Climate change may be ongoing, but it doesn’t seem to have any measurable effect so far on North Atlantic hurricanes that drive cat market losses. The future, however, could be much more risky.
That’s one of the main findings of a Karen Clark & Company report on the impacted of climate change on catastrophe reinsurance contracts and related securities. The roundup is intended, in part, to reassure cat market investors worried about seemingly upward trends in major North Atlantic storm activity in recent years.
“Some cat market investors are concerned about the apparent increase in frequency and severity of North Atlantic hurricanes. This concern may be best explained by the dramatic increase in media coverage of severe weather events,” the KCC report stated. “However, the data show that recent hurricane activity – no matter how one chooses to define “recent” – has been well within the pattern observed over more than 100 years, normalizing for growth in the value of building stock.”
Rather, losses have risen primarily due to increases in the value of building stock, the report concluded. What’s more, as the KCC report concludes, increased building in hurricane-prone areas will likely lead to higher economic losses over time.
Still, climate change is happening, the KCC report notes, with the world warming, and warmer temperatures affecting hurricane formation and intensity. But the five-year time horizon relevant to most investors shows that other factors are more important to predicting cat losses, such as accurately forecasting hurricane landfalls.
The KCC report said that severe hurricanes that drive losses remain relatively rare, and that catastrophe simulation models can help assess risk over the next five years.
Looking ahead, the KCC report pointed out that global climate models predict lower frequency and greater severity in broader tropical storm activity, with expectations that it could vary “ocean to ocean.”
As well, rising sea levels could be a bigger factor in storm surge activity in the short term, the report said.
KCC said that long-term investors should periodically re-evaluate the risk-reward profile of the cat market against their investment criteria and other goals, keeping in mind that longer-term conditions should see a higher demand for catastrophe reinsurance.
Source: Karen Clark & Co.