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Insurance industry impacts to upgrading Michael to a Category 5

When Hurricane Michael made landfall on October 11th 2018, it had a central pressure of 919mb, which is the third lowest pressure of any U.S. landfalling hurricane. Yet, at the time, the storm was classified on the Saffir Simpson Hurricane Scale as a Category 4 hurricane with winds of 155 mph – only one mph below the Category 5 criteria. On April 19, the National Hurricane Center (NHC) announced what some meteorologists were already thinking, that, at the time of landfall, Hurricane Michael was actually a Category 5 storm with a wind speed intensity of 160 mph. The NHC bumped up the maximum wind speed based on a detailed analysis of aircraft, Doppler radar velocities, and new surface wind speed observations. It is worth noting the caveat from the NHC report that the maximum winds were in a very small area and future revisions are possible. Reconstruction of Stepped Frequency Microwave Radiometer (SFMR) winds showed possible higher values, but the reliability is still unknown, and more research is being done on this data.

There is also some other useful information to the insurance industry in the NHC report. Along a wealth of observational data the report also details some important loss information. The National Centers for Environmental Information (NCEI) currently estimates total economic damages from Michael in the United States at $25B. There have been several media articles written about the continuing insurance loss development. With a current insurance industry loss at $10B, the overall figure is coming close to the generally-held rule that the economic loss is about half the insured loss for U.S. landfalling named storms. Another interesting aspect of the report is the overall damage figures. For example, $3B of loss was on Tyndall Air Force Base near the landfall location. The damage survey suggested that every building at the Base was damaged to some degree. In Mexico Beach, 1,584 out of the 1,692 buildings were damaged with 48% being completely destroyed. The report also goes into damage figure details for Bay County and Gulf County. For example, Marianna, Florida, which is over 50 miles inland, had 1,000 buildings destroyed or with major damage. Seminole County in the Southwest part of Georgia reported 99% of homes were damaged from wind gusts in excess of 100 mph.

Not to be overshadowed, the storm surge section of the report is just as impressive. The storm surge surveys and analysis revealed maximum inundation of 14.7 feet above what is normally dry ground in Mexico Beach, which would also explain much of the damage found in that area.

Top Four Historical Category 5 Hurricanes that have made U.S. Landfall. Plots created using NOAA Historical Hurricane Tracks Tool https://coast.noaa.gov/hurricanes/

The formality of upgrading Michael from a Category 4 to a Category 5 is a big deal. Michael is now tied with the San Felipe Hurricane of 1928 or also known as Okeechobee hurricane as the fourth strongest hurricane to strike the United States (including Puerto Rico) since 1900, behind the Labor Day Hurricane (1935), Camille (1969), and Andrew (1992).
If you believe empirical landfall probabilities, the addition of Michael in the U.S. record since 1900 has increased the probability of a Category 5 storm making landfall from 2.52% to 3.36% or, in terms of a return period, 40 years to 30 years. As respects Florida only, the same calculations went from 1.68% to 2.52% and 60 years to 40 years.

Constantly Changing View of Landfalling Hurricane Risk
So, has the overall risk for the insurance industry increased? How will this new data change the insurance industry’s view of landfalling frequency and severity?

Hurricane risk across the U.S. is understood through the use of catastrophe risk models that employ stochastic catalogs containing thousands of events, each one with a small impact on model results. There is an ongoing process of recalibration of the stochastic catalogs. This constant reevaluation of current and past storms contributes materially to the development of a rich stochastic set of events informed by the historical record that is adjusted based on history or future forecasts.

Due to advanced observation techniques and improved understanding of tropical cyclones, the Hurricane Research Division (HRD) has implemented a data set (HURDAT2) that addresses errors and biases identified in the historical record. A working group of scientists makes corrections to location and intensity information in the six-hour track points for select tropical cyclones. Additionally, this research, supported by new evidence and data, adds previously undocumented cyclones to the record. Currently, the scientists are looking at storms after 1960 with further changes likely as a result of new findings.

One does not need to look very hard for proof that catastrophe modeling companies use changes in HURDAT2 to help adjust landfall frequencies. Recently, HURDAT2 updated Hurricane King (1950) from a Category 2 to a Category 3 storm resulting in a long-term rate increase in Miami Dade County in one of the stochastic catalogs. Another notable example of a tropical cyclone reanalysis is the Labor Day Hurricane of 1935. Upon reanalysis, the maximum wind speed at the time of its first landfall over the Florida Keys was increased (23 mph), increasing its intensity to strong Category 5 status. This reanalysis revised the Labor Day Hurricane to be the strongest U.S. landfalling hurricane in the historical record. Additional reanalysis upgraded its second landfall, in northern Florida, from Category 1 to Category 2 intensity and shifted its track closer to land. This change also resulted in changes in loss results from the Florida region in particularly using this event as a historical what if scenario.

As Hurricane Michael continues to be examined by researchers, recent activity will also adjust landfall rates. In fact, the most recent updates of HURDAT2 reevaluated landfalling events during the 2015 – 2016 season, including Hurricane Hermine (2016) and Hurricane Matthew (2016), yielding localized loss increases in the landfall areas. Similarly, losses increased in Canada due to changes in landfall categories for some storms during the 1956 – 1960 period as part of the HURDAT2 updates. In areas that didn’t see any new landfalling storms, small decreases in loss across mainland U.S. resulted.

With the knowledge that Hurricane Michael is, in fact, the fourth Category 5 hurricane to make landfall along the U.S. coastline, it will surely change the historical view of risk, particularly in the Eastern Florida Panhandle, which already has a limited historical record of major hurricanes making landfall. Michael is now the strongest hurricane landfall of record in the Florida Panhandle and only the second known Category 5 landfall on the northern Gulf Coast. Additionally, Michael marks the latest in the season a Category 5 hurricane has made landfall in the United States. All of this should be factored into new landfall rate adjustments.

It is too early to determine potential changes to future stochastic catalogs, but these revisions tend to be in the single percentages based previous Atlantic Hurricane model updates. It should also be a reminder, however, that just because the landfall frequency and severity might change for major hurricanes, the insurance industry should not forget storms of lesser intensity can also cause billions of dollars in loss. Any hurricane can cause great devastation.

BMS partners with BitSight to provide cyber risk analysis services

BMS Group (“BMS”), the independent specialist (re)insurance broker, today announces a partnership with BitSight, the Standard in Security Ratings, to provide cyber risk analysis services to BMS clients across all lines of business as part of BMS’s consultancy offering.

BitSight’s market-leading security ratings platform provides the most comprehensive and trustworthy security performance information in the marketplace today. Approximately half of all global cyber premium is underwritten by carriers/markets who utilise BitSight. This is the first partnership for BitSight with a London market broker.

Ryan Jones, Head of Innovation at BMS, said: “As an independent, employee-owned broker, our focus has always been to add value to our insureds by developing a tailored and comprehensive offering. With that in mind, we tasked our teams and our internal Innovation Lab with developing initiatives to improve our clients’ understanding of risk and therefore provide better coverage for their needs. The expansion of our analytical capabilities was a key takeaway from our innovation programme, so I am very pleased to announce this partnership today.

Cyber risk, particularly the silent cyber exposures, affects all businesses and is a growing threat. Through this service, our clients will now be able to, regardless of what they are insuring, accurately assess the cyber exposure of their assets and choose insurance providers accordingly.”

Samit Shah, BitSight’s manager of insurance strategy and operations, said: “We are excited to partner with BMS to provide valuable cyber risk insights to their clients. Working with carriers around the world, including several in London for a number of years now, we believe providing transparency into security posture along all parts of the insurance value chain – carrier, broker, and client – is critical to accurate risk transfer decision-making.”

About BitSight
Founded in 2011, BitSight transforms how organizations manage cyber risk. The BitSight Security Ratings Platform applies sophisticated algorithms, producing daily security ratings that range from 250 to 900, to help manage their own security performance; mitigate third party risk; underwrite cyber insurance policies; conduct M&A due diligence and assess aggregate risk. With over 1,500 global customers and the largest ecosystem of users and information, BitSight is the most widely used Security Ratings Service. For more information, please visit www.bitsight.com, read our blog or follow @BitSight on Twitter.

BMS secures long-term investment from BCI and PCP

BMS today announces an agreement for a significant investment by affiliates of British Columbia Investment Management Corporation (“BCI”) and Preservation Capital Partners (“PCP”). The investment, which values BMS at £500m, is subject to regulatory approvals and is expected to close in the third quarter.

The BMS management team, led by chief executive officer Nick Cook, will all remain in their current roles following completion, and management and staff of BMS will remain significant shareholders in the company.

Following the transaction’s completion, Pioneer Underwriters will be owned directly by the current shareholders of Minova Insurance, the holding company that had previously owned BMS.

Nick Cook commented: “The long-term investment by BCI and PCP secures our future as an independent broker and maintains significant employee ownership. We have grown consistently over the past 5 years generating revenues in excess of £100m for the first time in 2018. We look forward to partnering with BCI and PCP as we continue to invest in our business and attract market leading talent to the benefit of our clients. My thanks go to all of our colleagues who have been at the root of our success.”

Dane Douetil, CEO of Minova added: “This investment is excellent news for BMS’s dedicated staff, who will remain important shareholders, and particularly for BMS clients who will continue to benefit from the very best independent advice in the market. It is also a ringing endorsement of the London market and, following considerable consolidation in the broking sector, ensures that an independent voice will continue to be heard.”

Gordon J. Fyfe, CEO/CIO of BCI said: “As an investor of patient capital, we seek companies with a sustainable competitive advantage that offer value-add services and are led by talented management teams. BCI’s long-term investment in BMS allows them to grow the business and generate the returns that our pension plan and accident fund clients require. Our investment also provides regional and sector diversity to our clients’ private equity portfolio.”

Jatender Aujla, a Partner of Preservation Capital commented: “We have been impressed by the growth BMS has experienced since Nick and his management team took over the business. Today, BMS is one of the largest independent specialty lines focused insurance brokers in the London market. We look forward to working with the team as long term partners and helping them seize the significant opportunities available in the market.”

About BCI

With C$145.6 billion of managed assets, British Columbia Investment Management Corporation (BCI) is a leading provider of investment management services to British Columbia’s public sector and one of Canada’s largest asset managers. We generate the investment returns that help our institutional clients build a financially secure future. With our global outlook, we seek investment opportunities that convert savings into productive capital that will meet our clients’ risk/return requirements over time. We invest across a range of asset classes: fixed income; mortgages; public and private equity; real estate; infrastructure; and renewable resources.

For more information about BCI, please visit www.bci.ca

About PCP

Preservation Capital Partners is a mid-market private equity firm specialising in the financial services sector. It focuses on partnering with market-leading companies with proven and resilient business models that have demonstrated strong growth.

BMS 2019 Atlantic Hurricane Season Update

The Season Has Begun
There has undoubtedly been a lot of attention given to severe weather across much of the U.S. since the end of April, but in the meantime, the Atlantic hurricane season has arrived. In fact, most people may not have noticed that the Atlantic Basin already had its first named storm (Andrea) of the season. Andrea was a short-lived (less than 24 hours) storm that formed on May 20, about 300 miles south of Bermuda. Andrea became the fifth tropical storm to form before the official start of the Atlantic hurricane season, which did not officially begin until June 1.

Dates of first named storm formation over the past 50 years. The official start of hurricane season is marked by the horizontal green line, and the median date of the first formation is marked by the horizontal dashed black line. The trend over the past 50 years has been for the first named storm to form earlier, with a large spread. There is no correlation between an early start of the season and the season’s overall activity, as discussed here. Source: (Brian McNoldy)

According to the National Hurricane Center, there is a 60% chance of named storm development in the near term in the southern Gulf of Mexico. It’s typical for us to see early season development in this area. At this time, most of the forecast models are bringing tropical weather up into Texas, which will also bring more moisture to the Central Plains where it is surely not needed at this time.

Invest 91 is a tropical disturbance in the southern Gulf of Mexico, which could develop into a named storm as it moves northwest over the coming days. Source: Weathermodels.com

Seasonal Forecasts

I was recently asked: “Does the insurance industry place any weight on seasonal hurricane forecasts?” My quick answer was Yes and No, as it depends.

To elaborate on the Yes part: The insurance industry has always been supportive of seasonal hurricane forecasts by subscribing to private forecasting companies and by funding academic research in these areas. Most companies don’t like surprises and, naturally, being prepared is the logical thing to do for both the reinsurance and insurance industries. However, insurance companies may be more limited in what they can do than reinsurance companies.

The seasonal forecasts can influence the strategic planning of an insurance company by making sure they have adequate claims adjusters in place going into the hurricane season to better serve their customers. Of course, an active hurricane season might require an insurance company to consider service level agreements or loss adjustment expenses and the effects of demand surge that might need to be paid in an active hurricane season. However, since the insurance industry is heavily regulated, companies have little ability to adjust rates for an active or inactive season ahead of time. The reinsurance industry, on the other hand, can be a bit more opportunistic when dealing with seasonal forecasts in terms of planning ahead to provide reinsurance in the secondary market.

To the No side of the answer: Capital requirements for insurance companies are regulated by rating agencies and the insurance commissioners of each state, and do not allow for rate adjustments on a seasonal basis. As part of its strategic planning, an insurance company may want to stress test a portfolio to a certain loss level, as it has the ability to buy more reinsurance during the season if it is uncomfortable with the potential losses that may come from a particular seasonal forecast. The extent of just how much seasonal forecasting plays into each insurance company’s strategic planning is unknown, but generally, insurance companies spend considerable time with strategic planning to understand the potential of losses in any given season, regardless of the Atlantic Basin seasonal activity.

From a business perspective, it’s hard to rely heavily on forecasting when the accuracy of seasonal forecasting is low. Historically, in June seasonal forecasts, the forecasting of activity has not correlated well with actual insurance industry losses. How many times have you heard about 1992’s Hurricane Andrew and how that season was a below normal year? Yet, Andrew happened and was a very big loss for the industry. “It only takes one” will haunt the industry until forecasting gets better.

The readers of my past Atlantic hurricane seasonal forecasts may know that I am all for our industry moving away from simply looking at activity in terms of the number of named storms and hurricanes the Atlantic basin might produce, and rather focus more on what the pattern is suggesting in terms of landfall impacts. This is where we will find the most value, as I describe in more detail below.

Seasonal Forecast and Landfall Threats
The seasonal forecasts we see each year from various sources that provide a number range of expected named storms and hurricanes in the Atlantic Basin are a dime a dozen. There is usually a considerable spread in these forecasts. Currently, there are 19 different forecast groups that have submitted Atlantic seasonal hurricane forecasts to http://seasonalhurricanepredictions.bsc.es/ . The average of these forecasts calls for 6 hurricanes, which is closer to an above normal season.

What do El Niño and La Niña have to do with tropical cyclones? During El Niño, wind shear increases in the Atlantic and we see cooler sea surface temperatures. In La Niña, wind shear decreases and the sea surface temperatures become warmer in the Atlantic, fueling more tropical cyclone activity. Source: NOAACliamte.gov

One of the major factors being considered in many of these forecasts is what the state of El Niño Southern Oscillation (ENSO) may be during the hurricane season. Currently, there is a weak El Niño occurring in the tropical Pacific, and this is forecasted to maintain into the heart of hurricane season. El Niño historically limits named storm development by increasing wind shear across the Caribbean and the Main Development Region. However, not all El Niños are the same, and this El Niño is a Modoki El Niño. This means that the warmest water is found in the central Pacific rather than off the coast of South America. We may see less of an overall impact on Atlantic hurricane season activity with a Modoki El Niño.

General difference between La Niña and  El Niño season.  However, the current El Niño is more of a Modoki El Niño which has less overall impact on the Atlantic hurricane season. Source: NOAA

Another factor to consider, which I think some of the seasonal forecasts may be missing, is that the depth of warm water is shallow and there is actually cooler than normal water beginning to show up at depth, which actually suggests more of a La Niña signature. This could mean that we see very little El Niño impact this hurricane season and instead begin more of a transition to a La Niña weather pattern for 2020.

The image to the left is the  vertical profile of the water temperatures at depth across the Pacific Ocean from South America to Australia as represented by the black line in the image to the right. Note the cold water below the warmer sea surface temperature closer to South American coastline with much of the warmer than normal water in the Central Pacific, which is more of a classic Modoki El Niño signature. Source. NOAA CPC

Sea Surface Temperatures across the Atlantic are currently warmer than usual, which would suggest a more active season. However, we may also want to consider one of the indexes that the insurance industry has looked at for over two decades now. According to Colorado State University, the Atlantic Multidecadal Oscillation (AMO) is currently in a cold phase, which historically would limit named storm activity in a given season, however, SST will be plenty warm enough for named storm development.

The other two factors to watch this Atlantic hurricane season will be Saharan dust and the Madden Julian Oscillation (MJO). Both of these are difficult to predict at seasonal time scales, but understanding the phases of the MJO can help determine when named storm development will occur. The MJO is the major fluctuation in tropical weather on weekly to monthly timescales that comes from pulses of tropical convection over the subcontinent of Asia. The MJO can be characterized as an eastward moving ‘pulse’ of cloud and rainfall near the equator that typically recurs every 30 to 60 day. In fact, the Atlantic basin is currently going into a phase (The MJO is currently in phase 3 and about to enter phase 4) that is not conducive to tropical development. It would appear unlikely that anything of substance develops in the Atlantic Ocean through early July as El Niño and the phase of the MJO limit convection development, which would also limit named storm development.

Overall, it looks like we have the potential for another late blooming season for 2019 with some subtropical development between now and the middle of July, along with a chance for a weak named storm in the Gulf of Mexico this week.

Saharan dust can be an inhibitor of Atlantic Hurricane activity, but it often moves off Africa in waves. In between these breaks of dust, and when combined with the right phase of the MJO, you can find that named storm development has a higher probability of occurring.

Above are the phases of the MJO and the tropical storm tracks that have occurred across the world. Atlantic Ocean is to the far right in the images above.   The MJO can also considerably influence hurricanes in the Gulf of Mexico, Caribbean Sea, and tropical Atlantic. More hurricanes tend to occur in MJO phases 2 and 3 than in phases 6 and 7. Differences in major hurricane numbers and hurricane days in the main development region are a factor of 3. Source: https://journals.ametsoc.org/doi/pdf/10.1175/BAMS-D-12-00026.1

As we’ve discussed, there are multiple factors to weigh when trying to predict the timing for named storm development. However, what are the seasonal climate models suggesting in terms of the possible tracks for named storms? As seasonal climate models continue to get better, we can begin to pick up on the overall pressure and precipitation patterns to help determine where storms will track.

The ECMWF Climate model is suggesting higher wind shear across the Caribbean which would limit tropical storm development in this area.  However, a window of lower shear is forecasted for the Atlantic hurricane season from the Bahamas to south of Bermuda.  Source: Ben Noll Weather

 

The CanSIPS  climate forecast model provides an view of where the Bermuda Azores high might be positioned for the Atlantic hurricane season. The lower than normal pressure coming from the model could suggest area of more named storms. Pressure below average near U.S. coast, above average in Main Development Region. Source: TropicalTidbits.com

 

Seasonal climate models are suggesting that above normal precipitation will be occurring this summer off the eastern coast of the U.S. This suggests that this is where the storm track may set up for the season, as storms bring above average rainfall to the eastern coast of the U.S. and the island of Bermuda. Also notice less overall rainfall in the central Atlantic suggesting storms might form closer to the East Coast if they develop. Source: Ben Noll Weather

Summary

I am expecting a more active than normal (Named Storm and Hurricane Storm Counts) Atlantic hurricane season as I think the Modoki El Niño will have less of an overall impact. When one combines this with the warmer than normal SST and weaker than normal wind shear near the East Coast, the conditions should allow for more than normal named storm development. The climate models are suggesting above normal precipitation on the periphery of the west side of the Bermuda high, which could come in the form of named storms during the summer months.  The key to the overall season will be how the MJO and Saharan dust enhance convection, with the next best possible window after this week coming in early July.  How all of this insight will impact the insurance industry is a big question at this point in time, but risks along the East Coast need to be watched.