustav was set to traverse the Gulf of Mexico, Cat 4 all the way, en route to New Orleans. With reparation of New Orleans levees not scheduled for completion until 2011, Mayor Nagin ordered a mandatory evacuation starting in the early hours of Sunday morning.

Thankfully, unlike Katrina, Gustav’s structure was too disorganised to take the opportunity to intensify as it passed over the warm Loop Current, and further weakened as it approached landfall as a Cat 2 hurricane. Today, as reports come in, almost all the news has been positive:

• New Orleans’ levees just about coped with the tidal surge – overtopping but not failing
• Coast Guard flyovers showed that all platforms in the Gulf are in place and that energy infrastructure suffered no significant damage (here)
• Sabine has partially lifted ‘force majeure’ at Henry Hub, a major natural gas interconnection point, which allows companies to depart from contract terms in the event of a natural disaster
• The Louisiana Offshore Oil Port (LOOP) said it is optimistic it can restart operations “fairly quickly”
• Based on post-landfall data catastrophe modelling firms have lower (and narrower) ranges of estimates for onshore damage and insured losses. AIR are estimating $2bn to $4.5bn, while EQECAT and RMS both settle on $3bn to $7bn.

If these estimates are borne out by actual claim experience (once damages have been fully assessed) Gustav will be very much a business-as-usual hurricane rather than the mega-catastrophe it nearly was.

Detailed maps of Gustav’s windfield are available to all Lloyd’s managing agents – contact the Exposure Management team.

Lloyd’s policyholders affected by the hurricane should read more in the policyholder advice section of lloyds.com.

Tags: Energy, Gulf of Mexico, Gustav, Henry Hub, Hurricanes, LOOP, New Orleans

Edouard, the fifth named storm of the Atlantic hurricane season, has just made landfall near Galveston in Texas as a tropical storm. While unremarkable in itself, from Lloyd’s perspective it is interesting to note that the trajectory of Edouard’s track as it approached land is almost identical to the Lloyd’s Realistic Disaster Scenario  (RDS) for the Gulf of Mexico. When we first published the scenario some people commented that the trajectory was unrealistically ‘flat’, so thanks go to Edouard for going some way to validating our choice.

Another storm worth mentioning in connection with Edouard is Tropical Storm Allison. ‘Allison’, also made landfall near Galveston in June 2001, and is notable for being the only storm to have it’s name retired from service without reaching hurricane status. While doing minimal direct damage due to wind speed, Allison stalled, dumped inches of rain, and caused flash floods which resulted in 41 deaths and around $3-5 billion in flood damage. Thankfully Edouard moved on quite quickly and early estimates suggests minimal (under $100mn) losses. 

Tags: Allison, Edouard, RDS, Tropical Storm

Tropical Storm Dolly is heading for the Mexico \ Texas border this morning and has prompted a rash of evacuations of non-essential staff from offshore platforms (see here, here), although currently production is not expected to be affected. The National Hurricane Centre’s (NHC) central forecast is for landfall around Brownesville, TX although some models put Dolly closer to the larger city of Corpus Christi (Click here for link to Google Earth KML of track models).

For insurers with Offshore Energy interests, Watson Consulting produce a nice real-time kml view (here) showing estimated impact on overall offshore production and downtime for refineries.

As for intensity, Dolly is expected to reach hurricane Cat 1 before landfall, but unlikely to reach Major Hurricane status (Cat 3+).

Tags: Dolly, Energy, Hurricanes

It’s been a busy week for hurricanes around the world. Starting in the Atlantic/Caribbean, in the last seven days we have been introduced to Gabrielle, Humberto and Ingrid taking the total number of named storms in 2007 to nine. When comparing with the forecast activity levels (opens new browser window), though, we have to discount sub-tropical storm Andrea (link to NOAA 2007 season summary including ACE index). With tropical storm Gabrielle only grazing the Carolinas, and (now) tropical depression Ingrid fading fast near the Leeward Islands, only Humberto posed any real threat to people and property. The third hurricane of the year (for the Atlantic region) Humberto intensified rapidly to Cat 1 (on Saffir-Simpson scale) just before landfall, which is unusual.

Earlier in August, Hurricanes Dean and Felix, earn 2007 the distinction of being the only year on record where the first and second hurricanes of the year both reached category five on the Saffir Simpson scale. While intense, Dean’s track and two Mexican landfalls managed to avoid major concentrations of people and property. Felix claimed 101 lives, making landfall as a cat 4 in Nicaragua with damaging windspeeds extending into Honduras. While clearly still vulnerable to major hurricanes, it appears that the authorities and coastal communities in these two countries have improved early warning and evacuation procedures since Hurricane Mitch claimed the lives of 7,000 Hondurans and 3,000 Nicaraguans in October 1998.

Meanwhile, in the north-west Pacific, South Korea has been having a bad week. Typhoon Nari (Korean for Lily) hit the south coast, killing 11 people and causing major disruption through flooding and fight cancellations. Unfortunately there are more clouds on the horizon as Typhoon Wipha (see picture) looks set to visit the regions major cities of Taipei, Shanghai and finally Seoul, the capital of South Korea sometime on Thursday.

One really useful source of information that the (re)insurance industry draws on is the award-winning TSR website which has details of track and rainfall forecasts, windspeed probabilities and historical wind swaths. My team has been working closely with Dr. Mark Saunders and colleagues at TSR and as a result of this collaboration we are pleased to make available KML file format views of some of TSR’s beta products to Lloyd’s managing agents. This gives Lloyd’s insurers the capability to quickly assess the extent to which a given hurricane windfield might affect their respective portfolios of direct risks. Managing agents who would like to receive updates on live hurricanes should contact me (paul.nunn@lloyds.com).