Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Recent tornado outbreak could cause insured losses of up to $2 billion


A couple of days ago we wrote about the higher than average incidence of tornadoes in the U.S. this year. Now the first estimate of insured losses for the recent outbreak of tornadoes in the U.S. midwest and southern states has come from risk modelling firm EQECAT. The recent spate of tornadoes saw almost a months worth of tornadoes in just two days and caused significant losses across the regions. EQECAT estimates that insured losses from this two-day period will be between $1 billion to $2 billion.

EQECAT comments on the recent tornao outbreak and the season so far:

Over 150 tornadoes (preliminary count) touched down in two distinct systems between February 28 and March 3, with the majority occurring in Tennessee, Kentucky, Indiana, Illinois, and Alabama. Tornado activity for the year is well above average with 272 tornadoes versus the seven-year (2005-2011) average of 123 (through March 4). Tornadoes have been cited as the cause for 49 fatalities year-to-date.

The 231 tornadoes (adjusted for duplicate observations) year-to-date through March 2 is less than the historic record for this date (291 from 2008) but is still representative of an early start in tornado activity in the United States.

Further commentary on the recent tornado outbreaks comes from Plenum Investments, a Zurich based investment manager with a focus on the insurance-linked and catastrophe bond asset classes. They say that with high certainty there will be no impact to any cat bonds from the recent tornadoes. There aren’t any pure U.S. tornado cat bonds in the market place, given the default of the two Mariah Re cat bonds from last years tornadoes that is no surprise. There are a number of multi-peril cat bonds in the market which have some exposure to U.S. tornadoes but the exposure is small and so tornadoes represent only a small risk to these bonds. The risk to cat bonds is highest in aggregating bonds due to the frequency of occurrence of tornadoes.

Plenum Investments said that their flagship ILS fund, the Plenum CAT Bond Fund, has no exposure to any aggregating bonds exposed to U.S. tornadoes. The fund holds three positions in bonds which have a small exposure to tornadoes, these bonds make up close to 9% of the fund. However the largest of these positions is exposed to tornadoes in the U.S. northeast and so this recent outbreak cannot affect it. The remaining two cat bond positions, which make up close to 5% of the fund, have only a small share of tornado risk being predominantly U.S. hurricane and earthquake exposed.

So it looks like the recent tornado outbreak is not a threat to cat bonds but with losses projected to be up to $2 billion they will have an impact on reinsurers and with the tornado season barely begun reinsurers and retro underwriters will be watching it closely.

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