February 23, 2006 by Canadian Underwriter
The insurance industry must compensate for extreme changes in the number of tropical cyclones and hurricanes by assuming a different loss distribution for the current warm phase of the natural climate cycle than in the years before, according to a report by Munich Re.
The report, entitled “Hurricanes: More Intense, More Frequent, More Expensive,” says the annual number of major hurricanes in the current warm phase is about 170% higher than in the previous cold phase. In terms of landfalls, the increase is in the order of 230%.
“Even if we compare the loss distribution of the current warm phase with a loss distribution that is indifferent to the natural climate cycle (and is based on all years since 1900), we should still expect a large difference,” the Munich Re report says. “This is borne out by a comparison of the hurricane intensity distributions for the whole period of 19002005 and the current warm phase 19952005.
“It clearly shows that the proportion of severe storms has risen and that of moderate storms has fallen. As the loss distribution in present models has usually been based on all loss events since 1900, and does not distinguish between the various phases, it is inevitable that the present estimate of loss levels is too low.”
As a result, the report adds, the insurance industry is confronted by a great challenge: it must respond to the present-day hazard and loss distribution and take them into consideration adequately in its risk management.
Munich Re notes the record losses generated by Hurricane Katrina have illustrated factors that amplify tropical cyclone losses. And yet, the report adds, these factors are disregarded in current loss models and are not given sufficient weight in the estimate of the overall insured loss. These factors include:
the effects of storm surge and flood;
complex relationships in the insurance of business interruption that have a loss-aggravating effect;
limited number of loss adjusters, which hampers the settlement process when there are large numbers of individual claims;
substantial increases in the prices for materials and wages for the work of restoration and in the costs of alternative accommodation when buildings are damaged and uninhabitable;
more severe damage and delayed, more expensive repairs when the same region is hit by several storms within a short time.