In the US, highly respected wind watchers Philip Klotzbach and William M Grey of the University of Colorado department of atmospheric science have put their money on the 2010 hurricane season being “somewhat more active” than the average 1950-2000 season.

 After the lull of 2009, Klotzbach and Gray predict that activity will return to levels more typical of recent times. They expect to see between one and 16 named storms, six to eight hurricanes and three to five major hurricanes.

 Over in London, fellow scientists Adam Lea and Mark Saunders of the Aon Benfield UCL Hazard Research Centre also predict an active hurricane season. They reckon there will be 13.9 (+/- 4.9) tropical storms, 7.4 (+/- 3.1) hurricanes, 3.4 (+/- 1.8) intense hurricanes. Or put another way, the University College London team thinks there is a 62% probability that the hurricane season will be above average and only a 14% chance that it will be below normal.

The thinking behind Klotzbach and Gray’s early prediction is that 2010 is unlikely to be an El Nino year. (El Nino refers to the warming of the sea in the Eastern Pacific.) The absence of big windstorms in 2009 was attributed to the moderate to strong El Nino event.

According to the latest research from the US Climate Prediction Center, the current El Nino will persist into the Spring – but peak before June 1, the official start of the US hurricane season.

The odds on there being a consecutive 2010 El Nino are very low based on previous experience, Klotzbach and Gray say, so conditions are ripe for a return to hurricanes.

Lea and Saunders take a similar tack citing weaker than normal trade wind speed over the Caribbean and North Atlantic and higher than normal sea surface temperatures in the North Atlantic as key predictors.

Both sets of forecasters admit that the precision of such an extended outlook is low. But some insurers need reminding how lucky we were in 2009. A big insured event would have shaken the industry to its capital foundations in 2009, at a time when the financial markets were in recovery mode.

How will the markets respond if the wind blows a hole in insurers’ balance sheets in 2010? Has the insurance industry really reloaded sufficient capital?

http://www.tropicalstormrisk.com/

http://www.cpc.noaa.gov/products/analysis_monitoring/enso_advisory/

The CCRIF is the Caribbean insurance pool which pays out when certain parametric earthquake or hurricane indices reach a threshold.  The pool provides fast liquidity to islands that can see multiples of their GDP wiped out in a single event.  The pool purchases reinsurance and the Lloyd’s market (via Hiscox) has been involved.

CCRIF explain that their intention is to help Caribbean islands increase their knowledge on natural catastrophes and climate change.  It is interesting to see this development in advance of the landmark Copenhagen meeting on Climate Change later this year which, it is hoped, will bring a major change in the politics of climate change.  Many stakeholders have submitted proposals to this meeting and at least two of these relate directly to insurance.

The proposals by AOSIS (Alliance of Small Island States) and the MCII (Munich Climate Change Initiative) both believe that insurers have a key role to play in helping the developing world adapt to climate change.  First they believe that countries must adapt and thereby attempt to offset the growing risk (for example by building flood defences, changing building methods, increasing risk management education); but they both admit that adaptation will not remove all risk and some of the residual risk can be pooled by insurers and reinsurers. 

The new CCRIF announcement is a good example of the education on risk (sometimes called “capacity building”) that adaptation will require.  They also state they will assist with disaster reduction schemes, which makes a lot of sense; by reducing the risk the pool will go further.

Deep and rapid cuts in greenhouse gasses are essential.  Yet there will be many years of unavoidable change (probably at least 100) and the global efforts to adapt will bring opportunities to those adept at managing risk.  Insurers have a lot to offer and need to be ready to act.

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 gathering, organized by the Willis Research Network (WRN), heard how a perfect storm and its accompanying storm surge could wreak residential losses of between $36 billion and $140 billion.

The wide range of loss estimates reflects 89 track variations and the sensitivity of using differing assumptions in calculating damages. Some disaster scenarios envisaged storm surges, coinciding with a high tide 10ft higher than Manhattan’s sea walls.

Rowan Douglas, chairman of WRN, acknowledges that the wide range of possible loss outcomes demonstrates how much variance still exists in models—but he says that model technology is improving all the time.

“The insurance industry has always used historical data to form the basis of the event sets that drive insurance industry loss models,” he told lloyds.com. “But today’s climate is more dynamic than previously and it means that we are now at the limits of the value we can extract from historical data alone.”

But, as the Princeton conference delegates heard, climate scientists are developing physically based models of the planet that simulate the world’s oceans and atmosphere. They’re called General Circulation Models or, sometimes, Global Climate Models.

“We’re entering a new era whereby we can begin to assess the regional impacts of a changing climate,” he says. “At the Princeton seminar we discussed how this emerging science will inform future cat models the insurance industry uses in its catastrophe risk management.”

Representatives from the leading model shops AIR, Eqecat and RMS explained to the conference how they were actively incorporating the latest scientific thinking into their products.

“We’re often asked by clients what is the best model to use,” Rowan Douglas says. “But there is no single ‘best’ model. Our philosophy is to take an ensemble approach by obtaining more than one modelled output.”

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.

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

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
 

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.

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+).

Early August saw all the major forecasts for Atlantic basin storm activity being shaved(see table); with Klotzbach/Gray citing ‘dust outbreaks from Africa’, ENSO (El Niño Southern Oscillation) conditions and slightly cooler Sea Surface Temperature anomalies.

Before we get too carried away, take a look at the Average row above and you’ll notice that notwithstanding the fine tuning, all the forecasts are still calling for an above average Atlantic hurricane season for 2007. The graphic below (source: http://www.nhc.noaa.gov/pastprofile.shtml) shows clearly that by far the busiest months of the season are August, September and October.

Right on cue we have some developments in the Atlantic/Caribbean to follow. Tropical Storm Dean is mid-Atlantic and heading towards the Lesser Antilles. Almost all the current models suggest this storm will intensify over the next few days and has the potential to be Cat 3 in three to five days, and a possibility of making US landfall.

Coincidentally, almost 15 years ago (16Aug1992) another storm formed on same spot: Andrew- let’s hope the similarities stop there.