Thunderstorm frequency to rise: Munich Re. Hail to grow, costs increase?

The occurrence of severe thunderstorm weather in the United States could become even more frequent, Munich Re said today. At the same time another study says hail may increase in size. Both of which could mean higher costs and losses for insurance and reinsurance markets.

Reinsurance firm Munich Re said that as increased temperatures and moisture, due to a warming climate, might make weather conditions more favourable for severe thunderstorm and convective weather outbreaks, we should be prepared for the resulting tornadoes to cause in uptick in socio-economic costs.

Munich Re has been tracking outbreaks of tornadoes and severe convective weather for years and says that loss trends show that the damage these storms inflict on U.S. property has been increasing steadily over the past 40 years.

In the early 1980s damages were averaging less than $2 billion per year, but by 2016 the damage exceeded more than $22 billion in economic losses, including a whopping $15.3 billion in insured losses.

Already in 2017 insurance and reinsurance losses impacting the industry from convective storms and severe thunderstorm related hail and tornadoes has passed $12 billion, so is well on the way to surpassing 2016’s total already according to broker Aon Benfield’s data.

The frequency of outbreaks of severe convective weather has been impacting the insurance-linked securities (ILS) market on a more regular basis over the last few years, as losses aggregate from these perils and cause small losses to ILS funds investing in private collateralised reinsurance arrangements.

Additionally, we have seen the default and total loss of the Gator Re catastrophe bond due to severe thunderstorm weather losses suffered by the sponsor, another example of increasingly frequent convective weather outbreaks striking ILS investors.

On frequency, Mark Bove, senior research meteorologist at Munich Re, US, explained; “An increase of atmospheric heat and moisture due to our warming climate will likely increase the number of days per year that are favorable for thunderstorms and their associated hazards, including tornadoes.”

But as well as increasing frequency, it’s also expected that severity and resulting size of loss could increase too.

“The socio-economic impact of tornadoes will continue to escalate due to people moving to regions at greater risk to severe thunderstorms, increases in the value of personal property, and suburban sprawl creating more ‘targets’ for severe thunderstorms,” Bove continued.

If the occurrence of convective weather is set to increase due to a warming climate you’d also expect hail to be an increasing threat.

However a study released in recent days from Nature Climate Change suggests that hail frequency, which can often be the key driver of insurance losses from convective weather, could actually reduce, but that severity of hail events may rise.

The study suggests that the number of hail storms could actually decrease, but the size of hail stones increase, in the coming years across the United States.

“Anthropogenic climate change is anticipated to increase severe thunderstorm potential in North America, but the resulting changes in associated convective hazards are not well known,” the researchers say.

“Although fewer hail days are expected over most areas in the future, an increase in the mean hail size is projected, with fewer small hail events and a shift toward a more frequent occurrence of larger hail.

“This leads to an anticipated increase in hail damage potential over most southern regions in spring, retreating to the higher latitudes (that is, north of 50° N) and the Rocky Mountains in the summer. In contrast, a dramatic decrease in hail frequency and damage potential is predicted over eastern and southeastern regions in spring and summer due to a significant increase in melting that mitigates gains in hail size from increased buoyancy,” the researchers suggest.

So more frequent convective weather and severe thunderstorms, with greater chances of tornadoes as a result, while hail shifts to a less frequent but larger stones scenario, all while economic exposures continue to rise, will equal increasing costs for the insurance, reinsurance and ILS industry.

Tornadoes also result in the tragic loss of life, as well as property, and 2017 has seen deaths from tornadoes reach 34 already, as compared to 18 deaths during all of 2016, due to an early and active start to the season, Munich Re noted.

Resilience is vital and Bove explained the need for construction standards to enforce more rigorous building practices.

“The U.S. experiences more tornadoes than anywhere else in the world, and a lack of resilient construction and weak or non-existent building codes in some states leaves many communities at risk of loss of property and lives when a tornado occurs.

“More stringent building codes and enhanced high wind construction materials can help reduce the costs associated with tornadoes and other types of storms. Often, an incremental cost in resilient construction techniques in a new home can allow a building to withstand 130 mph winds—much more than the current requirements of many building codes, where they exist. A resilient home can help mitigate the physical damage to property and save lives and, when combined with adequate insurance, reduce the time it takes to return to normalcy after a tornado hits,” Bove explained.

If we’re set for more frequent, sometimes wilder, and more costly weather outbreaks, the need for insurance and as a result reinsurance capital will rise as well. While at the same time re/insurers will have to double-down on their own management of exposures, as they need to protect their aggregates and ensure they have sufficient risk transfer in place.

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