New research into alternative risk transfer methods for extreme wind events

In an effort to better understand the damage risks associated with climate change, members of the insurance industry have enlisted a prominent scientific research firm to examine and document historical weather patterns in North America, specifically tornado, hail and wind-related events. Insurers, in conjunction with the financial industry, are hoping to gain insight into mounting damage claims, as well as gather objective data that will help them explore new forms of insurance linked securities and alternative risk transfer related to these kinds of weather occurrences.

Atmospheric and Environmental Research (AER) was chosen to conduct the research because of its familiarity with the insurance industry and its technical expertise. Insurance linked securities and forms of alternative risk transfer, including catastrophe bonds, have attracted significant interest from investors so far in 2013, and weather will continue to loom large for the insurance and financial industries going forward. The AER study, entitled Climate Change: Tornado and Hail, should help members of both industries successfully adapt their business offerings to changing physical and investment environments.

AER will examine emerging wind risk in the U.S. and Canada. TD Insurance’s Jean Roy, vice president of Rating and Classification, named hail as a particularly strong concern for the insurance industry in Canada. Certain parts of the country face significant exposure to hail, said Roy, and the damage to roofing has been expensive for insurers. Alternative risk transfer vehicles such as cat bonds have helped dilute risk for insurers, but understanding whether climate change is boosting damage risk from intense wind will prepare the industry more thoroughly.

While extreme weather events make headlines across the world, population growth is also contributing to the large scale and cost of damage. A greater density of people and property, even in damage-prone areas, has been responsible for higher losses, and will be an ever stronger factor in how insurance companies mitigate and transfer risk. One attractive alternative, catastrophe bonds, has shown promise for insurers and investors alike, especially during the first half of 2013.

The tornado and hail research initiative follows an earlier study of covered loss in the event of a large-scale power outage in the U.S. August 14th marked the 10th anniversary of a major blackout that hit Ontario, Canada and eight states within the U.S., leaving more than 50 million people without power and demonstrating the fragility of the continent’s energy infrastructure.

AER’s latest endeavour will also attempt to establish a new normal for extreme wind events, such as tornadoes.

Posted: Monday, October 7th, 2013