Industry may underestimate frequency of intense hurricanes: Bank of England

The insurance and reinsurance industry may be underestimating the frequency of major hurricanes, according to a research paper from the Bank Of England’s Insurance Division, which suggests that clustering of major storms into a single season could become more common.

The Bank of England team’s analysis found that the clustering together of multiple major hurricanes in a single season, as was seen in 2017 with hurricanes Harvey, Irma and Maria, may be expected to occur more often in future.

The findings, when looking at data from recent seasons, suggest the probability of three or more major hurricanes striking the United States in any given year could be as high as 1-in-7 (~15%).

The researchers noted that, “Given the destructive potential of deep-tropical hurricanes and the tendency of hurricanes to occur close together, these relatively high-probability events could have significant insurance implications.”

By analysing only data from the last 30 years the researchers found that the probability of three or more major hurricanes striking the U.S. rises from 1-in-450 years, if you look at long-term historical data, to just 1-in-180 years if you only look at recent history.

The researchers concluded, “We have shown that if the last 30-years frequencies persist, the recent experience of the 2017 hurricane season is probably not an outlier but closer to the norm.

“This is an important topic for insurers and others alike, and one where further research is needed to improve our collective understanding of hurricane clustering and its potential impact. Given these trends, insurers, in particular, need to consider the operational, economic and risk management impact of the assumptions made when modelling hurricanes.”

The findings suggest that more research is required to look at how hurricane frequency may have changed over time and whether the risk models should offer views based on more recent as well as longer-term historical datasets.

For insurance, reinsurance and ILS interests if there is a chance of clustered major hurricane landfalls in one season occurring more regularly, it could suggest that some pricing needs a rethink.

However, we understand that many re/insurers and ILS funds do analyse hurricane historical trends in this way, looking at how frequency trends change over time and how different periods of Atlantic basin hurricane activity should feed into their risk management and risk pricing.

As ever, it’s prudent to analyse all the scenarios before creating your own personalised view of risk and this research shows that the recent history of hurricane landfalls may be worth another look.

Keep track of our 2018 Atlantic Hurricane Season page where we will update the forecast numbers over the coming months and then track every storm of the season.

Register now for our upcoming Singapore conference. Tickets on sale here.