Changes in exposure – the number of buildings and value of the buildings that are exposed to hurricane hazard – exacerbate the impact of climate change on hurricane losses by more than twice over, according to a recent Inver Re report.
In its Unpicking North Atlantic Hurricane Risk report, Inver Re also highlights the need for an ongoing re-balancing of the discussion between hazard and exposure within a reinsurance context.
This is needed, the report states, despite all the analysis that has been done and directed towards modelling the impact of the change in hurricane severity and the acknowledgement that anthropogenic global warming has increased the severity of North Atlantic hurricanes.
Inver Re said: “Changes in hazard due to climate change is only one part of the picture. Changes in exposure mean more people living in coastal communities in the US than ever before, and inflation driving replacement costs to record levels.”
“Inver Re analysis at the end of the 2022 hurricane season estimated exposure effects could have twice the impact of hazard effects due to climate change on hurricane losses between now and 2030. That is assuming a worst-case scenario of two degrees of global warming by 2055 (RCP8.5), under an intermediate scenario (RCP4.5) exposure effects could have four times the impact,” the report stated.
Adding: “This is not to suggest that it is not critically important to mitigate potentially catastrophic effects of climate change within a broader context. But specifically within the context of North Atlantic hurricane risk, changes in exposure are a more significant driver of the increasing cost of these events.”
Hurricane risk is broken down into three components: vulnerability, hazard, and exposure, analysts explain. The vulnerability of a built environment is complex. Properties in the US are being constructed under improved building codes, ensuring built environments are more robust to repeated hazards.
In time, improvements to the built environment should negate the effect of historical building regulations. Moreover, changes in the building code and other mitigation and climate adaptation measures will hopefully help to mitigate the effects of hurricane risk in the future.
But right now, analysts highlight, changes in hazard and exposure will likely have a more material impact on hurricane risk.
With hurricanes, the primary hazards are: windspeed, precipitation and storm surge. According to the report, studies have found that windspeed has increased because
of the impact of climate change on oceanic factors such as sea surface temperatures (SSTs).
It is less clear whether relative precipitation has increased to date. Although changes in hurricane translation speed could have contributed to hurricanes dropping more water it is not clear what, if anything, has caused this, analysts noted.
Regarding exposure, there has been significant population growth in the eastern coastal states of the US, particularly Florida. According to the report, growth has been enabled and encouraged by political factors including the National Flood Insurance Program (NFIP), low taxes and good job opportunities.
Consequently, there is significantly more property in the way of landfalling hurricanes in the US, and population growth is expected to continue.
Additionally, annual US replacement cost inflation averaged 10.8% in the two years up to the start of the 2022 hurricane season and outpaced CPI at a compound annual rate of 2.1% since 20129. COVID-19 had a significant impact on this, but replacement cost inflation outpaces CPI even after normalising for these effects.
This means that the value of the buildings exposed to hurricane hazard has increased significantly, not only in absolute terms but in real terms too.
“Changes in hazard and exposure interact to have a multiplicative effect on economic losses. As the reinsurance industry has experienced, the product of severe hurricane events, replacement cost inflation and demographic trends have made it extremely difficult to accurately predict and price hurricane risk.,” Inver Re’s report explains.
Inver Re’s data analysis revealed in the report demonstrates a clear relationship between windspeed, precipitation, storm surge and economic loss.
The broker has used this data to developed a top-down model that is able to capture a significant amount of the variance within this set of 164 historic events.
Inver Re said: “Assuming 2 degrees of global warming by 2100, we have broadly applied the results by Knutson et al. 2020, approximate changes in storm surge based on projected sea-level rises and projected inflationary and demographic trends to estimate the relative effect of hazard and exposure on economic losses out to 2030.
Taking an average Category 1 hurricane event making landfall in Florida, assuming 2 degree global warming by 2100 (RCP4.5) and continuation of inflationary and demographic trends since 2002, there is a 0.5 probability that economic losses increase by more than 28% by 2030.
“For an increase of 28% or more, the impact of climate change on hurricane hazard is estimated to account for roughly a fifth of the increase with inflationary and demographic effects accounting for the remaining 80%,” the report found.
“Assuming a worst-case scenario of 2 degrees global warming by 2055 (RCP8.5) there is a 0.5 probability of losses increasing by more than 36%, with the impact of climate change on hurricane hazard estimated to account for just over a third of the increase in this case.”
Inver Re concluded: “In our view, this demonstrates the need for the ongoing rebalancing of the discussion between hazard and exposure within the context of North Atlantic hurricane risk. Fundamentally, it is essential that as a starting point underlying exposures are accurate and up to date, and rate changes reflect underlying inflationary dynamics. Assuming these criteria are met, reinsurers will be much better equipped to navigate a changing North Atlantic hurricane risk.”
