Monday, March 21, 2016

Hurricane Risk and Insurance Pricing Coming Into the 2016 Season

Following up on Friday's "Re/insurance: 'El Niño in decline but impacting global weather, ~50% chance of La Niña'".

La Niña correlates with more hurricanes and in addition, as pointed out in the piece linked above, the now-ending El Niño bears some resemblance to what the Japanese researchers dubbed the Modoki varient, which is also correlated with more hurricanes.

From Artemis:

Will an inactive phase change ILS investor appetite for hurricane risk?
Scientists have highlighted the possibility that the heightened period of hurricane activity that began more than 20 years ago has ended, suggesting that insurance-linked securities (ILS) investors with related exposures could need to adjust their view of the peril, according to Deutsche Bank Securities.

Hurricane Alex satellite imageIt’s been more than a decade since Florida experienced the impacts of a landfalling hurricane, yet between 1995 and 2012 the North Atlantic Ocean has been in an active phase of the Atlantic Multidecadal Oscillation (AMO), a period that some scientists and weather experts believe relates to an increase in hurricane activity.

Referencing a publication in the Nature Geoscience Journal from Dr. Klotzbach, Dr. Gray, and Dr. Fogarty, that suggest the active hurricane phase could have actually ended in 2012, Deutsche Bank Securities ILS team questions if a transition to an inactive AMO phase has any impact on how insurance-linked investors assess their exposure to hurricane risks.

For those that believe the AMO cycle has a direct impact on the frequency of hurricane activity this suggests that being in the current inactive phase relates to a reduction in hurricane activity, underlining a potential need for ILS investors participating in hurricane risk to adjust, or rethink their allocation and modelling approach to the peril, says Deutsche Bank Securities.

It’s important to stress that the paper from the above-mentioned authors and the analysis from Deutsche Bank Securities does simply suggest that the cycle has now entered into the inactive phase, so by no means should this be taken as conclusive.

Furthermore, some weather experts feel that AMO activity doesn’t actually have any impact on hurricane activity.

Regarding the ILS space and its investors, of which approximately two-thirds of the catastrophe bond space is exposed to hurricane risks, a transition to an inactive AMO phase and the possible, resulting reduction in hurricane frequency could create a need to rethink modelling approaches and hurricane risk allocations....MORE
We have hundreds of posts on cyclones and hundreds of posts on re/insurance and scores of posts on the interactions of the two. Some related to this post:

July 2009
New Type Of El Nino Could Mean More Hurricanes Make Landfall
Feb. 2016
"Reinsurance cycle won’t turn until there’s “blood in the streets”: Bernstein"
A combination of lousy pricing and the risk of a touch of La Niña this hurricane season makes the re/insurance biz ripe for shorting....
May 2015
Global climate on verge of multi-decadal change
Feb. 2016
Hurricane Watchers, The Atlantic Multidecadal Oscillation Is Rolling Over
What a great time to be alive.
For now this is a personal bookmark I'll probably be referring back to ad nauseam.

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