24 June 2024
A Parametric Port in a Storm
How can parametric insurance enhance business resilience against named windstorms?
Weather patterns in the Atlantic are expected to change from El Niño to La Niña in late summer, increasing the potential for extreme weather. The US National Oceanic and Atmospheric Administration has predicted a range of 17-25 named storms this season. Of those, eight to 13 are forecast to become hurricanes.
This climate shift underscores the pressing need for effective risk transfer solutions to mitigate the potential impact on businesses. Parametric insurance is emerging as a cutting-edge and practical approach, providing additional capacity for businesses to effectively manage the amplified risks associated with severe weather events.
What are named windstorms?
Named windstorms are significant weather events, typically involving high winds, that receive specific names to help with identification and communication. These names are assigned by meteorological organisations to aid in the dissemination of information and warnings to the public.
Tropical Storms and Hurricanes: In the Atlantic Ocean and the eastern North Pacific, these storms are named by the National Hurricane Center (NHC). Once a tropical depression strengthens into a tropical storm (with sustained winds of at least 39 mph or 63 km/h), it receives a name from a predetermined list. If it further intensifies to reach hurricane status (with sustained winds of at least 74 mph or 119 km/h), it retains the same name.
Typhoons: In the western North Pacific, these storms are referred to as typhoons and are named by the Japan Meteorological Agency (JMA) and the regional specialised meteorological centre in Tokyo.
Cyclones: In the Indian Ocean and South Pacific, these storms are known as cyclones and are named by various meteorological organisations, depending on the region.
Other windstorms can also be named, including:
Extratropical Cyclones: In Europe, powerful extratropical cyclones (also known as windstorms) are named by meteorological services such as the UK Met Office and the Free University of Berlin.
Nor'easters: In the United States, particularly strong nor'easters, which are powerful storms along the East Coast, occasionally receive names from media outlets or weather services, although this practice is less formalised.
Developing trends
Increased frequency and intensity
There has been a noticeable increase in the frequency and intensity of named windstorms. Some studies suggest that climate change is contributing to warmer sea surface temperatures, which can fuel stronger and more frequent storms. Notably, the 2020 Atlantic hurricane season was the most active on record, with 30 named storms.
Extended seasons
Traditionally, the Atlantic hurricane season runs from June 1 to November 30. However, in recent years, storms have been forming outside of this period, prompting discussions about whether the official season should be extended. For instance, Tropical Storm Ana formed in May 2021, before the official start of the season.
Rapid intensification
There has been an increasing occurrence of storms that undergo rapid intensification, where a storm's wind speeds increase dramatically over a short period. Hurricanes like Harvey (2017), Michael (2018), and Ida (2021) experienced rapid intensification, posing significant forecasting and preparedness challenges.
Record-breaking storms
Several recent storms have broken records for intensity, rainfall, and other metrics. Hurricane Dorian (2019) tied the record for the strongest landfalling Atlantic hurricane when it hit the Bahamas, with sustained winds of 185 mph. Hurricane Harvey (2017) set a record for the most rainfall from a tropical cyclone in the continental US, with over 60 inches in some areas of Texas.
Wider impact areas
The impacts of named windstorms have been felt in regions that are not typically associated with such events. For instance, Hurricane Ophelia (2017) reached as far north as Ireland and the UK, causing significant damage. Similarly, Cyclone Amphan (2020) was a devastating storm in the Bay of Bengal, affecting millions in India and Bangladesh.
Improved forecasting and communication
Advances in meteorology have led to better forecasting models and earlier warnings, helping to mitigate the impacts of these storms. The use of satellite technology, computer models, and real-time data has improved the accuracy of storm tracking and intensity predictions
Economic and social impacts
The economic and social impacts of recent named windstorms have been significant. The cost of damage from storms like Hurricanes Harvey (2017) and Ian (2022) runs into hundreds of billions of dollars, with long-term effects on communities, infrastructure, and economies.
What does the future hold?
As climate change continues to impact global weather patterns, we expect previous trends to intensify, along with several additional risks from named windstorms.
Increased storm frequency and rapid intensification
Climate models predict that the intensity of tropical cyclones will continue to increase. Warmer sea surface temperatures provide more energy for storms, leading to more frequent occurrences of Category 4 and 5 hurricanes. These stronger storms can cause more severe damage to infrastructure and ecosystems.
The phenomenon of rapid intensification, where a storm's wind speed increases dramatically in a short period, is expected to become more common. This trend makes forecasting more challenging and gives affected regions less time to prepare.
Greater precipitation and flooding
As the atmosphere warms, it can hold more moisture, leading to heavier rainfall during storms. This increases the risk of flooding, both from storm surge and from prolonged, intense rainfall. Urban areas with poor drainage systems are particularly vulnerable.
Changing storm tracks
Climate change may alter the typical paths that tropical cyclones take. This could expose regions that are not traditionally affected by such storms to new risks. For example, higher-latitude regions might see an increase in storm activity.
Compound events
The interaction of multiple extreme weather events, such as hurricanes followed by heatwaves or wildfires, can compound the overall impact. These compound events can strain emergency response systems and complicate recovery efforts.
Infrastructure vulnerability
Ageing infrastructure in many parts of the world is not designed to withstand the increasing intensity of storms. This puts critical facilities like hospitals, power grids, and transportation networks at greater risk of failure during extreme weather events.
The phenomenon of rapid intensification, where a storm's wind speed increases dramatically in a short period, is expected to become more common. This trend makes forecasting more challenging and gives affected regions less time to prepare.
How does Gallagher quantify a client's exposure to extreme weather?
Gallagher Specialty’s Parametric Centre of Excellence is designed to respond to changing market conditions and client demand. This specialist team will advise clients on alternative risk transfer mechanisms to strengthen their traditional insurance portfolio and support clients’ ongoing resilience and adaptation journeys. Gallagher uses a number of data tools and bespoke software to analyse a client's risk exposure relating to named windstorms.
Based on historical data, the modelling team takes the client's information and runs it through its various modelling programmes to better understand how likely the client is to be impacted by different categories of storms. This risk assessment is then shared with underwriters to help determine an appropriate payout structure and coverage limits.
Quantifying the specific risk helps Gallagher design customised parametric insurance packages to manage the client's risk from named windstorms.
Parametric benefits
· Absolute certainty of payment if a storm triggers the parametric threshold, avoiding disputes over claims
· Rapid payouts within 30 days of a trigger event, providing quick liquidity and flexibility to make repairs
· Coverage for exposures traditionally not covered by traditional insurance, like golf courses and beachfront properties
· Coverage for all forms of loss, including pure financial losses and non-damage business interruption from disruptive storms
Our solution
Gallagher’s parametric team offers risk solutions tailored to your company’s specific risk profile. Our analytic capabilities can help businesses understand what risk to retain and what to transfer. Please contact us to find out how we could support your business.
The sole purpose of this article is to provide guidance on the issues covered. This article is not intended to give legal advice, and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and/or market practice in this area. We make no claims as to the completeness or accuracy of the information contained herein or in the links which were live at the date of publication. You should not act upon (or should refrain from acting upon) information in this publication without first seeking specific legal and/or specialist advice. Arthur J. Gallagher Insurance Brokers Limited trading as Gallagher Specialty accepts no liability for any inaccuracy, omission or mistake in this publication, nor will we be responsible for any loss which may be suffered as a result of any person relying on the information contained herein.
Let's talk
James Bosley
Head of Climate Strategy, Carbon Insurance & Parametric Solutions
James_Bosley@ajg.com
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