Munich Re Study Cites Changes in Atlantic Hurricane Risk

December 16, 2005

A report prepared by Dr. Eberhard Faust, who heads Munich Re’s Climate Change Research Department, points to some significant changes in the hurricane risk factors in the North Atlantic.

Munich Re notes: “The elevated frequency of intense storms in 2004 and 2005 — no fewer than four of the ten strongest hurricanes ever recorded occurred in 2004 or 2005 — hints at a systematic change in the hazard situation and hence a shift in the loss distribution and its parameters.” It also stressed that 2004, a record breaking year, was then surpassed in 2005. What’s in store for the future is the next question.

One conclusion from the findings indicates that the “current situation has to be characterized by a higher average market-wide annual loss and different return periods for market-wide claims expenditure compared with the situation a few years ago.”

The report then proceeds to analyze some of the factors involved. It begins with a discussion of the increase in ocean temperatures and in cyclone intensities worldwide, citing a scientific study performed by the Scripps Institute (See IJ Website Feb. 21, 2005). Among other conclusions Munich Re cites the finding that “anthropogenic [i.e. man-made] climate change is having a strong impact on increases in recorded temperatures of the upper ocean layers since 1960.”

Dr. Faust also discusses new evidence with respect to the possible causes of changes in hurricane frequencies and intensities. Concerning “Climate Oscillation in the North Atlantic,” the study found that there’s been a “shift in the intensity distribution towards the higher categories.”

Focusing on Global warming the report indicates: “The natural fluctuation between these phases [warmer and colder] seems to be intensified by a superimposed long-term warming process so that sea surface temperature and the level of hurricane activity increase from warm phase to warm phase (Fig. 4). The increase in the number of strong hurricanes per year from 2.6 to 4.1 from the previous warm phase to the current warm phase means an increase of 58 percent.* There are strong arguments in favor of climate change as the long-term warming agent. ”

As a result of the changing weather patterns the insurance industry is facing some greatly increased risk factors. “These strong changes, reflected in both the number of tropical cyclones and the number of landfalls, can only mean that we must expect a different loss distribution in the current warm phase since 1995 compared with the distribution in the prior period,” the study noted. “We should recall that we observe an increase in terms of the annual frequency of major hurricanes in the order of 170 percent from the foregoing cold phase (1971 to 1994) to the current warm phase since 1995. In terms of landfalls the increase is of the order of 230 percent.”

Munich Re also said: “Even if we compare the loss distribution of the current warm phase with a loss distribution based on all years since 1900, which can be called indifferent towards the natural climate cycle, we should expect a large difference. This is strongly indicated by a comparison of hurricane intensity distributions calculated for the whole period 1900 – 2005 versus the current warm period 1995 – 2005 (Fig. 6). It is plain to see that the current warm phase is marked by a higher proportion of strong hurricanes (Categories 4 and 5 on the Saffir-Simpson Scale) and a lower proportion of weaker hurricanes (Categories 1 and 2 on the Saffir-Simpson Scale).”

In addition the study points out that “none of the loss models available commercially incorporate such a change in the distribution. So it is a major challenge for the insurance industry to respond to the present-day hazard distribution and – as a consequence of this – the present-day loss distribution and to take them into consideration adequately in its risk management.”

The study is available in PDF format on the company’s Website at: http://www.munichre.com.

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