Typhoon Nangka continues on its forecast path towards Japan’s southern coastline, with the now weakening storm still threatening damaging winds, torrential rainfall and a storm surge which could inundate some coastal areas.
Typhoon Nangka’s forecast has been tempered some what in recent days, as the once strong Category 3 typhoon moderated down to Category 2 overnight and now to a Category 1 storm that we see today. Nangka is expected to make landfall in Japan late on Thursday and the typhoon’s impacts will still be widely felt.
Typhoon Nangka is now packing sustained winds of 90mph according to the latest update at 15:00BST on 15th July, with gusts of 115mph or higher. Nangka is set to make a perpendicular direct hit on Japan, crossing the islands before recurving towards the north east and tracking along the eastern and northern edge of the island chain.
At landfall Nangka is expected to be a weakening Category 1 typhoon in the latest forecast, which will reduce the potential for wind related damage significantly.
The threat from rainfall is expected to be greatest to the north and east of the landfall, where between 150mm and 300 mm (6 and 12 inches) of rain could be expected to fall. Further away in the main metropolitan areas such as Osaka and Tokyo set to experience 50 mm’s (2 inches) and upwards of rain over the next couple of days.
Meteorologists continue to highlight a potentially severe storm surge threat from Nangka, with the direct approach of the storm likely to exacerbate the surge height. Typhoon’s more typically curve as they reach Japan, running up the coastline, but Nangka looks set to directly attack the coast which is expected to push up a bigger surge in the landfall area.
Nangka remains no major threat to the two catastrophe bonds which are exposed to the typhoon. Our position on that has not changed and at Category 1 wind speeds it is unlikely to come anywhere near the levels of damage required to trigger either cat bond. More information here.
At the current Category 1 strength land fall forecast, typhoon Nangka is more likely to be an insurance event, with the potential for some reinsurance industry losses.
Given the ILS markets increasing expansion into collateralized reinsurance and the growth of vehicles such as sidecars, there is always the possibility for a storm of this size to cause some impact to ILS funds. However any impact to ILS funds collateralized positions would be expected to be minimal, based on this latest forecast.
For Nangka to have a major impact on the insurance and reinsurance industry now it would need to maintain its strength up to landfall and also for the track to adjust further towards Tokyo and Kanagawa. That would bring the areas of Japan with the highest exposure concentrations into play and also make storm surge a considerable threat.
Here’s the latest update from Aon Benfield’s Impact Forecasting unit who give a medium to high chance of a significant local insured loss:
LATEST DETAILS ON TYPHOON NANGKA
COORDINATES: 31.1° north, 134.7° east (previous location: 26.5° north, 136.4° east)
LOCATION: 430 kilometers (270 miles) southeast of Iwakuni, Japan
MOVEMENT: north-northwestward at 22 kph (14 mph) (previous: northward at 19 kph (12 mph))
WINDS: 130 kph (80 mph) with gusts to 160 kph (100 mph) (previous: 170 kph (105 mph))
RADIUS OF TROPICAL STORM-FORCE WINDS: 400 kilometers (245 miles)
RADIUS OF HURRICANE-FORCE WINDS: 85 kilometers (50 miles)
MINIMUM SEA LEVEL PRESSURE: 970 millibars (previous: 956 millibars)
SAFFIR-SIMPSON SCALE RANKING*: Category 1
LANDFALL AND LOSS PROBABILITIES
FORECAST LANDFALL LOCATION: Near Kochi City, Shikoku Island, Japan
FORECAST LANDFALL TIMEFRAME: Late Thursday night/early Friday morning, July 16/17 (JST)
24-HOUR SIGNIFICANT LOCAL INSURED LOSS POTENTIAL: MEDIUM-HIGH
Typhoon Nangka, located approximately 430 kilometers (270 miles) southeast of Iwakuni, Japan, has tracked north-northwestward at 22 kph (14 mph) over the past six hours. High resolution, animated satellite imagery shows that the system has degraded as the convective bands have weakened. The cyclone has also lost symmetry, even as it maintained a ragged 65-kilometer (40-mile) wide eye. The initial position is based on the aforementioned satellite imagery. The initial intensity estimate of 130 kph (80 mph) is based on an overall assessment of Dvorak current intensity estimates from all reporting agencies and reflects the weakening trend the system is exhibiting. Upper level analysis indicates a less favorable environment with increasing vertical wind shear however, excellent outflow aloft continues to provide ventilation to the weakening convection. Typhoon Nangka is tracking north-northwestward under the steering influence of a ridge of high pressure.
The system will track north-northwestward along the western edge of the ridge of high pressure for the next 24 hours. Afterwards, it will recurve northeastward as it rounds the edge of the ridge and accelerates on the poleward edge. The system will make landfall over Shikoku Island late tonight/early tomorrow morning (local time) which will begin a rapid weakening trend due to interaction with the rugged terrain of Japan. By Friday morning (local time) Nankga will emerge in the Sea of Japan as a weak tropical storm and turn to the northeast as it rounds the axis of the high pressure ridge. The rapid decay of the system will be further exacerbated as it encounters cool sea surface temperatures and high vertical wind shear.
In the extended forecast period, Nangka will continue to accelerate towards the northeast and will cross the northern tip of Honshu Island, near Misawa, and will re-emerge in the Pacific Ocean. Poor environmental conditions will continue to weaken the system leading to its dissipation by the end of the forecast period. Forecast model guidance remains in good agreement lending high confidence to the JTWC forecast track.
We’ll update you should typhoon Nangka intensify as it proceeds towards Japan. You can track the storm’s progress using these tracking map further up this article and the interactive wind field map below.
Details of typhoon Nangka’s potential threat to two exposed catastrophe bonds:
The two catastrophe bonds which are exposed to the approaching typhoon Nangka are Mitsui Sumitomo’s 2012 $130m Akibare II Ltd. and Sompo Japan and Nipponkoa Insurance Company’s 2014 transaction $100m Aozora Re Ltd.
These two bonds have quite different structures making them difficult to compare. Akibare II uses a modelled loss trigger, based on actual parameters of the storm which are run through a post event loss calculation process to define an event percentage. The Akibare II cat bond covers both wind and flood losses from typhoon’s as well.
Meanwhile Aozora Re is an indemnity bond covering wind, rain, flood and storm surge related losses suffered by the sponsor from Japanese typhoon events.
In terms of risk profile, Akibare II has an initial expected loss of 1.05% and an initial attachment probability of 1.71%. Most of the exposure is concentrated around Tokyo and Kanagawa, however there is a concentration of exposure in Fukuoka, on Kyushu island which may be more in the Nangka’s path.
The Aozora Re cat bond is a relatively remote risk cat bond, with an initial attachment probability of 0.57% and expected loss of 0.52%. As a result this cat bond would require a very large and powerful typhoon to be at risk of being triggered.
Looking at historical risk modelling for the two bonds, there is only one historical typhoon in risk modeller AIR Worldwide’s catalog that would have caused the Akibare II cat bond to be triggered. 1959’s typhoon Vera would have resulted in an event percentage of 7%, so a small loss to investors.
There have not been any typhoon events since 1947 that would have generated sufficient losses to reach the attachment point for Aozora Re meanwhile. Even 1959′s typhoon Vera, which had the highest estimated ultimate net loss of ¥286.5 billion, would need to have resulted in nearly 79% more losses to reach the initial attachment level, or a 34% increase if the Aozora attachment had been adjusted to the maximum under a variable reset.
So, if typhoon Nangka is, as forecast, a Category 3 or lower storm and makes landfall away from the Tokyo and Kanagawa prefectures where the exposure is always highest, it would appear that neither of these exposed catastrophe bonds would face any losses.
Artemis spoke with Dirk Schmelzer, Senior Portfolio Manager ILS at specialist catastrophe bond and insurance-linked investment manager Plenum Investments.
Commenting on the current forecast which would take typhoon Nangka towards a landfall on the northern side of Kyushu, the southern of the main Japanese islands, Schmelzer said; “The contribution to expected loss from Kyushu is smaller in Akibare than in Aozora, which means that the risk of suffering a loss from storms hitting Kyushu is very similar in the two transactions. Based on the forecast information currently available and the comparison with historical events, we think that losses to investors are unlikely.”
Commenting specifically on the possibility of loss to both of the bonds, Schmelzer explained; “For Aozora, the loss contribution from storms below cat 4 is less than 10%. The losses will of course depend heavily on the path of the storm. Nangka is forecast to hit the Kyushu island, which is a major contributor to the Expected Loss, mainly because of the higher frequency of storms there and not because of the exposure, which is less than 10%. In Kyushu, the prefectures of Nagasaki and Kagoshima represent the highest risk. Nangka is currently forecast to miss Nagasaki and Kagoshima is on the border of the forecast cone. If the storm stays on the forecasted track, it will go into the strait between Kyushu and Shikoku. The bordering prefectures have only a limited contribution to expected loss.
“Akibare is a riskier transaction with a significantly higher contribution to expected loss from cat 1-3 storms. I have looked at a few historical storms (Mireille, Songda, Nancy and Chaba). The tracks Nancy and Chaba are looking reasonably similar to Nangka. Both storms would not have caused a loss to the note. Exposure is more concentrated in areas that are outside of the forecast cone of Nangka.”
Other ILS investors and catastrophe bond fund managers Artemis has spoken with today also expect the two cat bonds to be safe, based on the current forecast. However it is worth noting that should Nangka re-intensify to a Category 4 storm and maintain such strength up to landfall, then the potential impact and eventual insurance and reinsurance industry losses could be significantly greater and these cat bonds could come into play.
At the current forecast typhoon Nangka is more likely to be an insurance event, with the potential for some reinsurance industry losses as well. Given the ILS markets increasing expansion into collateralized reinsurance and the growth of vehicles such as sidecars, there is always the possibility for a storm of this size to cause some impact to ILS funds. However any impact to ILS funds collateralized positions would be expected to be minimal, based on the current forecasts.
Register today for ILS Asia 2023, our next insurance-linked securities (ILS) market conference. Held in Singapore, July 13th, 2023.
Get a ticket soon to ensure you can attend. Secure your place at the event here!