Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Severe thunderstorm research program aims to expand ILS market


A new research program, launched by scientists at Atmospheric and Environmental Research (AER) alongside insurance, reinsurance and insurance-linked securities sector companies, aims to quantify any shifts in hazard patterns for severe thunderstorms, tornadoes and hail in the U.S.

The research, which involves meteorologists, actuaries and remote sensing scientists from AER alongside re/insurance industry thought-leaders, will involve an extensive historical analysis of severe thunderstorm wind, hail, and tornadoes. The output of this historical analysis will be used to determine whether those perils are exhibiting a different frequency or severity than in the past. The research team will also look at whether there is any evidence of local influences on severe thunderstorm occurrence within different parts of a city.

The research program aims to create new datasets and assess trends in the risk of these perils occurring due to climate change. The focus of the research will primarily be on tornadoes and hailstorms, given these perils high interest to both personal and commercial lines insurers across the U.S.

One of the companies involved in this research program is catastrophe bond focused ILS investments specialist Fermat Capital. John Seo, PhD, co-founder and managing principal at Fermat Capital Management, commented; “Despite the considerable efforts and resources applied by the insurance industry toward fundamental research into emerging risks, there has been and will always be significant gaps between the scientific community and the insurance industry. AER has the technical expertise, the industry knowledge and, just as important, the operating model to close such gaps.”

Fermat Capital’s involvement is encouraging to see as tornado, hail and severe thunderstorm risks are often included in multi-peril catastrophe bond transactions. Any improvement in the science and our understanding of these perils will assist in bringing more of these perils to the ILS market perhaps with new and improved modelling and structural features.

John Seo continued; “Our particular motivation for participating in AER’s Emerging Risk research program is to enable us to identify new risk transfer opportunities and expand the insurance-linked securities market beyond conventional risks in a responsible way.”

Of course such a research program has ramifications for the wider insurance and reinsurance markets, beyond purely cat bonds and ILS. A number of other key participants explained why they have engaged with AER on this project.

“Roof-related claims have been a focal point for personal lines insurers during the past five years,” said Benjamin Rhodes, vice president of Personal Lines Product Management at The Hanover Insurance Group. “The new data resources that AER will be creating will improve our understanding of how changes in weather patterns, population growth, and construction characteristics can impact risk.”

“Hail risk is of critical concern to the Canadian insurance market,” said Jean Roy, vice president of Rating and Classification at TD Insurance. “AER’s plan for original research in Canada, inclusive of cloud seeding influences, will inform how our insurance products need to evolve in hail-exposed parts of the country.”

“Commercial and personal lines insurers and associated industries need better quantification of the changing landscape of tornado, wind, and hail risk,” said Julie Rochman, president and CEO of the Insurance Institute for Business & Home Safety (IBHS). “IBHS’s mission is to conduct objective, scientific research to promote effective actions that strengthen businesses and homes against severe storms, and AER’s research reinforces that objective by helping us understand the new normal, why these numbers are shifting and where they are trending.”

“AER’s research into the question of whether a changing climate is influencing severe thunderstorm risk is a welcome endeavor,” said Jayanta Guin, PhD, senior vice president at catastrophe modeling firm AIR Worldwide, a Verisk Analytics company. “I’m confident that the program’s findings will inform future generations of our U.S. and Canada severe thunderstorm models.”

“The supporters of the AER Emerging Risk research program share our strong belief that objective scientific research, when put specifically in the context of industry needs, can directly enhance business strategies,” said Kyle Beatty, senior vice president at AER. “Our focus on providing actionable data to our supporters on an ongoing basis, built off the foundation of original, peer‐reviewed research, is what makes this program uniquely valuable.”

“Through Verisk’s work with the North American insurance market, we have observed weather claim activity from a unique position, which has inspired us to dive into the related science at a rigorous level,” said Mark V. Anquillare, executive vice president and chief financial officer at Verisk Analytics. “The data and resulting insights gained from this research will shape the way product managers and actuaries measure and manage the risk from these hazards.”

AER aims for the output of these research programs, of which severe thunderstorms is the second after its first research program looked at the risks of power outages from solar storms and space weather, to be actionable data which insurers, reinsurers and the ILS market could put to work in their daily operations.

The output of this specific severe thunderstorm and tornado research could result in improved tornado risk models, a better understanding of the frequency of severe thunderstorms and the potential impacts. All of these factors will improve the view of risk for these perils which will have benefits across the ILS, catastrophe bond, collateralized and traditional reinsurance sectors.

Read more about the research program: Climate Change – Tornado and Hail.

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