As we approach the last weeks of a relatively benign Atlantic hurricane season, which officially ends 30th November, we shift our thoughts across the world to the potential devastation that may be caused by Super Typhoon Haiyan in the coming hours.
Super Typhoon Haiyan (Category 5) is one of the most powerful storms on record and is just about making landfall in the Philippines right now. After it has finished with the Philippines, Haiyan will move back over the ocean before heading for Vietnam where a second landfall as a Category 3 typhoon is forecast.
Haiyan currently has maximum sustained winds of a terrifying 195mph (315kph) with gusts as high as 235mph, which threaten widespread destruction and loss of life in the Philippines. Storms of this ferocity are few and far between, thankfully, but it is hard not to think of the terrible impact and inevitable loss of life a storm like this will bring to people in its path.
The central pressure in super typhoon Haiyan has dropped below 900mb, the first storm to do so in 22 years we understand. It is forecast to bring rainfall levels of eight to ten inches with it as it crosses the Philippines, which could cause further devastation from landslides and flooding.
A storm such as Haiyan does bring to mind the potential impact to the catastrophe bond and reinsurance market if a similarly powerful, Category 5+ hurricane slammed directly into Miami, Florida. The resulting insurance losses could be enormous and the impact on the cat bond market could be huge as well.
With around 70% of catastrophe bond exposure located in Florida and the market seeing a concentration of both traditional and non-traditional reinsurance protections there, the impact of such a super-hurricane on the ILS and reinsurance market would be huge.
It would likely result in the triggering of multiple cat bonds (with a number of cat bonds paying out full principal potentially), industry-loss warranties (ILW’s) and other collateralized and traditional reinsurance contracts covering the Florida region. The losses to ILS investors could be dramatic under such a scenario.
A storm like Haiyan is of course not a common occurrence in the Atlantic or Gulf of Mexico. Although hurricane Wilma in 2005 saw winds of 185mph in the Gulf, but lost intensity as it tracked towards the U.S. and made landfall in an area with lower exposures than Miami, still creating $20 billion plus in damages.
Hurricanes like Katrina and Andrew, while major storms, did not have the intensity and potential to cause damage and loss of life that Haiyan does today. Also, no hurricane has in recent memory tracked straight into the major coastal city of Miami, a scenario that does put the fear into insurers and reinsurers due to the potential for major losses.
The Great Miami Hurricane of 1926 is often cited as an example, risk modellers Karen Clark & Comapny estimated a repeat of that storm could cost $125 billion in 2012. But that storm had estimated wind speeds of a maximum of 150mph and was thought to have lost intensity a little before it made landfall in Miami.
So we could speculate that a storm like Haiyan could cause a $200 billion insurance industry loss if it made a direct hit on Miami today. That is perhaps the loss that the reinsurance and ILS or cat bond market is most afraid of.
Of course investors are fully aware when they invest in cat bonds with Florida exposure, or any other peak peril such as California earthquake, that there is a chance of losing everything. That is the nature of risk transfer, risk financing and reinsurance. Understanding the risks and ensuring the ones you allocate capital to are within your loss tolerance levels is vital in this market.
In the Philippines the insurance industry losses could be large, for an event in that country, but generally insurance penetration is low still and the global markets are unlikely to face a large impact. Here lies the value of reinsurance and risk transfer and the need to promote insurance, reinsurance and peak risk transfer uptake in lesser developed nations of the world, they are required to help nations recover from the most severe of catastrophic events.
So, with the potential scale of this storm clear, spare a thought for the exposed people of the Philippines and hope that they are spared the worst as super typhoon Haiyan crosses the country in the coming hours.
You can find much more detail on super typhoon Haiyan over on Weather Underground.