New approaches needed as storms whip up ” Swiss Re
Environmental Finance, 26 November 2004 – Insurance companies can no longer rely on traditional loss estimates in the face of potentially more extreme weather conditions, according to Swiss Re.
The company, the world’s second largest insurer, notes that the 2004 hurricane season generated greater losses in the US and the Caribbean than any other storm season in history. However, its adoption of “event-based risk analysis” helped the insurer avoid crippling losses, it said in a report, Hurricane Season 2004, released this week.
Swiss Re estimates that hurricanes caused around $20-25 billion of insured losses in the US and the Caribbean while in Japan ” which was hit with an unprecedented number of typhoons this year ” losses are estimated at around $6 billion.
The report notes that it is impossible to tell whether climate change is leading to more windstorms ” as some scientists fear ” or whether their greater frequency is simply a result of a natural climatic variation.
Nonetheless, the increasing frequency of storms makes losses harder to predict, the report says, given difficulties in apportioning losses following multiple storms, and higher levels of damage to properties, as overwhelmed construction sectors take longer to carry out repairs.
Swiss Re argues that relying on statistical methods using loss history to estimate levels of risk is becoming increasingly inadequate. In 2002, the company began work on a proprietary ‘event-based’ computer model, that simulates the life cycles and loss effects of 500,000 wind storms.
Such models ” which are starting to be used by other leading insurers ” factor in the effect of practically every combination of storm trajectory and intensity. This makes it possible to write more business using the same amount of capital, Swiss Re says.
“Compared with conventional scenario models, an event-based approach allows us to perform a far more realistic risk analysis, and thus a more exact calculation of premium rates,” says Werner Schaad, Swiss Re’s chief underwriting officer.