Swiss Re Insurance-Linked Fund Management

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U.S. tornado season starts slowly in 2015. El Niño could be a factor


This year has seen a dearth of reported tornado events across the United States. Currently the run-rate for tornado reports is significantly below average and in fact less than half the 25th percentile and not far off the minimum ever seen by this time in March.

By this time of year the ten-year average suggests that we typically see around 200 tornadoes reported. So far in 2015 the number stands at a lowly 35 and in March there hadn’t been a single one until Wednesday 25th when a number of tornadoes hit Oklahoma.

U.S. tornadoes, daily count and annual trend

U.S. tornadoes, daily count and annual trend - Source: NWS Storm Prediction Center

On an inflation adjusted basis, the 2015 tornado season is currently tracking just above the minimum record, with the SPC reporting 30 tornadoes in 2015 so far on an inflation adjusted basis.

U.S. inflation adjusted annual tornado trend and percentile ranks

U.S. inflation adjusted annual tornado trend and percentile ranks - Source: NWS Storm Prediction Center

Up until Wednesday March was looking set to experience zero tornadoes, but the deadly series of twisters that struck Oklahoma, including Moore, demonstrated why this peril is so dangerous to property and lives.

While the figures for confirmed tornado reports are way below the averages for this time of year it should be noted that this is still very early in the season. However, according to a recent study, the fact that we’re heading into an El Niño year (as the NOAA announced earlier this month) could be a factor that is reducing the incidence of severe thunderstorms and tornadoes in 2015.

The study, which was published in Nature recently, demonstrates a correlation between El Niño years and lower incidence of tornado and hail events across the central U.S. Given that it was recently announced that we are now moving into an El Niño event, perhaps we’re already seeing its influence on severe thunderstorm activity.

The study authors said; “We use environmental indices that are correlated with tornado and hail activity, and show that ENSO modulates tornado and hail occurrence during the winter and spring by altering the large-scale environment. We show that fewer tornadoes and hail events occur over the central US during El Niño and conversely more occur during La Niña conditions.

“Moreover, winter ENSO conditions often persist into early spring, and consequently the winter ENSO state can be used to predict changes in tornado and hail frequency during the following spring.”

The study looks at the fact the El Niño events can be forecast in advance, there is an index which can be used to predict when the climate will move over into El Niño or La Niña states. The study authors suggest that by using this and the correlation between El Niño and tornado and hail event frequency a long-range seasonal forecast for severe thunderstorm activity could be developed.

A long-range forecast of season severe thunderstorm, tornado and hail activity for the United States would be welcomed by insurance, reinsurance and insurance-linked securities (ILS) players. The losses suffered due to convective storm related exposures have been rising and, especially for primary insurers, can be a major source of attritional loss.

Swiss Re discussed this in its latest sigma report when it said that both economic and insured losses from severe convective storm events, so including thunderstorms, tornado and hail, are rising faster than for other weather exposures.

A significant amount of reinsurance market capacity and also ILS and catastrophe bond capacity is exposed to tornadoes and other severe thunderstorm related perils such as hail, which would make a seasonal forecast a useful tool for the market.

According to our analysis of the Artemis Deal Directory, outstanding U.S.-focused cat bonds with an exposure to severe thunderstorm (and so tornado) as a named peril amount to roughly $3.1 billion of the catastrophe bond markets capital at risk.

And this figure doesn’t include the ILS markets collateralized reinsurance exposures, which will be exposed to tornadoes and convective storms, which is likely a greater percentage than we see of the outstanding cat bond market.

Over time, the volume of capital in ILS and reinsurance funds exposed to tornadoes is growing steadily, especially as private ILS deals, collateralized reinsurance and structures such as sidecars grow and multi-peril transactions increasingly become more prevalent.

While incidence of tornadoes remains extremely low so far in 2015, of course that doesn’t mean that economic or insured losses will, or as evidenced on Wednesday the tragic loss of lives. A single large tornado could cause a multi-billion dollar insurance industry loss and all it takes is one day of weather conducive to storm formation for that to occur.

In its recent report, Swiss Re said that severe convective storm losses are trending upwards at a faster rate than insured losses from other perils. The impact to insurers, and as a result reinsurers, from thunderstorm, tornado and hail losses is becoming a concern in the market, as the incidence of these events has led to high attritional loss rates in recent years.

Could 2015 see losses from thunderstorm and tornadoes come down nearer to normal or even below, due to the influencing factor of El Niño? It’s too early to tell. From an insured loss perspective it only takes a single tornado to track into a metropolitan area and the impact to insurers, reinsurers, catastrophe bonds and ILS investors could be huge.

So it’s advisable not to be complacent and to keep an eye on the trends in tornadoes and severe thunderstorms as they develop throughout the season. You can do exactly that here at Artemis over on our U.S. tornadoes and severe thunderstorms page.

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