Computerised catastrophe modelling that factors the impact global warming might have on the frequency and intensity of hurricanes is increasingly being used by re-insurers to price their insurance rates.
The practice has drawn criticism in the United States, partially because scientists not only have differing views on the effects climate change will have on the frequency and intensity of hurricanes, but also on whether global warming is a long-term phenomenon or just a cyclical warming of the earth’s oceans.
Island Heritage Chief Marketing Officer Nigel Twohey said he spoke to representatives of Munich Re, an active reinsurer in the Caribbean, about this issue in June at an insurance conference.
‘Reinsurers are aware of the probable effects of global warming on sea temperatures and are making provisions for this in pricing and deductibles,’ Mr. Twohey said. ‘For the Caribbean, they have not increased their premiums that much for global warming – yet. As details become clearer, especially if we have an active [hurricane] season, then we can certainly expect this to become an increased factor.’
Although many atmospheric factors affect the genesis and intensification of tropical cyclones, sea surface temperatures play an important role. Hurricanes need sea surface temperatures of at least 82 degrees to form and maintain themselves. The warmer the water above that temperature, the more energy a cyclone can use to intensify.
Scientific data confirms that sea surface temperatures have risen over the past century, but the cause of that temperature increase is disputed. Some scientists believe global warming has occurred as a result of the greenhouse effect, which is caused by the burning of fossil fuels. Others, like noted hurricane forecaster William Gray, believe global warming is nothing more than naturally occurring weather cycle.
A report written by several US National Oceanic and Atmospheric Administration scientists – led by Thomas Knutson – and published in May of this year suggested that the warming of sea surface temperatures could actually reduce the frequency of tropical cyclones in the Atlantic basin. The report, also based on computer models, suggests a decrease in hurricane frequency because warmer sea surface temperatures would also increase vertical wind sheer, something known to inhibit tropical cyclone formation. The report does suggest, however, that warmer sea surface temperatures would lead to hurricanes of greater intensity and with more rainfall.
Despite the uncertainty, reinsurers, particularly after very active hurricane seasons in 2004 and 2005, have started including the potential future impact of global warming in their pricing methodology.
‘Many of the catastrophe models do indeed include increasing amount of data to include global warming,’ said Mr. Twohey. ‘For the Caribbean and Cayman, we are concerned about rising water levels and increased heat in the water, which is one of the major factors for hurricane development.’
Michael Gayle, senior vice president property and casualty at Sagicor General Insurance (Cayman) Ltd. said the concept of insurance relies somewhat on the prediction of future events.
‘Typically, past events are used as a base and any expected changes would be factored into the decision process in an attempt to ensure that there is sufficient funding to cover future claims,’ he said. ‘In life insurance, for example, actuaries examine past mortality rates and factor in changes such as increased rates of cancer, AIDS and the like, in order to predict future mortality rates and set the premium levels accordingly.’
Mr. Gayle confirmed that on the property side of the insurance industry there has been an increased use of modelling as a predictive tool, although he could not say whether the potential effects of global warming were reflected in pricing.
Mr. Twohey explained that modellers could weigh loss projections for an infinite number of factors.
‘They essentially can tweak the figures to take account of virtually anything.’
However, such modelling methods have created a storm themselves in the United States, where – according to an article that appeared in the Wall Street Journal earlier this month – insurers have doubled premiums in certain areas like Cape Cod, Massachusetts based on the assumptive effects of global warming.
The article quotes Massachusetts Attorney General Martha Coakley as saying the hurricane model used in the pricing there was not calibrated for Massachusetts weather patterns and that it predicted the type of storms that had never made landfall in Massachusetts.