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Waves, Wind and Water: Weather perils and insurance
Dmitry Gorelik
Weather and Insurance• Recent quotes from the press regarding weather-
related losses“…our result for the 2008 financial year has been
affected by…. succession of severe weather events”
“…we have been affected by the increased frequency of natural perils…”
“…raise premiums on personal products to offset more frequent claims after bad weather…”
“…sustained impact of volatile weather …”
Data and Loss adjustmentData• ICA Natural Disasters Claims List• EMA disaster database (www.ema.gov.au)• Benfield market knowledge
Loss Adjustment• CPI alone is not appropriate• RiskFrontiers (Crompton and McAneney) use a
combination of changes in population, wealth and inflation
• CPI and GDP used as a proxy for changes in wealth and inflation
Historical loss adjustment
Crompton and McAneney; 2008Yearly Natural Hazard Losses (in 2008 dollars)
0
500
1,000
1,500
2,000
2,500
3,000
1967
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
tota
l los
ses
($m
)
Original
Yearly Natural Hazard Losses (in 2008 dollars)
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
1967
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
tota
l los
ses
($m
)
Normalised
Historical loss adjustment – a few examples
• Comparison of top 10 natural peril insurance losses ($m) as at 2006
670
710
740
820
1430
1480
1610
1790
3300
4120
Normalised Loss(Crompton/McAneney ,2006)
446
465
560
683
886
688
1100
1341
2990
3944
Benfield (CPI and GDP)
51580Sydney1984Flood10
533104Sydney1986Hailstorm9
70840Sydney1976Hailstorm8
128030Multiple1973Tropical Cyclone Madge7
1512180Brisbane1985Hailstorm6
773319Sydney1990Hailstorm5
983176Multiple1983Ash Wednesday Bushfires4
243368Brisbane1974Tropical Cyclone Wanda3
31141700Sydney1999Hailstorm2
3635200Darwin1974Tropical Cyclone Tracy1
Benfield (CPI/GSP
and population)
OriginalLossLocationYearEvent Rank
670
710
740
820
1430
1480
1610
1790
3300
4120
Normalised Loss(Crompton/McAneney ,2006)
446
465
560
683
886
688
1100
1341
2990
3944
Benfield (CPI and GDP)
51580Sydney1984Flood10
533104Sydney1986Hailstorm9
70840Sydney1976Hailstorm8
128030Multiple1973Tropical Cyclone Madge7
1512180Brisbane1985Hailstorm6
773319Sydney1990Hailstorm5
983176Multiple1983Ash Wednesday Bushfires4
243368Brisbane1974Tropical Cyclone Wanda3
31141700Sydney1999Hailstorm2
3635200Darwin1974Tropical Cyclone Tracy1
Benfield (CPI/GSP
and population)
OriginalLossLocationYearEvent Rank
Why is weather hard to model?
998
Natural Peril losses through time (1967 – 2008)Proportion of Natural Hazard Losses (in 2008 dollars)
ex Tracy, ex Newcastle Earthquake
22%
1%
10%
18% 11%
39%
Proportion of Natural Hazard Losses (in 2008 dollars)
20%
9%
9%
16% 10%
36%
bushfirecycloneearthquakefloodhailstorm
• Hail and Storm losses account for more than half of all natural peril insurance losses
• Difficult to differentiate between “Hail” and “Storm” events• The “outliers” cannot be clearly defined where natural perils are
concerned
Natural Peril losses through time
• Almost 80% of natural peril losses in the last 20 years were storm related
• However, this split is influenced by inclusion of large events such as “Ash Wednesday”, Sydney Hail Storm, Cyclone Larry etc
Proportion of Natural Hazard Losses (in 2008 dollars) ex earthquakes ex TC Tracy
12% 6% 7% 11%
10%10% 9%
22%8%
6% 5%
10%
46%50% 47%
39%
24% 28% 32%18%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
last 30 years last 20 years last 10 years total over 40 years
bushfire cyclone flood hail storm
70% 78% 79%
57%
ENSO – El Niño Southern Oscillation• El Niño
– part of a natural oscillation of the ocean-atmosphere system in the tropical Pacific
– commonly referred to as El Niño-Southern Oscillation (ENSO)
• Extreme weather associated with El Niño:– severe droughts and bushfires– devastating floods and landslides– depends on geographic location
• The opposite phase to El Niño is known as La Niña– also linked with extreme weather– storms, hail and cyclones
ENSO – 1967-2007
• A full ENSO cycle, which incorporates one El Niño and one La Niña event - generally takes about four years.
• Approximately a 25% chance of an El Niño (La Niña) event occurring in any one year
SOI index 1967 - 2007 (5 months MA)
-30.0
-25.0
-20.0
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
Jun-67
Feb-69
Oct-70
Jun-72
Feb-74
Oct-75
Jun-77
Feb-79
Oct-80
Jun-82
Feb-84
Oct-85
Jun-87
Feb-89
Oct-90
Jun-92
Feb-94
Oct-95
Jun-97
Feb-99
Oct-00
Jun-02
Feb-04
Oct-05
Jun-07
ENSO and Eastern Seaboard insurance losses
• No clear relationship between losses, type of ENSO phase or the length
Length of ENSO phase vs Industry Loss per month
0
5
10
15
20
25
30
35
40
1/1967 6/1969 4/1972 7/1976 7/1979 3/1985 10/1990 3/1995 3/1997 8/2000 9/2004 10/2005 7/2007
num
ber o
f mon
ths
in a
pha
se
0
50
100
150
200
250
300
350
400
450
loss
per
mon
th ($
m)
La Nina
El Nino
Neutral
Average monthly losses (ex TC Tracy)
• Average monthly loss is higher in the last 10 year• Losses are significantly higher in La Nina phase• However…. These are mainly driven by April
1999 Sydney hail storm
0
20
40
60
80
100
120
140
All Periods Last 10 years Last 20 years
loss
($m
)
La Niña
La Niña ex Sydney Hail
Neutral
El Niño
Average monthly losses – capped at $500m
• A lot less variability when the upper limit is imposed• Arguably a more relevant representation for the
insurance industry – catastrophe reinsurance is likely to cap the industry loss
0
10
20
30
40
50
All Periods Last 10 years Last 20 years
loss
($m
)
La Niña
Neutral
El Niño
Losses by ENSO State
• No bushfire losses in La Nina phase• Large proportion of Hail in La Nina phase• Storm, Hail and Flood should potentially be combined due to the
difficulty in separating these perils
Proportion of Loss Amount
29%12%
21%
15%52%
3%
13%
6%
36%
32%
38%
11%
28%
4%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
El Niño Neutral La Niña
Storm
Hail
Flood
Cyclone
Bushfire
Losses by ENSO State – excluding ‘outliers’
• “Outliers” change the loss distribution in ENSO phases• Observation: approximately 45% of losses in El Nino are Hail –
counter-intuitive
Proportion of Loss Amount (ex TC Tracy, ex Sydney Hail, ex "Ash Wednesday")
14% 12%
25%15% 45%
4%13%
14%
44%
32%
32%
13%28%
9%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
El Niño Neutral La Niña
Storm
Hail
Flood
Cyclone
Bushfire
ENSO by Peril
• Vast majority of bushfires occur in El Nino phase• Cyclones occur in La Nina phase• Rest is not very clear – similar split to time spent in each phase – slight bias
towards La Nina phase
Proportion of Loss Amount
63%
15%23% 18% 20%
31%
37%
16%
57% 30%
70%
43%
46%
69%
34%47%
12%
37%23%
9%0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Bushfire Cyclone Flood Hail Storm Storm/Hail/Flood Time Split
El Niño Neutral La Niña
ENSO by Peril – excluding “outliers”
• Similar observations when the “outliers” are removed• Even more similarity between storm/hail/flood losses and
the time spent in each phase
Proportion of Loss Amount (ex TC Tracy, ex Sydney Hail, ex "Ash Wednesday")
40%26%
33%18%
25% 31%
60%
28%57%
43% 70% 54% 46%
45%34%
24%12%
22% 23%
9%0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Bushfire Cyclone Flood Hail Storm Storm/Hail/Flood Time Split
El Niño Neutral La Niña
ENSO by Peril – Event Counts
• Size of the event can skew the representation of losses over time• Frequency of losses shows that:
– Bushfires tend to occur during the El Nino Phase– Cyclones during Neutral and La Nina– Storm/Hail Flood during Neutral and El Nino phases
Proportion of Losses
63%
20%32% 38% 32%
38%
40%
69%46%
42% 47%
40%
15%22% 20% 20%
15%0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Bushfire Cyclone Flood Hail Storm Storm/Hail/Flood
La Niña
Neutral
El Niño
Summary of resultsEl Niño Neutral La Niña
Probability of a loss in a monthBushfire 7% 3% 0%Cyclone 3% 3% 7%Storm/Hail/Flood 21% 31% 13%
Average Monthly Loss ($m)Last 10 years 57 62 45Last 20 year 38 50 36
Average Number of Months in a phase 7 6 7
Analysis of extreme events - Scientific viewPeril La Niña Neutral El Niño 5 year Forecast
N. of Tropic of CapricornCyclones NA Stability in occurrence
Floods NA Below Average
S. of Tropic of CapricornThunderstorms – Sydney NA Below Average
Thunderstorms – Brisbane NA Above Average
Cyclones NA Below Average
East Coast Lows NA Stability
Floods NA Below Average
Bushfire NA Above Average
South Pacific BasinCyclones West 170o NA NA NA Stability
Cyclones East NA Above Average
Floods NA Above Average
Climate Change
Conclusions• Weather has been the primary cause of
Australia’s historic catastrophe losses• Framework for considering losses from
weather perils– Not a definitive study– Some relationships are clear– Others may need more investigation
• Climate Change will make prediction even more difficult