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Long-term trends occupy catastrophe modelers

Hurricane Idalia

As 2023 proves to be another active year for hurricanes and other catastrophe losses, modeling companies remain focused on long-term climate trends rather than annual variations.

Rising air and sea temperatures are more likely to have a lasting effect and are more closely scrutinized by modelers than temporary changes in weather patterns, but modeling companies are still making some adjustments to single out the short-term phenomena, experts say.

Modelers are also scrutinizing severe convective storm risks, which caused roughly two-thirds of the $93 billion in natural catastrophe insured losses through the third quarter of this year, according to a recent report from Gallagher Re, the reinsurance brokerage business of Arthur J. Gallagher & Co.

This year displays two opposing climate characteristics: warmer sea surface temperatures, which help foster hurricane activity, and El Nino conditions (see related story below).

“Sea surface temperatures in the tropical and subtropical Atlantic are at a record high this season, fueling hurricane activity,” said Elisabeth Viktor, senior natural catastrophe specialist at Swiss Re Ltd. in Zurich. Meanwhile, El Nino conditions, which began in the summer and are expected to persist, inhibit the formation of hurricanes, she said.

The hurricane season traditionally runs from June 1 to Nov. 30. In the most recent update to its well-respected hurricane forecast, Colorado State University said in August it expects 18 named storms this year, compared with an average of 14.4 from 1991 to 2020, and nine hurricanes, compared with the 7.2 average.

Meanwhile, worldwide insured natural catastrophe losses topped $100 billion in 2021 and 2022, according to Swiss Re.

Warmer sea temperatures are a continuing phenomenon and thus are accounted for in the inputs for catastrophe models, said Karen Clark, founder and CEO of Boston-based catastrophe modeler Karen Clark & Co.

“The trends are very relevant,” Ms. Clark said. “The sea surface temperatures are trending, so that trend is incorporated into the model. Seasonal fluctuations are not as relevant,” she said.

Catastrophe modelers look at longer-term trends, said Peter Sousounis, Boston-based senior vice president and director of climate change research for Verisk Extreme Event Solutions, a unit of Verisk Analytics Inc.

“For example, we know we have high confidence that climate change is impacting certain aspects of extreme weather more than others. We believe that climate change is intensifying storms, and when those storms are more intense, they’re able to squeeze more moisture out of the atmosphere,” he said.

“Sea surface temperatures going up, hurricanes becoming more intense — that is accounted for in our model, that’s very important. The sea surface temperature being above or below average this particular year is not relevant to the modeling,” Ms. Clark said. “You get those random things once in a while, but it doesn’t necessarily mean that there are any trends or if there’s anything significant about it.”

A model that Verisk is developing, slated to be released in a few years, will give clients the ability “to extract those years in the model that are characterized by El Nino events,” Mr. Sousounis said.

Swiss Re’s North Atlantic hurricane model is adjusted to account for the current period of higher hurricane activity compared with long-term history, Ms. Viktor said.

CoreLogic Inc.’s North Atlantic hurricane model was designed to account for two different scenarios: either elevated or normal sea surface temperatures, allowing a user to calculate portfolio risk under either set of baseline assumptions, said Jonathan Schneyer, Boston-based catastrophe response director at CoreLogic.

Severe convective storms, which caused $60.45 billion of the total $93 billion of insured natural catastrophe losses so far in 2023, according to the Gallagher Re report, present a newer challenge to modelers.

Steve Bowen, Chicago-based chief science officer for Gallagher Re, said severe convective storm “poses a notable challenge for the catastrophe model vendors. Unlike hurricane and earthquake models, which have been developed and tweaked for two or three decades, other perils such as severe convective storm or wildfire would be considered in their modeling infancy by comparison.”

Results from these less developed models can carry a greater degree of uncertainty, which can translate to more challenges in trying to underwrite the risk, Mr. Bowen said.

Karen Clark & Co has a severe convective storm model that generates hail and tornado footprints that insurers can use when reviewing daily claims activity. “It’s not just catastrophes that we’re modeling but the daily weather,” Ms. Clark said.

Climate events alter conditions

The 2023 North Atlantic hurricane season has produced some climate extremes that can potentially affect hurricane activity, according to industry sources.

“The 2023 North Atlantic hurricane season has been characterized by record-breaking sea surface temperatures in the North Atlantic, which typically enhance hurricane activity by providing more energy to tropical systems to develop and intensify; and an El Nino phase of the El Nino-Southern Oscillation in the tropical Pacific Ocean, which typically hinders hurricane activity by increasing vertical wind shear across some of the key development areas,” said James Cosgrove, London-based senior modeler for Moody’s RMS. 

As of mid-October, the hurricane season had generated 19 storms, of which six developed into hurricanes, with three of those major hurricanes. 

“This is just above the long-term average and in line with some of the expectations of the preseason forecasts,” Mr. Cosgrove said.

“The 2023 Atlantic Ocean hurricane season is a battle of record warm sea surface temperatures and the effects of the El Nino Southern Oscillation shifting from La Nina to El Nino conditions,” said Jonathan Schneyer, Boston-based catastrophe response director at CoreLogic.

El Nino is associated with increased vertical wind shear, a change in wind speed or direction with elevation, over the Atlantic, which hinders hurricane development, while sea surface temperatures across much of the tropical Atlantic have been much warmer than average, providing fuel for hurricanes. 

“So far, the warm sea surface temperatures have dominated the influence on hurricane activity this season,” Mr. Schneyer said.