Extreme weather, catastrophe modelling and the (re)insurance industry
When Hurricane Andrew made landfall in Florida in August 1992, it resulted in 65 fatalities and the destruction of 25,000 homes. Due to the storm’s impact on populated regions of South Florida, damages spiralled to over $25 billion USD at the time, and it remained the costliest weather-related event in absolute financial terms for over 20 years (only surpassed by Hurricane Irma in 2017). Unbeknown to most outside of the insurance industry, the event had a seismic impact across financial markets, resulting in the insolvency of 16 insurance companies and many more coming perilously close to financial collapse.
As the dust settled, one thing was clear: the global (re)insurance industry was largely ill-prepared in its risk management of US hurricanes. Insurance companies had not sought to purchase enough protection (in the form of reinsurance cover) and reinsurance companies had been providing US hurricane reinsurance for years without really understanding how costly an event could be.
The event proved to be a catalyst for what was a burgeoning science called catastrophe modelling — whereby complex natural hazard models incorporating data on exposure (number of properties at risk of a specific event) and vulnerability (characteristics of properties related to risk, such as building material type, building age, building height etc), could be run on software programs to assess an organisation’s potential financial risk to such events.
Catastrophe models
Catastrophe models rapidly gained traction through the 1990s, further accelerated due to increased computing power, reduced hardware costs, and scientific advances in our knowledge of key catastrophic perils for the insurance market.
Nowadays, these models are a cornerstone of the industry, with almost every transaction made in property insurance utilising a catastrophe model(s) or related risk map in the process, from underwriting through to capital management.
They are essential to managing severe weather risk and to help insurers not only manage their overall accumulations (total risk potentially exposed) and estimate the likely amount of claims from large events, but also assist in deriving a rational price (technical premium) for insurance given a location’s exposure to weather driven hazards.
In recent years, catastrophe models for meteorological systems such as tropical cyclones, extra-tropical cyclones and severe convective storms have become more complex, and are now increasingly able to capture the many components of these hazards, and with the market now increasingly regulated around the use of catastrophe model output. In short, these models help to quantify financial losses from extreme weather events.
Meteorological risk
Despite this widespread adoption of catastrophe models, however, some knowledge gaps remain in the insurance industry regarding the impacts of extreme weather events. This can be due to a number of factors:
- Weather risk itself is changing (through climate change or natural variability) compared to our historical understanding of extreme weather currently captured in catastrophe models
- Global exposure is changing (including increased urbanisation and population growth in high-risk areas and higher valued properties) compared to historical housing stock currently captured in catastrophe models
- A growing protection gap, with an increasing difference between economic losses from extreme events and costs covered by insurance
This is where the importance of continued research into meteorological risk, with clear industry applicability, cannot be overstated.
In 2022, Gallagher Re founded the Gallagher Research Centre (GRC), with the aim to identify topics and trends most impactful to insurers and address these in partnership with academic and public research institutions. Since its launch, the GRC has initiated a range of projects which focus on weather extremes and changing meteorological risk.
European windstorm clustering
In Europe, the property insurance market was significantly impacted by losses in the years 1990 and 1999. A string of damaging extra-tropical cyclones during the European winter season caused extensive damage in many countries across the continent, generating a high volume of claims for insurers.
Weather Photographer of the Year 2022
More recently in 2022, storms Dudley, Franklin, and Eunice again highlighted the capacity of windstorms to cause significant damage and disruption in Europe.
To help insurers ensure they are pricing and managing European windstorm risk adequately, the GRC has established a partnership with the University of Birmingham to provide insights on the ‘clustering’ of these European extra-tropical cyclones, where multiple storms form in the North Atlantic and impact parts of Europe across a very short time window, as was observed in the damaging 1990 and 1999 seasons.
The research is investigating how this clustering of storms may vary both temporally (i.e. whether clustering is more likely to occur at certain times of year than others) and spatially (i.e. whether clustering is more likely to occur in different parts Europe than others). Both of these aspects are not currently captured effectively in existing catastrophe models used in the market.
Initial findings are already improving understanding of previously poorly understood characteristics of European windstorm clustering behaviour, with early results suggesting that, in some regions of Europe, the clustering of storms tends to increase later in the windstorm season, with more storm clustering observed between January and February than in earlier months.
This temporal variation has implications for reinsurance contracts, which in Europe tend to renew on 1 January, halfway through the European windstorm season, before the observed ‘peak’ clustering period. The preliminary findings from the University of Birmingham’s research therefore suggest that clustering more frequently occurs at the beginning of the typical term of the contract rather than at the end — insight that is useful for both reinsurers and reinsurance buyers.
Rapid intensification of US hurricanes
Given the significance of US hurricane risk to global insurance markets, having access to the latest research into emerging trends and observations for this region is vital for insurers and reinsurers alike.
For this reason, one of the projects supported through the GRC is research at Colorado State University (CSU) to investigate the rapid intensification of tropical cyclones, a phenomenon by which hurricanes (and other storms of this type) gain windspeed over the ocean at an extremely fast rate (>30 knots in a 24hr period).
Rapid intensification is a topic which has garnered particular attention in recent years, most notably in 2024 when it was observed during the incredibly damaging Hurricanes Helene and Milton which impacted Florida in September and October.
The CSU research, led by Dr Phil Klotzbach and Dr Levi Silvers, aims to produce a series of papers on trends in rapid intensification, which Gallagher Re can use to examine how effectively existing catastrophe models used by insurance markets consider this phenomenon in hurricane risk.
Rapid intensification is also observed in storms in different basins globally, allowing the CSU research to have clear applicability for assessing tropical cyclone risk for Gallagher Re’s clients in different regions such as Australia, India, Japan, and the Philippines.
This partnership is part of a wider research initiative exploring changes in global tropical cyclone risk.
Changing risk landscape
The insight from the research supported through the GRC is vital for insurers to generate a comprehensive view of the meteorological risk that may impact their exposure, but also to better understand how the nature of that risk may be changing under the influence of climate change.
Early findings from the work between the GRC and CSU, for example, indicates that whilst rapid intensification has long been observed during tropical cyclone strengthening, a higher threshold of intensification, known as “explosive” rapid intensification, with a threshold of a rate of windspeed increase of >50 knots in a 24 hour period, shows a significant increase in occurrence globally over the period 1990-2024.
These insights are helping (re)insurers to have a better understanding of how their current and future risk may be impacted under a changing climate, helping them to assess how their existing approaches to risk pricing and management may need to be revised and reconsidered as a result.
These impactful partnerships formed through the Gallagher Research Centre highlight the importance of collaboration between academia and industry, and evidence how continued support of scientific research will allow the development of new ways in assessing catastrophic weather risk for insurers.
About the Gallagher Research Centre
The Gallagher Research Centre, part of global reinsurance broker Gallagher Re, is a network of academic and industry partnerships dedicated to connecting world-leading and innovative research with the needs of the (re)insurance industry. Unsurprisingly, much of this research focuses on the issue of extreme weather and climate change, which poses a significant risk to (re)insurers worldwide, and which requires robust information to support risk management decision-making. But while critical to the wider (re)insurance industry, the Gallagher Research Centre also plays a role in the broader research landscape.
