Swiss Re Insurance-Linked Fund Management

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Study shows single tornado losses could reach $20 billion: Swiss Re


A recent study conducted by reinsurance giant Swiss Re uses logic-based methodology to predict the potential financial impacts of tornadoes on large US cities to the insurance and reinsurance industry.

The report, titled ‘US Tornadoes: An examination of the past to prepare for the future’ used the 2013 tornado that tore through Moore, Oklahoma as an example. The Moore tornado was an extremely intense storm and resulted in insured losses of $1.1 billion.

Swiss Re used the track of this tornado and placed it over Cook County, Illinois, including the Chicago area to study the potential for loss. By using similar ratios of damage and loss the firm was able to predict that a storm of the same intensity placed over Cook County would likely incur insurance industry losses of $20 billion.

Population, asset and value growth throughout the U.S. and globally has, over time, increased tornado exposure – it’s now more common for single-event tornado insured losses to reach $1 billion. Swiss Re has conducted this research as an effort to warn about the possibility that tornadoes can cause insured losses into the tens of billions of dollars.

Part of Swiss Re’s report highlights the increase in asset and population growth and it’s impact on tornado exposure, reading; “Perhaps the most compelling reason to build our store of knowledge is the growth in exposure to tornadoes, a trend that has accompanied population growth and accumulation of physical assets. Total insured values (TIV) in Dallas/Ft Worth, Oklahoma City, St. Louis, and Birmingham are now in the USD 50-100 billion range, with TIVs in some counties exceeding USD 100 billion and approaching USD 1 trillion.”

The catastrophe bond market contains a great deal of exposure to U.S. severe thunderstorm risks including tornadoes, so the study is relevant to the insurance linked securities (ILS) market. With the growth an expansion of collateralized reinsurance as well the exposure in the ILS market to U.S. tornado risk has been rising steadily.

A $20 billion tornado loss would likely trigger a number of outstanding catastrophe bonds, leading to losses for ILS investors, as well as causing losses to many ILS funds or collateralized reinsurers. In fact such a loss could be so much bigger than the typical modelled tornado losses that other collateralized instruments such as sidecars may see losses as a result, as large reinsurance programmes would bear much of the financial brunt of such an event.

We’re more used to seeing tornado losses in the single billion dollar range, but Swiss Re’s study shows that much larger losses are possible should the tornado track take certain routes and reminds us how difficult modelling tornado risk can be. It’s an important fact to remain aware of as an underwriter or U.S. tornado risks or an investor in tornado exposed ILS or cat bonds.

You can access the report here via Swiss Re’s website.

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