Gone With The Wind: US Tropical Cyclone Risks

Hurricane Ian landed on the southwest of Florida's coastline in September 2022. Severe flooding and catastrophic damage occurred across the U.S.'s southeast region. Natural catastrophe losses are on the rise globally and hurricanes account for a significant proportion of them. Plus, hurricanes are expected to be further exacerbated by climate change, becoming more destructive. In a nation with a high concentration of assets that face growing catastrophic hurricane losses, the U.S. is increasingly at risk from hard-to-predict and intense hurricanes with potential losses running into billions.

Multiple ingredients must coincide for hurricane phenomena to transpire. These include intense-low pressure systems that form over warm tropical or subtropical ocean waters, moisture in the air, low-vertical wind shear and a pre-existing disturbance (cluster of thunderstorms). If any of the factors change too much, the storm cannot form or will weaken. On the other hand, hurricanes can concoct extreme winds, heavy rainfall and storm surges. Once a tropical cyclone reaches maximum sustained winds of 74 mph (119 km/h) or higher, it is then classified as a "hurricane" in the Atlantic and north-east Pacific regions, "cyclone" in the Indian Ocean and South Pacific, and "typhoon" in the northwest Pacific. With so many moving parts, forecasting a hurricane is difficult. Large-scale changes in the climate impact hurricanes over entire seasons; thus, determining how climate change impacts hurricanes is vital.

The current state of research is that there will be a rise in the global average hurricane intensity and an increase in the proportion and clustering of particularly severe storms and storms with extreme precipitation. In turn, this will reduce the capacity to respond and recover quickly, increasing hurricane damage. 

Bastian Manz, Senior Climate Risk Analyst at Allianz Re stated, “there is more certainty that high-intensity storms will become more frequent, indicating the potential for greater wind and storm surge damage.” 

Climate change cajoles storm severity due to rising sea levels and warmer ocean temperatures. Higher sea levels increase the risk of coastal flooding damage from storm surges, while warmer sea surface temperatures can intensify tropical storm wind speeds. Plus, a warmer ocean can drive wetter hurricanes, with 10-15% more precipitation from storms projected to lead to more frequent and intense heavy rainfall episodes. These events combined can further exacerbate the impacts of tropical cyclones. In addition, a storm's strength becomes harder to predict as they intensify in a short time. The increasing severity of hurricanes are showcased across the U.S. annually. Climate-related events could be further showcased this year with a 43% chance of a major hurricane reaching landfall in the U.S. this year and more people at risk with states like Florida with a growing population as people move to the coasts for an improved lifestyle.

For the U.S., hurricanes primarily affect areas along the Gulf Coast and the East Coast during hurricane season, typically from June to November, causing substantial damage to infrastructure and businesses yearly. The Atlantic hurricane season ended in November 2022 after generating 14 named storms, eight hurricanes, two major hurricanes, and an accumulated cyclone energy (ACE) of 95. The season was near-average for several named storms and hurricanes and below-average for significant hurricanes and ACE index. It breaks an unprecedented streak of six consecutive years with an above-average ACE index (>126). 

The 2022 season saw three hurricane landfalls along the U.S. coastline. Hurricane Fiona, Nicole and most notorious, hurricane Ian made a name for themselves. Hurricane Ian first made landfall by smashing into western Cuba as a category 3 storm; it continued northwards to reach the coast of Florida as a category 4 storm with winds up to 155 mph (249km/h) and a central pressure of 940 to become the fifth-deadliest Atlantic hurricane since 1963.

The mighty hurricane’s winds, storm surge and flooding rain caused catastrophic damage and knocked out power to more than 2.6 million customers in Florida – approximately 24% of the state’s customers. Furthermore, it killed 140+ people, rendering $65 billion in insured losses in September 2022.

Over the past six years, the U.S. has suffered unprecedented pummeling from category 4 and 5 hurricanes. The following seven hurricanes were landfalls: Harvey (2017 in Texas), Irma (2017 in Florida), Maria (2017 in Puerto Rico), Michael (2018 in Florida), Laura (2020 in Louisiana), Ida (2021 in Louisiana) and notoriously Ian (2022 in Florida). The only comparable beating the U.S. has taken occurred from 1945 to 1950 when five category 4 hurricanes hit South Florida. The intense and deadly storm surge of Hurricane Ian provided a glimpse into the fact that human-induced climate change is intensifying, with the globe evermore exposed to its adverse impacts. Ultimately, it has been identified that increased rainfall was the only aspect of Hurricane Ian attributed to climate change so far.

Hurricane Ian's timing was challenging for experts to predict. The hurricane's predicted path fluctuated hundreds of miles as it developed more aggressively towards the coastline, giving less time for people to prepare. While the highest landfall intensity characterised Ian out of the 3 storms, it affected a smaller portion of Florida than Irma. At the same time, it retained significant hurricane status further inland. Although hitting the peninsula in a similar position to Hurricane Charley (2004), highlighted below in figure 3, Hurricane Ian's overall impact significantly differed due to different storm characteristics of the structure, interaction with land and other factors that were difficult to predict.

Assuming a 2℃ warming scenario, experts project an increase in general tropical cyclone intensity by between 1% and 10% and an increase in tropical storm rainfall rates by 10-15% with a higher number of Category 4 and 5 hurricanes, resulting in the increased severity of flooding and storm surges. Hence, the North American basin will face a dual threat of the strongest storms and increased precipitation carried by all storms.

Hurricanes have become the costliest form of weather disaster in the U.S., accounting for more than half of the total damages from billion-dollar U.S. weather events since 1980. Through 2022, hurricanes averaged $20.1 billion per event in losses and caused over $1.1 trillion in damages between 1980 to 2022, labelled in Figure 4 below as ‘Tropical Cyclone’. The numbers include everything from wrecked homes to mangled material assets. In addition, cyclones damage public infrastructure, including roads, bridges, power lines, and income-generating assets such as crops and businesses. This a stark reminder of increasing future losses from hurricanes and other extreme weather events projected to cost $2 trillion annually by 2100.

Hurricane events incur several damage-inducing conditions that amplify economic losses and interruptions across the world's interconnected economy. In this case, tropical cyclones which enter the midlatitudes often transition from symmetric warm-core systems into cold-core, a process known as an extratropical transition (ET). These post-tropical cyclones (PTCs) can bring extreme weather effects to regions far removed from the tropics. Approximately 10% of cyclones with tropical Atlantic origin impact Europe, and those retaining or redeveloping warm-core characteristics often have incurred severe weather in Europe with extreme precipitation, high winds and large waves. Showcased in 2011 across Scotland, ex-hurricane Katia was responsible for over £100mn in damages. Due to climate change, the frequency and intensity of windstorm risk in Europe from Atlantic tropical hurricanes may also increase.

The U.S. real estate industry has enacted the physical risks of climate change to the top of its agenda. The World Economic Forum has deemed it likely the most recognised area of resilience for the real estate industry as complex to deny the negative impact of extreme weather events, such as hurricanes. Approximately 2% of U.S. homes, worth a combined $882 billion, are at risk of being inundated by 2100. More obvious physical risks are to those in coastal settings, especially in the path of hurricanes. In some coastal areas, such as Hawaii and Florida, 10% and 12% of all homes are expected to be underwater if sea levels rise by 6 feet. Specifically in Florida, at least 2.5 million properties are at risk from a Category 5 hurricane in 2023 and expected to rise to 4.1 million by 2053. “The harsh reality is that most areas face at least some climate risk,” iterated Daryl Fairweather, chief economist of Redfin.

Climate risks posed are changing how real estate is calculated. Hence, investors increasingly demand that climate risk be assessed and factored into new and existing real estate asset and portfolio valuations. For the industry, climate-related risks of hurricanes and secondary peril events of flooding, wildfires and landslides provide new opportunities and additional challenges. To mitigate climate risks, many real estate owners and developers adapt by factoring climate risk into business strategies. This comprises mapping physical risks for current portfolios and potential acquisitions, incorporating physical adaptation for assets at risk and climate risks in their due diligence processes. However, real-estate companies that think deeply about how their assets are at risk of climate change for where people live and work and the values and community that matter to them most will have the edge.

Tropical cyclones are one of the most significant risks for insurers. Losses from hurricanes have increased over the past 15 years. Climate change is making hurricanes and other disasters more destructive and, as a result, advancing the cost of home insurance until it's out of reach for many people. Ernst Rauch, Chief Climate Scientist at Munich Re, believes that 2022 shows a continuation of a trend of growing insured losses with climate change to be an apparent growing factor. "This is not new, of course, but it is important. Because it is precisely hurricanes like Ian – powerful storms with extreme precipitation – that will occur more frequently in the future due to climate change." As a result, more violent storms, flooding and wildfires in Louisiana and California are causing insurers to retract from those vulnerable markets. In some cases, worsening hurricanes have the potential to slow the entire housing market in certain states without insurance potentially being available. Captivated by Keith Wolfe, President of U.S. property and casualty for Swiss Re, that "these problems have been brewing for years."

The normality of insurance markets is that companies typically try to maintain large cash reserves to pay out all or most of the claims they expect to face in a given year. In a hurricane-prone U.S. state like Florida, the model is different: insurers avoid building up large surpluses, which lets them keep rates lower than they would otherwise be. Instead of relying primarily on their surpluses when a storm hits, Florida insurers depend heavily on reinsurers: companies, many of which are based in Europe, Bermuda or the Caribbean, whose primary business is selling insurance to insurance companies in the event they face claims that exceed their cash reserves.

The problem with that arrangement is that reinsurers, including Lloyd's of London, Munich Re and Swiss Re, renegotiate annually with Florida insurers. And if they decide physical risks are too high, they can raise their rates as much as they like. With increasingly persistent extreme weather events, some reinsurers increased their prices by as much as 50%. The unpredictability of reinsurers means "you've got to keep reinsurers happy if you want to have reasonable rates for consumers," said Joseph Petrelli, president of Demotech, Inc.. Rising reinsurance rates have globally increased by 37% in the recent January renewals. The most considerable rise since 1992, with increased demand from seven powerful hurricanes in six years, such as most recently hurricane Ian's historical losses and secondary peril losses, including wildfires, have created the most difficult U.S. renewal in decades. In turn, rising rates from reinsurers have been pushing some U.S. states like Florida's insurers into more profound financial distress. According to Florida's state data, property insurers have lost money yearly since 2017. Last year, the state's insurers lost more than $600 million — in a year when no hurricanes made landfall in Florida. As a result, some insurers resorted to shortfall covers as buyers failed to fill their programmes, and name-peril coverage became more prevalent.

Exampled most recently by State Farm, the largest property insurance provider in California worth $131 billion and accounting for 20% of California's bundled home insurance policies, stopped issuing new policies due to increases in construction costs outpaced by inflation, a challenging reinsurance market and ultimately, rapid exposures to climate risks. In this case, wildfires led to more than $10 billion in losses and torrential rainfalls of $1.5 billion in damages. State Farm's position showcases what is already happening in Florida with declining coverages. Florida's state-backed insurer, Citizens Property Insurance, predicts to hit a record with nearly 2 million policies in 2023 from private insurance companies dropping coverage for Florida's residents from climate risk difficulties. 

We're steadily marching toward an uninsurable future, not just in California but throughout the United States"

Source: Dave Jones, the Director of the Climate Risk Initiative at UC Berkeley

Effective mitigation solutions are essential across the global insurance industry. According to Thierry Léger, Group Chief Underwriting Officer of Swiss Re, states, "To enable the insurance industry to keep up with increasing volatility and demand, it will be critical to model evolving frequency and severity trends." In addition, pricing needs to reflect the effective risk. To achieve this, re/insurers must utilise more sophisticated tools to quantify and manage their climate risks. By implementing comprehensive climate risk insurance, such a scheme could compensate for the expected increase in hurricane-induced growth losses. This is how Climate X's Spectra analytics platform can play a crucial role in enabling companies to develop appropriate reinsurance, underwriting and exposure management measures by providing granular data to crucially facilitate the radical alteration of internal decision-making processes within entities to ultimately prevent losses and provide sufficient coverage to populations most impacted.

Our platform is showcased in Figure 5 below (June 2023).

Staying ahead of difficult-to-predict hurricane forecasts is crucial for preparedness and financial loss mitigation. Gathering sufficient data allows users to remain agile with weather events beyond their control, especially hurricanes. “Loss can be greatly minimised by adequate preparation before a storm arrives. The development and implementation of a comprehensive windstorm emergency plan should be a number one priority for those companies that don’t already have this in place,” stated Thomas Varney. As more data is collected and measured, an improved understanding of forecasting hurricanes and how they may be impacted by climate change is crucial. 

The development of current hurricane forecast methods has advanced over the past decades; uncertain hurricanes require using novel simulation and weighting techniques that extend standard methods for adjusting risk models. However, more than predicting hurricanes is needed. Statistical approaches are limited due to the complexity of unpredictable atmospheric systems, and the need to utilise accurate global historical data still needs to be explored. As the worldwide frequency and severity of intense category 3 to 5 tropical cyclones increase, models and data availability for several different industries, including real estate and insurance, need to be upscaled to support the development of risk mitigation strategies and become more resilient to hurricanes before the U.S. becomes somewhat uninsurable and protected from increasing climate risks.