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Hot air & Hurricanes

by Nomad
Thu Oct 28th, 2010 at 06:22:51 PM EST

Often the influence of big industry on climate science has been associated with attempts to tone down the effects of anthropogenic climate change. However, the reverse may be equally true: when unsettled science is exaggerated, it can easily become a perverse tool for larger industry profit. An example is coming into view with (re)insurance companies and the science on hurricane activity. Hat tip to Roger Pielke Jr. whose blog provided most of the pieces to stitch the story together.

Two part series on Bermuda's control over insurance rates | Ocala.com

Reinsurance operates on a global scale, regulated to some extent in Europe and hardly at all elsewhere, especially in Bermuda, a tax haven.

The tiny volcanic rock 600 miles east of North Carolina is home to nearly half the reinsurance sold to Florida, a $470 billion powerhouse crammed in a few blocks between the rum bars and T-shirt shops.

There are more than 1,200 foreign insurers incorporated in this oceanic frontier town, including 59 reinsurers that provide billions of dollars of hurricane protection for nearly every home in Florida, from swamp trailer to coastal high-rise.

Bermuda's regulations are famously light, exposing consumers to business practices designed to reduce competition and encourage price-fixing.

And then, in 2005, hurricane Katrina hits New Orleans.



Two part series on Bermuda's control over insurance rates | Ocala.com

The streets of New Orleans were still flooded in 2005 when reinsurers started raising money to pay for Hurricane Katrina and take advantage of the market boom expected to follow.

By December, Bermuda's reinsurers had raised $17 billion from eager investors, primarily hedge funds, private equity firms and U.S. investment banks such as Merrill Lynch, Goldman Sachs and Lehman Brothers.

But the flood of new money was not used to make more hurricane coverage available to Florida.

Reinsurance contracts and comments by executives show that even when they had money in the bank and board approval to use it, Bermuda reinsurers cut the capital they were willing to allot to Florida.

The layoff in part was driven by the belief global warming had increased hurricane risk, a view backed by some scientists hired by the insurance industry. But it also was driven by a hunger to maximize profit.

Emphasis mine. Commonly, insurance premiums get raised in the wake of a massive natural disaster. But the article remains vague on the role of the mentioned scientists, and who these scientists were.

Well known is that Risk Management Solutions, an influential company assessing the risks of natural disasters, providing risk models for insurance and reinsurance companies, released early 2006 a risk assessment for hurricane damage for the 2006-2010 period.

RMS Press Release - March 23, 2006 - New RMS View of U.S. Hurricane Activity Rates Increases Losses by 40% in Florida and Gulf Coast

Risk Management Solutions (RMS) today announced that increases to hurricane landfall frequencies in the company's U.S. hurricane model will increase modeled annualized insurance losses by 40% on average across the Gulf Coast, Florida, and the Southeast, and by 25-30% in the Mid-Atlantic and Northeast coastal regions relative to those derived using long-term 1900-2005 historical average hurricane frequencies.

This new view of risk is driven by an increase of more than 30% in the modeled frequency of major (Saffir-Simpson Category 3-5) hurricanes making landfall in the U.S. to account for current elevated levels of hurricane activity in the Atlantic basin that are expected to persist for at least the next five years. When compared with a pre-2004 historical baseline, as has been previously employed for quantifying insurance risk, the increases in modeled annualized losses are closer to 50% in the Gulf, Florida, and the Southeast.

The increased frequency and intensity of hurricane activity in the Atlantic Ocean Basin, as observed since 1995, are driven by higher sea surface temperatures in the tropical North Atlantic and by associated changes in atmospheric circulation. These warmer temperatures are expected to translate into a continuation of high activity in the basin, leading to a greater potential for hurricanes to make landfall at higher intensities over the next five years.

That paper is found here. This sentiment was riding high in the wake of the well-publicized Webster et al. publication in Science, which was published in 2005, just weeks after hurricane Katrina had ravaged New Orleans.

That's one piece of the set. It gets a bit messier from here for a second piece, as it wades into another climate war battle front. The main author of the above, dr. Muir-Wood, chief research officer at RMS, also released a white paper at a 2006 conference in Germany, arguing that there is already a 2% increase in normalized losses for the period associated with increased global temperatures.

This publication, while not part of the official science literature and thus not having passed through independent peer-review, was included in the 2007 IPCC Fourth Assessment Report (Working Group II), was prominently referenced there and formed the single foundation of the  argumentation that normalised catastrophe loss was on the increase with 2%. Note that for this particular IPCC chapter, Muir-Wood has been credited as a contributing author. The relevant excerpt:


A previous normalisation of losses, undertaken for U.S. hurricanes by Pielke and Landsea
(1998) and U.S. floods (Pielke et al., 2002) included normalising the economic losses for changes in wealth and population so as to express losses in constant dollars. These previous national U.S. assessments, as well as those for normalised Cuban hurricane losses (Pielke et al., 2003), did not show any significant upward trend in losses over time, but this was before the remarkable hurricane losses of 2004 and 2005.
A global catalogue of catastrophe losses was constructed (MuirWood et al., 2006), normalised to account for changes that have resulted from variations in wealth and the number and value of properties located in the path of the catastrophes, using the method of Landsea et al. (1999). The global survey was considered largely comprehensive from 1970 to 2005 for countries and regions (Australia, Canada, Europe, Japan, South Korea, the USA, Caribbean, Central America, China, India and the Philippines) that had centralised catastrophe loss information and included a broad range of peril types: tropical cyclone, extratropical cyclone, thunderstorm, hailstorm, wildfire and flood, and that spanned high- and low-latitude areas.
Once the data were normalised, a small statistically significant trend was found for an increase in annual catastrophe loss since 1970 of 2% per year (see Supplementary Material Figure SM1.1).

(source)

Emphasis mine. The mentioned figure SM1.1 was the following graph (in the supplementary material), and again cited the 2006 Muir-Wood publication as source.

source

Of course a caveat applies here - it's not just hurricanes responsible for increased losses - but they are considered part of it.

So far so good? It gets more messy from here. Early this year, the above figure gained some blog prominence as it became part of the furore surrounding the criticisms levelled at the IPCC for faulty work and mistakes, including on financial losses by natural disasters - and most, but not all, of the history of both the inclusion of the 2006 Muir-Wood publication as well as the controversial figure have been mapped out since.

Because while accredited to it, the IPCC figure above isn't included in the 2006 Muir-Wood publication - as everyone can see for oneself. The data underpinning the figure can't all come from the 2006 publication either.

The 2006 Muir-Wood paper was, as usually happens in science, refurbished and incorporated as a book chapter - published in 2008, with Stuart Miller as first author and dr. Muir-Wood the second author. But the above IPCC figure wasn't included in that publication either.

So where does this figure comes from? Although not conclusively solved, there are some good clues. During the Second Order Draft of the chapter, the expert critics were heckling the inclusion of a figure 1.5 from an unpublished study by Miller in 2006. Miller 2006, however, has never appeared, and became the Miller 2008 book publication - which does feature a similar figure of figure 1.5.

In response to the expert critics, the author team responsible for the chapter writes:


Figure moved to Supplementary Figure and employed a different plot that smoothes catastrophe losses and shows these alongside temperature. After smoothing (that thereby removes the peaks noted) the correlation
remains. The text now provides a balanced commentary on this. .

Based on this it has been suggested that it was the actual Writing Team of the IPCC chapter which independently changed the presentation of the graph from an unpublished publication (which for that very reason should not have been included in the A4R), then mis-cited the 2006 Muir-Wood publication as the source. As a contributing author of the IPCC chapter and second author of the Miller paper, Muir-Wood may actually have provided the initial figure 1.5 that then was altered in presentation and was added to the IPCC report. Nevertheless, this is all rather awkward coming from an authoritative body like the IPCC, and I can only see it as a faux-pas at best.

In the wake of the criticism early this year, both dr. Muir-Wood and his employer RMS have admitted that, even while the 2006 Muir-Wood paper was well reflected in the chapter, the notorious graph should not have been included in the IPCC report. The IPCC sees no problem, however.

It gets worse, though. Pielke Jr., a professor of environmental studies and in a turf war about this issue, was quick to point out that the 2008 Miller publication negated the very conclusions drawn in the 2006 Muir-Wood publication:

Roger Pielke Jr.'s Blog: Castles Built on Sand

Most notably Miller et al. concluded the abstract with the following remarkable conclusion:
We find insufficient evidence to claim a statistical relationship between global temperature increase and normalized catastrophe losses.
The full text states:
In sum, we found limited statistical evidence of an upward trend in normalized losses from 1970 through 2005 and insufficient evidence to claim a firm link between global warming and disaster losses.

Which rendered the 2006 Muir-Wood conclusion, and thus the entire IPCC argumentation stacked on it, entirely moot - something the Writing Team also could have avoided if they had fully incorporated the criticisms received during the drafting of the chapter.

So, unless there are more "scientists hired by the insurance industry" matters stand as following: 1) the authors of the controversial graph in the IPCC, referenced to a publication that was not published nor peer-reviewed and in which the figure wasn't even included, have admitted that the figure shouldn't have been inserted into the IPCC report; and 2) the argument of a 2% increase in normalised losses from natural disasters since 1970 was found to be statistically insignificant by the same authors in a later publication anyway.

Of course this does not mean that disaster losses have no link whatsoever with the effects of anthropogenic global warming, but that, if such a link actually exists, it hasn't been showing in the data available so far - and this attribution hasn't been shown in more recent science publications either. It is however a crucial sort of detail - and I bet it would be important for the insurance industry.

But before 2010 came along, the analysis by the RMS, its subsequent prediction for hurricane losses for the 2006-2010 period, the hasty (and incorrect) vindication of the RMS analysis in the IPCC A4R report and the echoes in the public press with these findings following the disaster of hurricane Katrina, all delivered perfect grounds for (re)insurance companies to raise premiums. Which is exactly what happened.

So, on the piece left untouched, the RMS prediction for financial damage for the 2006-2010 period, how is that coming along, some 4 years later? As the 2010 Hurricane season is winding down (it officially closes on 30 November), results of the yearly damage assessment have been drawn up by Pielke Jr.:

Source

Pielke Jr. published in 2008 an article, in which he wrote that:


no methodology has yet shown skilful out-of-sample predictions of US hurricane landfalls or damage, on timescales
of one to five years, in the form of real-time forecasts provided to decision makers.

Add another one to the pile.

In the meantime, things are swell in Bermuda, hurricane or no hurricane, while Florida is getting sucked dry...

Property insurance: Domestic reserves dwindle as overseas reinsurers profit | HeraldTribune.com

In the past four years, Florida-based home insurers paid out $15 billion for private reinsurance.

There has been no storm to trigger payments. Most of the money is gone, pocketed by a reinsurance industry that plays by Wall Street rules, able to rack up profits no regulated insurance company would be allowed to keep.

Without a major storm before next June, Florida's lost capital will near $19 billion.

Had it remained in Florida, that money could have doubled the size of the state's publicly run catastrophe fund and lowered premiums 20 percent. It could have paid for another round of hurricanes like the eight that struck in 2004 and 2005.

Instead, homeowners' insurance premiums reached record levels in 2006 and 2007, exacerbating widespread policy cancellations. The lost capital also weakened insurance company finances, drained surplus for future storms, and pushed carriers over the edge, giving Florida the highest insurance failure rate in the nation.

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And this was supposed to be a small diary...
by Nomad on Thu Oct 28th, 2010 at 06:24:17 PM EST
What an interesting take on the game, danke Nomad.  Another example of Anglo Disease.

"Life shrinks or expands in proportion to one's courage." - Anas Nin
by Crazy Horse on Thu Oct 28th, 2010 at 06:59:22 PM EST
Great find Nomad. Who would have thought the insurance industry could find a way to profit from global warming. Wonder if the rates will reset now that 2010 was a payout "bust?"

I can swear there ain't no heaven but I pray there ain't no hell. _ Blood Sweat & Tears
by Gringo (stargazing camel at aoldotcom) on Sat Oct 30th, 2010 at 11:13:41 PM EST
AIR is about as influential as RMS and they are fiercely competitive. RMS is not likely to be captive to anyone. They have sufficiently diverse models and knobs to turn on the models to allow reinsurers to pick and choose what suits them to back up what they want to write without conspiracy. All the reinsurers will use both models in any event.

Reinsurance underwriting spreads ARE actuarially high - and yet there remains insufficient capital and capacity to reinsure the peak risks in FLA and GOM - not because of conspiracy or greed but because like any insurer, they want , no, need, a diversified pool of risks. And rightly so, since who would want to reinsured by an undiversified and reasonably highly leveraged reinsurer? Answer: no one.

There is a market failure here, but the failure is that investors have short horizons, don;t understand cat risk, and fear negative fat-tails even if compensated for that tail risk. Go figure. Investor preference for skewed returns, coupled with extreme complexity of modeling and understanding the underlying primary portfolio risk, and a dollop of good old moral hazard keeps risk-capital in short supply. That's my two cents anyway...

by NihonCassandra (rusol1@yahoo.com) on Sun Oct 31st, 2010 at 09:35:16 PM EST
You mean like this?

ABC The Drum - Bookies buying into climate change race

"Munich Re has been dealing with climate change and its consequences and the scientific background since the 1970s, when there was no public debate on climate change," says Munich Re's Ernst Rauch, who heads the insurance giant's Corporate Climate Centre.

"As a risk-taker, we are somewhat like an early-warning system when it comes to changes in the risk field of natural catastrophes."

Mr Rauch's original expertise was in earthquakes, but following devastating losses for the insurance industry from a series of storms in the European winter of 1990, his area of responsibility shifted to the analysis and modelling of meteorological risks.

And the verdict?

"Climate change, we believe, is a fact."

Why?

His pockets are already hurting.

"Based on our own loss experience, climate change we believe is a fact. It triggers natural disasters, atmospheric natural disasters, and the number of these natural disasters worldwide has more than doubled since the 1980s, driven by atmospheric perils, not by earthquakes or volcanic eruptions," Mr Rauch said.

"If we look at the sheer number of losses from natural catastrophes worldwide since the 1980s, more than $US1,600 billion in losses have occured. Most of them were actually weather-related, not earthquakes, not geophysical events."

And he says the economic cost of these disasters, once you take out things like inflation and currency fluctuations, is increasing by 11 per cent a year.

So faced with these increasing losses, what are large insurers and reinsurers doing?

Well, they're putting up premiums of course.

That 11% then seem negated by scientific publications, amongst others one publication by... Munich Re.

ScienceDirect - Environmental Impact Assessment Review : Tropical cyclone losses in the USA and the impact of climate change -- A trend analysis based on data from a new approach to adjusting storm losses

Economic losses caused by tropical cyclones have increased dramatically. Historical changes in losses are a result of meteorological factors (changes in the incidence of severe cyclones, whether due to natural climate variability or as a result of human activity) and socio-economic factors (increased prosperity and a greater tendency for people to settle in exposed areas). This paper aims to isolate the socio-economic effects and ascertain the potential impact of climate change on this trend. Storm losses for the period 1950-2005 have been adjusted to the value of capital stock in 2005 so that any remaining trend cannot be ascribed to socio-economic developments. For this, we introduce a new approach to adjusting losses based on the change in capital stock at risk. Storm losses are mainly determined by the intensity of the storm and the material assets, such as property and infrastructure, located in the region affected. We therefore adjust the losses to exclude increases in the capital stock of the affected region. No trend is found for the period 1950-2005 as a whole. In the period 1971-2005, since the beginning of a trend towards increased intense cyclone activity, losses excluding socio-economic effects show an annual increase of 4% per annum. This increase must therefore be at least due to the impact of natural climate variability but, more likely than not, also due to anthropogenic forcings.
by Nomad on Mon Nov 1st, 2010 at 09:07:42 PM EST
[ Parent ]
You take a special case -- tropical cyclone losses in the USA from 1971 to 2005 -- and project that on the entire world, claiming to know better than Munich Re... Are you an American politician, by any chance?

The basis for the 11% number quoted in the ABC article :

"If we look at the sheer number of losses from natural catastrophes worldwide since the 1980s, more than $US1,600 billion in losses have occured. Most of them were actually weather-related, not earthquakes, not geophysical events."

And he says the economic cost of these disasters, once you take out things like inflation and currency fluctuations, is increasing by 11 per cent a year.

Whereas in the ScienceDirect abstract :

losses excluding socio-economic effects show an annual increase of 4% per annum.

It's hard to see a specific contradiction here :

  • Do you assert that "socio-economic effects" of hurricanes in Louisiana or Florida have been negligeable?
  • Perhaps climatic disasters have been more severe in the world in general than in the US Atlantic coast? (Well golly, you wouldn't think so when you look at the news media.)

And you mentioned "scientific publications"... so you've got more that you'd like to discuss?

And what's the thesis here? Munich Re are exaggerating climate risks in order to justify higher premiums? Or they are honestly but stupidly exaggerating the risk?

Reinsurance is a competitive business. I doubt that they could get away with scamming their clients.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Tue Nov 2nd, 2010 at 07:39:03 AM EST
[ Parent ]
One problem with the reinsurance industry is that it works from flag-of-convenience countries like Bermuda. So no it is not competitive, and yes it can get away with scamming its clients.

So it is perfectly possible that they are gouging their customers on the increased risk of adverse weather events. However, the solution to gouging is to regulate the industry, not to idly bemoan the fact that they are gouging.

- Jake

If you only spend 20 minutes of the rest of your life on economics, go spend them here.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Nov 2nd, 2010 at 07:54:35 AM EST
[ Parent ]
Crisis and Leviathan, The Shock Doctrine...

Bureucracy never shrinks.

Align culture with our nature.

by ormondotvos (ormond no spam lmi net no spam) on Sun Oct 31st, 2010 at 10:13:50 PM EST
Just a few remarks from first principles.

It's hard to criticize the reinsurance industry for covering its arse. After all, the precautionary principle ought indeed to dominate in this industry. Hard to criticise them for being wrong in their projections, because the best science available isn't very good.

Your argument seems to be that they commissioned and used voluntarily alarmist projections to raise capital and profiteer with it. But this isn't the only interpretation. If there had indeed been a wave of expensive hurricanes in the last few years, the picture would be different.

BUT in any case, the problem is that they are the wrong people to be doing reinsurance. As a first guess, it should be a sovereign function, with a global re-reinsurance system...

In the case of Florida, and more acutely Louisiana, undoubtedly home owners and the economy would have been better served if the states occupied the reinsurance role. But ... would you trust them with the money?

If insurance companies are going bust and/or charging unaffordable premiums, it's because they are not capable of accurately predicting or covering the risks. In the end, government may have to enter retail insurance, because the risk of having a big proportion of uninsured property would seem to be unacceptable...

This would perhaps have the advantage of obliging the federal government to intervene as reinsurer in case of major disasters.

The risks are way too big and unassessable to be left to the magical market.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Mon Nov 1st, 2010 at 07:59:59 AM EST
eurogreen:
Your argument seems to be that they commissioned and used voluntarily alarmist projections to raise capital and profiteer with it. But this isn't the only interpretation. If there had indeed been a wave of expensive hurricanes in the last few years, the picture would be different.

The key point here is that there wasn't anything close to such a wave.

I do not argue at this point that insurance companies commissioned anything, or deliberately used projections to raise capital. The only thing I was attempting to bring into view was the cause-and-effect of what can happen when unsettled and controversial science lifts on (popular) sentiment, to the profit of industries and to the detriment of ordinary people. It's not an indictment to industry per se; it is, however, intended as a critical look on how science ticks, and how it effects on society.

by Nomad on Mon Nov 1st, 2010 at 08:38:43 PM EST
[ Parent ]
I think you've missed the wider point (remarkably, since this is your diary! and thank you for posting it)

There is a huge, global problem emerging : how to insure / reinsure against increasing risks due to climate change.

That rapid climate change is happening is not controversial. That it is overwhelmingly destructive in its net effects has not escaped insurers.

That hurricane activity has not increased in the Carribean / Atlantic in the past few years, is something that has surprised, mildly, many people who keep up with climate science.  It's not controversial that warmer sea is correlated with more intense hurricanes, and it's not controversial that the Carribean has been warmer in the past few years. But weather, and hurricane prediction in particular, is not simple. I don't think that the re-insurers will have been more than mildly surprised either. They are, after all, used to provisioning risks that finally don't occur.

In any case, if for you, this phenomenon of an over-provisioned risk informs the wider question of reinsurance and climate change, and brings you to the opinion that climate-change risks should not be provisioned, then I fear you are falling victim to the "cry wolf" phenomenon.

Meanwhile, in Asia, storm intensity and damage has spiked in recent years. Perhaps it's lucky for them that they have less well-developed insurance industries, since these might well have worsened the damage, as they seem to have done in the USA.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Tue Nov 2nd, 2010 at 07:18:58 AM EST
[ Parent ]
if for you, this phenomenon of an over-provisioned risk informs the wider question of reinsurance and climate change, and brings you to the opinion that climate-change risks should not be provisioned, then I fear you are falling victim to the "cry wolf" phenomenon.

I'd appreciate it if you could either stop projecting your own thesis onto my writings, or point me out the specific sentence where I write that particular opinion.

The focus was on American hurricanes. You're welcome to address this wider question if you want to.

eurogreen:

That hurricane activity has not increased in the Carribean / Atlantic in the past few years, is something that has surprised, mildly, many people who keep up with climate science.

And yet it wasn't for people who kept up with the scientific literature on this subject and were well aware of the considerable spread in uncertainty and the lack of statistical significance for the data available. I've long argued at ET that the reliance on doom scenarios for climate poster subjects (like hurricanes) could come back to haunt people who frequently touted the worst-case scenario, and for a number of climate subjects (like hurricanes), this is practically what has happened over the past few years, and may well have led to a declining public belief in the urgency to address the anthropogenic contributions to climate change.

How (re)insurance companies provision against catastrophic risk, including hurricanes, should be based on proper data analysis. Yet for the (Atlantic) hurricane segment there isn't much scientific data with a significant trend (at best, a hint of one), there isn't yet a reliable prediction model on which (re)insurance companies can actually rely on.

That is all. What this means for this wider question of provisioning for global catastrophic risk, and what the state is of the science on which that perception of risk is based, I've no idea. The science could be more certain. It could be less certain. It could be the same. You're welcome to pitch in from here.

by Nomad on Tue Nov 2nd, 2010 at 07:31:37 PM EST
[ Parent ]
A wider confidence interval in your models should make (re-)insurers charge higher premiums. Insurance is the business of taking your money and your volatility and/or uncertainty. Increase the uncertainty, increase the fair price of taking it.

Now, you can easily get me to believe all kinds of nasty stuff about any financial business principally operating out of Bermuda. But raising (re-)insurance premiums in the face of uncertain modelling is not prima facie evidence of alarmism.

- Jake

If you only spend 20 minutes of the rest of your life on economics, go spend them here.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Nov 2nd, 2010 at 09:35:48 PM EST
[ Parent ]
Increasing trend in losses by hurricane damage, increasing premium. Increased uncertainty and confidence interval, increasing premium. And I'm sure that range has also been quantified by the industry, and it may have changed over the years. All fine.

Except that there were public claims of a significance of trend in hurricane losses, not on confidence intervals or uncertain modelling.

If people come back with arguments that the uncertainty was bigger, that's all fine - but it doesn't excuse anyone to claim something which has not been proven, and particularly when it's being done by people working in an industry that may benefit.

by Nomad on Wed Nov 3rd, 2010 at 08:49:39 AM EST
[ Parent ]
The last comment was very prescient. The reinsurance market does act as a global swpaper and diversifier of risk - albeit with a chunky spread taken out. Until recently, insurable values were very skewed, and in much of the world, went uninsured. The multiples Fla residents are being  required to pay global reinsurance market is because there just remains too much insurable risk there relative to what can be swapped or diversified globally (at present). Cat bonds and other attempts to broaden tradeable risk which diminishes spread and disintermediates reinsurers has yet to really to fully realize its potential.

Finally, the models are really not bad, and the modeling and brainpower resources that goes into them makes Wall Street IT look like a several-generations-old gameboy.

by NihonCassandra (rusol1@yahoo.com) on Mon Nov 1st, 2010 at 01:55:51 PM EST


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