RMS Medium Term Perspective on Hurricane Activity Dr. Manuel Lonfat Florida Commission on Hurricane Loss Projection Methodology Workshop Tallahassee, July 27 2006
Agenda Multiyear autocorrelation of Atlantic, US and FL hurricane activity over the last century Appropriate insurance industry time horizon for assessing a forward looking perspective on activity RMS medium term perspective methodology Summary: future plans 2
Issues with Atlantic and US Hurricane Datasets The datasets used in this analysis are HURDAT and the US list of US Hurricanes, both available at NHC The datasets are known to be incomplete ATL basin data likely incomplete prior to 1950 or possibly later regarding the storm intensity The US landfall dataset also has issues, in particular with the max intensity of low Rmax hurricanes before 1900 What is the chance that Charley would have been classified Cat 4 in 1860? Source: http://www.aoml.noaa.gov/hrd 3
Atlantic Basin Hurricane Activity has shown a Marked Increase Since 1995 Since 1995 # CAT 3-5 storms x 2 the 1970-1995 average Principal driver: low latitude sea surface temperatures (SSTs) Competing theories as to the cause of the current high levels of activity: multidecadal oscillation vs. climate trend However statistically and climatologically there is no doubt that we are currently in a persistent period of higher than average activity Annual number of Category 3-53 hurricanes in the Atlantic basin between 1900-2005 and 5 year running mean 4
NOAA s Perspective (May 2006) Atlantic hurricane seasons exhibit prolonged periods lasting decades of generally above-normal or below-normal activity. Hurricane seasons during 1995-2005 have averaged 15 named storms, 8.5 hurricanes, and 4 major hurricanes, with an average ACE index of 179% of the median. NOAA classifies nine of the last eleven hurricane seasons as above normal, and seven as hyperactive. In contrast, during the preceding 1971-1994 period, hurricane seasons averaged 8.5 named storms, 5 hurricanes, and 1.5 major hurricanes, with an average ACE index of only 75% of the median. One-half of these seasons were below normal, only three were above normal (1980, 1988, 1989), and none were hyperactive. 5
Hurricane activity in Florida Cat 1-5 in FL have gone through phases of high and low activity The frequency of Cat 1-5 from 1970 to 1994 was significantly lower than that of the long term. Frequencies of Cat 1-2 and Cat 3-5 have both been above the long term over the last 11 years Since 1995, 7 Cat 1-2 have impacted Florida, giving rise to an annual rate similar to that prior to 1970 Number of FL Cat 1-5 4 3.5 3 2.5 2 1.5 1 0.5 0 1 12 23 34 45 56 67 78 89 100 Years since 1900 Annual number of Category 1-51 hurricanes in Florida between 1900-2005 6
Climate and Hurricanes - Science timeline Pre 2005 The recent increase in Atlantic hurricane activity: Causes and implications - Goldenberg et al. 2001 Penetration of Human-Induced warming into the world s oceans Barnett et al. 2005 Gray 2005 on natural cycles and ENSO Uncertainty in Hurricanes and global warming - Trenberth 2005 Increasing destructiveness of tropical cyclones over the past 30 years Emanuel 2005 2005 Chan 2005 on West Pacific activity trends Landsea 2005 response to Emanuel 2005 Pielke et al. 2005 on trends damage Low frequency variability in globally integrated tropical cyclone power dissipation Sriver and Huber 2006 Trends in global cyclone activity over the past twenty years (1986-2005) - klotzbach 2006 Changes in tropical cyclone number, duration and intensity in a warming Environment Webster et al. 2005 Hurricanes and Global Warming - Pielke 2005 Gray 2005 on data quality prior to satellite era 2006 Atlantic Hurricanes and natural variability in 2005 - Trenberth and Shea 2006 decomposition of contributions to activity Sea Surface temperatures and tropical cyclones in the Atlantic Basin Michaels et al. 2006 Deconvolution of the factors contributing to the increase in global hurricane intensity. Hoyos et al 2006 Hurricanes and Global Warming Potential Linkages and Consequences Anthes et al 2006 Atlantic Hurricane Trends Linked to Climate Change Mann and Emanuel 2006 Blue global warming linkage Agenda Setting Green AMO linkage 7
What is the appropriate time horizon for assessing hurricane risk for the insurance industry? 8
The Appropriate Risk Horizon for CAT Models The long term historical activity rate is inconsistent with the current level of activity For capital management and insurance regulatory purposes, shifting to a short term seasonal risk horizon (i.e. less than 12 months) would prove far too volatile Would imply significant changes in Florida insurance rates year on year (and month on month?) 9
The Appropriate Risk Horizon for CAT Models In September 2005 RMS determined that in future model upgrades the expected activity rates would be for a rolling five year forward looking period More stable than seasonal forecasts Appropriate time interval for scientific forecasting relative to multidecadal variability To be updated annually 10
RMS Medium Term Perspective Methodology 11
Expert Elicitations RMS methodology uses a range of statistical analyses and an elicitation of leading experts in the field Elicitations have been widely used across fields where the length of the record is too short or the return periods too long to use traditional statistical methods: Eg. Assessment of return periods of earthquake fault rupture in California For hurricanes, this approach is relevant because Different theories exist regarding the causes of current high levels of activity, yielding different perspective on the future Issues with the data reduce the confidence in employing long term statistics 12
1 st Expert Elicitation Bermuda, October 15, 2005 The elicitation was organized to obtain a consensus over the activity of the next 5 years (2006-2010) US and Caribbean Formal process (following rules of elicitation) The following questions were asked: Expected annual mean activity rate of Cat 1-5/Cat 3-5 hurricanes in the Atlantic Basin for the period 2006-2010 Expected annual mean activity rate of Cat 1-5/Cat 3-5 hurricanes making one or more landfalls along the US coast in the period 2006-2010 How long will the current period of higher activity last, and how low will hurricane activity then fall? 13
Expert Elicitation of Medium Term Caribbean and U.S. Rates Experts present at the meeting were: Prof. Jim Elsner (FSU), Prof. Kerry Emanuel (MIT), Tom Knutson (NOAA/GFDL) and Prof. Mark Saunders (UCL), reflecting a broad cross section of expertise Experts were provided with detailed data and US (NHC) landfall statistics Range of statistics derived from the time series were also provided, along with description of the way that activity rates are considered in the RMS model A RMS analyst was present at the meeting to perform calculations on the data as requested by the experts 14
Expert Elicitation of US Medium Term Activity Rates Experts activity increment targets were obtained by assessing probabilities of exceedance of key historical activity rates, under the assumption of a Poisson distribution The range of answers was 2.12-2.32 for CAT15 and 0.88 0.94 for CAT35 Two approaches were used for calculating the mean rates across the experts A simple average A weighted average (weights for each expert inversely proportional to the range of their answers) The results from the 2 methods are within 2% or less from each other Experts targets for the next 5-year activity at US landfall are: 21% increase in the activity of CAT12, 36% increase in the activity of major hurricanes (CAT35) compared to the long term mean (1900-2005) Experts all agreed high period of activity likely to last for at least next decade 15
Implementation of activity rate increases Type 5 (Gulf) Type 3 Type 4 Caribbean Type 2 Type I Type I Marginal 20 N 10 N 0 Activity rate increases predominately in Type 1 and Type 2 Atlantic origin hurricanes 16
RMS Climate Hazard Models From May 2006 in all RMS models the default activity is that of the medium term 5 year perspective Recommended to be used for all standard applications of the model as used by insurers, reinsurers, rating agencies, Cat bond issuers & investors, regulators etc 17
Summary: Future Plans on developing Medium Term Hurricane Activity Rates Medium Term 5 year activities will be updated annually Procedures for end 2006 (2007-2011) update well underway to include increased component of multiple statistical and climatological inputs as well as expert elicitation Procedures and outcomes will be submitted for peer-review publication 18