Climate change does not = global warming.

The headlines of newspapers relating to temperature changes – oft quote the range of 1.1.to 6.4degC temperature increases by 2100 sourced from the IPCC.  The Press rarely delve to the level of detail below the headlines to explain how this average change is manifest across different geographical regions. This point was further highlighted yesterday during a talk with Pen Hadow who, as part of ClimateWise week, was addressing a Lloyd’s audience about his recent findings with the Catlin Arctic Survey.

Surface air temperatures here in the northern hemisphere are distinctly higher than the reference 1961-90 period. Indeed, the annual mean Arctic temperature for the year 2008 was the fourth warmest year for land areas since 1990. These changing temperature regimes are resulting in a marked decrease in the level of sea-ice thickness in this area.

In the early part of this decade, there were suggestions that the summer sea-ice extent in the Arctic may disappear by the end of the 21st century – it now appears that there may be no summer sea-ice within a decade. The rate of warming here is alarming.

Whilst we are witnessing decreasing sea-ice in the northern hemisphere, we are observing some distinct differences in Antarctica. The British Antarctic Survey recently published the first comprehensive review of the state of Antarctica’s climate. Since 1980 there has been a 10% increase in Antarctic sea-ice extent, particularly in the Ross Sea region, as a result of the stronger winds around the continent (due to the ozone hole). In contrast, regional sea-ice has decreased west of the Antarctic Peninsula due to changes in local atmospheric circulation and this has also been linked with the very rapid warming seen over land on the west coast of the Peninsula.

The picture is confused? Or is it? Regional climate change impacts will be varied – we know this – but does the wider public? On a relatively local scale, the UK Climate Impacts Programme (UKCIP) published a set of probabilistic scenarios for changes in projected UK climate – with distinct regional differences.

On a global scale all of these changes will be further magnified. BUT, this is not what is reported in the press – and does not help to inform the public debate. The impacts of climate change will not necessarily result in uniform warming across the entire planet. This has to be recognised as part of the outcome from COP15. Today is the last day of negotiations in Copenhagen. We await with baited breath as to what the outcome(s) will be. Fingers crossed for a number of positive steps forward.

My other pleas:

1. better communication around the regional dimension of climate changes, and that the planet will experiemce differemt changes as wego forward

2. Improved information arpound the rate of some of these change s- notabl y in the Arctic

The contents of the extracts that have been variously published at face value appear damming, and unsurprisingly have been held up high and wide by climate sceptics who argue that this is the end of the Global Warming “charade”. Senator Inhofe, who sits on the US Senate Committee on Environment and Public Works has really gone to town. The message from the Senator’s blog is unequivocal, and I quote ”Most important, however, these revelations of fudged science should have a cooling effect on global-warming hysteria and the panicked policies that are being pushed forward to address the unproven theory”. Although this is hardly surprising when one looks at Inhofe’s previous postings including the ‘Fact of the Day’  ”Skeptic’s guide to debunking global warming”.

Leaving aside the issue of the illegal access to the emails – the extracts are what they are, and they are now in the public conscious. What does this mean for climate science and advising governmental policy to drive forward and effect change? Personally, I think the sceptics will have a blip of a louder voice for a short while – and this will have a marginal impact on public sentiment. But thankfully this will pass. I am hopeful that the COP15 proceedings will further demonstrate the imperative to take decisive action to begin to mitigate the potential impacts of climatic change (not just global warming). And we need the scientists to help us to understand what this could mean.

Most climate scientists are reasonable and will agree that there remains a degree of uncertainty (if you’ll excuse the pun) as to the relative levels of natural variability and anthropogenic contribution to climate change, both regionally and globally. The one fact that doesn’t change is that change is happening – and its not all for the good. The scientific community needs robust challenge and needs the opportunity to share what it has found. Much of what we see published is based upon models – views of a potential future. The recent claims that have had a higher voice claiming these are all a sham fail to note that there are a number of independent academic institutions, running thousands upon thousands of simulations – and yes there are some years that point to globally averaged high increases in temperature, some lower (yes some will point to cooling!). However, the average of these multiple views all point to a dramatically changing global climate.

Now, we have a choice. Do we do nothing and let the world continue to pump inordinate quantities of CO2 into the atmosphere and see what happens? Or do we use the information that we have had from the climate science community and DO something.

Are we really going to play Climate Roulette? The bullet is loaded….

However, the fourth quarter is upon us and broader market conditions appear to be more conducive for more activity. The pipeline looks healthy right now, and historically, Guy Carpenter say the fourth quarter is the second most active of the year. GC’s consensus estimate for the year remains $3bn to $4bn, implying a strong fourth quarter for primary issuance.
One of the other features of this sector, as it begins to mature, is that there is a slug of outstanding risk capital that has matured. In the third quarter of 2009, $300m in catastrophe bond risk capital matured, bringing the year-to-date total to $2.5bn. Another $660m is scheduled to mature in the fourth quarter of this year.

(Tropical Storm Alberto in 1988 formed slightly further north at 41.5degN). Grace is also unusual in that the storm formed over sea surface temperatures of only c23degC. Normally, tropical storms require temperatures in the region of 26-27degC to form and be self sustaining.

Grace looks as though she will bow out today, and transition into an extra tropical storm.

In recent years the first named storm of the season has actually begun outside of the ‘official’ season. Last year Tropical Storm Arthur formed in the Gulf of Mexico on the 31 May. In 2007, Subtropical Storm Andrea and Tropical Storm Barry both formed before 1 June.

It’s time to turn our attention to 2009 activity, and again, sooner than perhaps we had originally anticipated—Dr Jeff Masters’ Weather Underground blog  flagged up one storm to keep an eye on from the morning of 19 May.  The storm didn’t develop into a tropical storm, however, an interesting precursor to the season, as some areas in Florida are deluged by rainfall.

Historically, we’ve seen how forecasters have changed their forecasts over the season, and we’ll look to provide an update on this situation later this summer. However, as the season begins, here’s the latest from some of the more highly respected forecaster organisations:

The hurricane forecasters are predicting an average season, with an average/slightly above number of tropical storms and hurricanes forming when compared to the 1950-2000 baseline.

With reference to the heightened activity observed from 1995-2008, we may well be looking at an average season.

Just because the forecasts predict an average season, it doesn’t mean that the (re)insurance industry should sit back and relax: it’s not the number of storms that count, it’s the intensity and also if landfall is made.

So as ever, insurers and reinsurers need to keep a close eye as the season progresses. And let’s not forget that although we may have a focus on the Atlantic season, the Pacific Typhoon season  is also in progress—and from a nat cat perspective, every day is earthquake season…

The recent incidence of Swine flu has brought some attention to the mortality bond market, and cat bond market issuers and investors will doubtless be keeping a watchful eye on the development of the outbreak with some interest.

Artemis.bm  reports that there are currently somewhere between USD1.5-2bn of outstanding mortality bonds in the cat bond market. The majority of these bonds have been issued by Swiss Re (via the Vita Capital Series), and most recently by Munich Re in February 2008, with USD100m of risk transferred to the capital markets. Other notable issuers include Axa and Scottish Life.

How material an issue is the current outbreak for bond investors and issuers?

It is clearly far too early to state, given that we are in the early stages of the pandemic. However, it may be useful to provide some context. An extreme mortality bond pays out to the sponsoring insurer if the mortality index to which it is linked exceeds a certain rate, typically 20% or more above what is expected for a given population.

The 1918 Spanish influenza pandemic, in which more than 50m people died, is the benchmark by which all modern pandemics are measured. And for any bond to be triggered, we would expect to see mortality rates of this order (ie millions not hundreds or thousands). The early news stories around the current Swine flu has some interesting characteristics, including a higher mortality rate when compared to 1918, although as at 30th April, only one fatality has been reported outside of Mexico.

The Insurance Information Institute estimated in 2006 that even a moderate avian flu pandemic could cost the US life insurance industry $31bn in additional death claims, while a pandemic on the scale of 1918 could cost $133bn.

The market has yet to see any impact on bond pricing – primarily due to a) the magnitude of the fatalities to date, and b) the geographic areas impacted (ie limited to Mexico). There may be far more concern if the number of reported cases increases exponentially and begins to impact the US and western Europe in particlar.

So the market will continue to watch the developing situation with interest, as will we all…

But there are two more issues worthy of consideration.

The first is that of large/single risk losses. Guy Carpenter has produced a report entitled Man-Made Cats hit USD7bn in 2008 (18th February, 2009) which highlights just how significant large losses have been in the past 12 months, both in respect of size and frequency.

In summary:

“Man-made and technological catastrophes caused around USD7bn in insured losses last year. This put 2008 losses around 46% higher than the annual average of USD4.8bn, according to data from Swiss Re. Nineteen known events resulted in insured losses of more than USD50m each, according to publicly available information. These events occurred in 11 countries, with losses ranging from USD80m to nearly USD2bn”.

Within these losses are significant contributions from business interruption losses – eg USD1.5bn from BHP Billiton and the Apache Varanus Island explosion (all in a USD1.8bn loss). A stark reminder to the insurance community of the requirement to manage these types of large risks, and to maintain control over large  business interruption loss potential.

The second element relates to balance sheet value erosion/deterioration. Swiss Re pre-announced (9th February, 2009) that they had taken a CHF6bn loss on their balance sheet. Swiss are not alone in this regard and year end statements have been punctuated by declining shareholder equity values. Many publicly listed companies have also suffered the ‘double-whammy’ of declining stock values.

Whilst the insurance industry has fared relatively well in comparison to counterparts in the banking sector, again the requirement to rebuild balance sheets and financial robustness will have a marked impact in determining the rating environment going forward. And it is important to note the different dimensions of potential losses that insurance companies are exposed to.

There is a new toy in the ILS toyshop.

As the ILS market has rapidly expanded over the past decade, a number of, predominantly European, (re)insurers acting under the auspices of the Chief Risk Officers’ Forum have been investigating the development of a bespoke European loss index. Yesterday Perils AG was announced. Perils’ founding shareholders, who hold equal shares in the firm, include Allianz, AXA, Groupama, Guy Carpenter, Munich Re, PartnerRe, Swiss Re, and Zurich. The company will be fully operational in the latter part of this year, and will offer two main products ‘to subscribers’, which are likely to include insurers, reinsurers, brokers, risk modellers, banks and other insurance industry stakeholders.

These two products are:

1. Aggregated industry-wide insurance exposure data (insured values), which will be catalogued by risk type and CRESTA zones (defined European geographical zones for natural catastrophe insurance). The data will be provided on an annual basis;

2. Industry loss estimates per risk type and CRESTA zones, following large natural catastrophe events.”

The development of this index will remove any perceived ‘moral hazard’ from Swiss Re. Swiss Re have been actively engaged in the ILS space, facilitating trades, buying/selling ILWs, and so forth. By removing the reliance upon a Sigma trigger will ease the reporting burden on Swiss Re, and increase the transparency around the index itself.

 This initiative is to be welcomed and will have some beneficial impacts upon the European insurance industry. But will it be industry-changing? The timing of the release of this product, given the current economic backdrop, will make it challenging for ILS providers to test the water with this index—as this has not been tested in a real cat scenario.

There are associated issues of basis risk given that the index will be based upon a large set of extrapolated exposure/inventory and loss date. The quality will be driven by the information provided by respondents to the questionnaire issued by Perils. The big question remains as to how forthcoming, and timely, this information will be. Improving data quality and maintaining the integrity of the underlying databases will be a significant challenge, and an ongoing issue – as the catastrophe modelling agencies have already found.

I look forward to seeing how this index develops, how widely it will be used (given that this is on a subscription basis rather than ‘free’), and whether it will indeed help to revive the ILS space in Europe this year.

Reaching the end of the Atlantic Hurricane season we can stop and reflect at what has been an eventful and record breaking year; five major hurricanes, eight tropical storms and a total of 16 named storms. Pre-season forecasts in December 2007 suggested that we should expect an ‘above average’ season (ie relative to the 1950-2005 baseline) and the consensus view as the season developed was for this situation to become well above average through 2008.

Image courtesy of Jeff Master's Wunder Blog at wunderground.com/blog/JeffMasters

The Season in review
The season began at the end of May two days earlier than the official start date with Tropical Storm Arthur making landfall on Belize.

Arthur was the first tropical storm to form in May since Tropical Storm Arlene in 1981. Arthur was an interesting transitional storm—having formed from the remnants of tropical storm Alma. Arthur was also unusual in that the first advisory position for the storm was inland over northern Belize, about 30 miles from the ocean.

The storm’s maximum sustained winds were near 40 mph (65 km/hr), with higher gusts, mainly over water east of its center. Hurricane Arthur rapidly intensified when it hit Belize causing torrential rain and flash floods. The storm claimed five lives and damages were estimated at $78million.

The rest of June was quiet, but was followed by the first major hurricane of the season – Hurricane Bertha (Category 3). Hurricane Bertha became the longest-lived named storm on record in July in the Atlantic Basin (17 days).

Bertha also formed farther east than any other on record so early in the season (east of 250W as a storm and 500W as a hurricane). It began its journey on 3rd July over the Atlantic Ocean and peaked at 120mph sustained winds on 7th July.

It did not make landfall and weakened as it approached Bermuda but produced rain and tropical storm winds. No losses were reported.

August proved to be an active month with Tropical Storms Eduoard and Fay, and Hurricanes Gustav and Hanna. All four made landfall with Tropical Storm Fay bringing heavy rain and wind to the island of Hispaniola. Tropical storm Fay stuck Florida a record four concurrent times claiming 36 lives and an estimated $180million damage.

Of these four windstorms, August produced the second most devasting and significant hurricane to the insurance industry of the season with Gustav. At its peak it was a Category 4 storm before making landfall in Cuba. It made landfall at the Island of Hispaniola and Jamaica but at this point it was still only a tropical storm.

It was then upgraded to hurricane status on 29th August where it caused most of its damage having been labelled as Cuba’s worst hurricane in 50 years. After Cuba, Gustav then moved across the Gulf of Mexico towards the US where the biggest evacuation in US history of 2 million people took place in Southern Louisiana including many from New Orleans as fear of a potential repeat of Hurricane Katrina in 2005 loomed. 

Estimates of economic damage from Gustav were placed at $18billlion and 138 deaths. Insured industry losses are estimated at $4 billion (Sigma).

Ike will be remembered for being a strong Category 2 storm at landfall in the US; however, it wrought much damage in the Caribbean as a Category 4 hurricane.

Ike’s impact was sufficiently significant. $6.3million was called upon by the CCRIF to help satisfy the short term financial needs of Grand Turk, where 85% of buildings were damaged or demolished (Source: CCRIF).

Ike weakened significantly as it passed over Cuba, but gained strength as it moved westward across the Gulf of Mexico.

There were some interesting similarities with Katrina. Ike passed over a warm pool eddy that helped to strengthen the storm, and underwent an eye-wall replacement before landfall on Galveston Island on 13 September.

At landfall Ike was a strong Cat 2 storm (with wind speeds just shy of the next category on the Saffir-Simpson scale), but had pressure and wind field dynamics analogous to a Cat 3 or 4 storm.

The physical extent of the storm was greater than that of Katrina. This is evident by comparing the statistics of Ike at the time and Katrina as Ike travelled over the Gulf of Mexico. Ike had a tropical storm force winds radius of 275 miles compared to Katrina’s 230 miles, and hurricane force winds radius of 115 miles compared to Katrina’s 105 miles.

Ike impacted downtown Houston and Galveston in Texas when it made landfall. Galveston suffered much of its damage through flooding resulting in an outage of power.

PCS released an initial insured US property loss estimates for Hurricane Ike at $8.1 billion (30 Sept) which was subsequently readjusted to $10.7 billion (5 Dec) not including offshore.

The overall damage caused by Ike included power outage, storm surge, wind damage and property damage to Ohio, Texas, Kentucky, Indiana and Illinois amongst others (Source: PCS).

Ike was particularly devastating due to the unusual introduction of an extra tropical front as it made landfall resulting in Ohio facing high force winds.

Records broken by Ike: The diameter of the tropical storm was 275 miles. This makes it the largest Atlantic hurricane recorded. It also had the second highest integrated kinetic energy at 5.2 (IKE = scale 1-6) of any Atlantic storm (Source: Weather Underground).

Just as we expected Hurricane season to be reaching its nadir, Hurricane Paloma (Category 4) closed in across the Cayman Islands and Cuba in November forcing 1.2 million people to be evacuated (Source: USA Today). The storm ended on the 9th November to draw a close to Hurricane Season 2008. Hurricane Paloma is only the 4th “P-named” hurricane since records began.

The 2008 season closed within the traditional end of November timeframe.

Records set  in 2008
• Fourth costliest hurricane season on record ($21billion dollars in U.S. damage, according to ISO’s Property Claim Services)
• First time major hurricanes have been observed in five separate months (Bertha, Gustav, Ike, Omar, Paloma occurred in July, August, September, October, and November, respectively)
• First time six consecutive storms made U.S. landfall (Dolly, Edouard, Fay, Gustav, Hanna, and Ike)
• First time three major hurricanes have hit Cuba (Gustav, Ike, Paloma)
• Costliest hurricane in Texas history (Ike, estimated onshore industry loss $15bn)
• Second deadliest US hurricane since 1972, and 26th deadliest in history (Ike, with 82 dead)
• Highest wind gust ever measured in a hurricane over land (Gustav, 212 mph in Pinar del Rio, Cuba)
• First storm ever to make four landfalls in one state (Fay, in Florida)
• Second strongest November hurricane (Paloma, 145 mph winds)
• Smallest tropical cyclone on record (Marco)
• Longest-lived July hurricane on record, longest-lived hurricane so early in the season, longest-lived tropical storm in July and so early in the season (Bertha, which was a hurricane 7.75 days, eclipsing the previous record of 7 days held by Hurricane Emily of 2005. Bertha was at tropical storm strength or greater for 17.25 days)
• Farthest east forming tropical storm and hurricane for so early in the season (Bertha)
• Hurricane Ike had the highest integrated kinetic energy in history

Hurricane season Average 1944-2002 vs 2008

Links

• 30 Deadliest US Hurricanes
• 30 Costliest US Hurricanes
• 30 Deadliest Atlantic Hurricanes
• Top 10 Most Active Hurricane Seasons

Sources

• BBC Weather 
• The Weather Channel
• Hurricane Central
• Earth observatory, Nasa
• Jeff Master’s Wunderblog
• Klotzbach and Gray, Tropical Meteorology Project
• TSR

by Dishni Payagalage-Don

The simulated earthquake was described as having of magnitude 7.8 that ruptured 300 km (200 miles) of the southern San Andreas Fault, between the Salton Sea and Lake Hughes, 80 km (50 miles) NNW of Los Angeles.

This scenario earthquake was not selected as a worst-case scenario, but rather as a plausible event on the fault system considered the most likely to produce a major earthquake in southern California (Jones et. al., 2008, USGS Open-File Report).

The southern San Andreas Fault is believed to have generated earthquakes of ShakeOut size on average every 150 years, and on the selected portion of the southern San Andreas – the last earthquake occurred more than 300 years ago indicating an earthquake is a possible future event.

In contrast, there are many faults within the highly populated regions of southern California that could produce damaging earthquakes as well; however, their average repeat times (recurrence intervals) are thousands of years.

Creating scenarios and testing how the market copes with possible extreme earthquake events are a familiar process to Lloyd’s.

The Exposure Management team have developed the RDS framework that outlines a number of well defined disaster scenarios, including earthquake events that cause an aggregation of risks that may have a material impact upon individual syndicates, and the market as a whole.

The team analyse the financial impacts of such events to ensure the market is capable of surviving damaging events.

The Great Southern California Shakeout Drill aims to ensure businesses and the general public are aware of the social and economic ramifications of an earthquake occurring.

The Shakeout scenario impacts were developed and described by the US Geological Survey, the California Geological Survey, and numerous other public and private organisations. The descriptive narrative of the event began at 10:00am local time with the two minutes needed for the rupture to travel the length of the fault and then proceeds through subsequent hours, days and weeks.

The total impacts estimated for the ShakeOut scenario include over 1,800 deaths and economic losses on the order of $213 billion. Its primary physical effects would be felt in eight counties (Imperial, Kern, Los Angeles, Orange, Riverside, San Bernardino, San Diego, and Ventura) but indirect economic impacts on shipping and transportation would likely be felt throughout the country.

Assuming a 12-14% take-up rate for earthquake insurance, the implied insurance loss is $25-30 billion. This does not include the potential insurance physical and liability associated with the loss of utility services and infrastructure.

Recent focus has been concentrated on the impacts of hurricanes, such as Ike and Gustav, but earthquakes have equally destructive capabilities and require careful preparation so as to reduce the impacts to society. It’s worth remembering that, unlike for hurricanes, every day is earthquake season!

Links:

What Would a Great Earthquake do to the Buildings in Downtown Los Angeles? USGS Release, 6 November 2008
Media Advisory: USGS Animations Show Intense Ground Shaking From 7.8 Great ShakeOut Scenario Quake, 10 November 2008