Swiss Re Hurricane Report Stresses Risk Analysis

Swiss Re’s recently issued report on the 2004 hurricane season stresses that, although the number of storms may have been extraordinary, “the impact on insurers has been controllable through a process of event-based risk analysis.”

The Report “The 2004 hurricane season: unusual, but not unexpected,” points out that the 2004 hurricane season “generated greater losses in the United States and the Caribbean than any other storm season in history. At the same time, Japan was also hit by an unprecedented number of typhoons.” But Swiss Re also notes that it could have been even more severe had not the company’s “robust event-based risk analysis successfully withstood the challenge.”

The hurricanes led to insured losses totaling between $20 and $25 billion, while the insured typhoon losses are estimated at around $6 billion. “If insurers and reinsurers are to successfully deal with events of this magnitude, loss histories alone cannot provide all the answers,” said Swiss Re’s bulletin. “Future events can deviate substantially from past experience in both frequency and severity as a result of natural climatic variation, the rapid movement of populations to the coast and the rise in value concentrations.

“To deal with these challenges an event-based risk analysis is required.” Swiss Re indicated that it ha begun work on such a model in 2002 “and the model has since simulated the life cycles and loss effects of 500,000 individual hurricanes in the North Atlantic alone.” It also said that this method “can be applied to any region of the world. Even the unusual “event spike” witnessed this season can be modeled using this approach.”

Swiss Re’s Chief Underwriting Officer Werner Schaad, commented: “Compared with conventional scenario models, an event-based approach allows us to perform a far more realistic risk analysis, and thus a more exact calculation of premium rates.”

Swiss Re explained that “managing accumulation risk is the top priority when dealing with natural catastrophes. In the event-based method, the amount of individual events modeled ensures that practically every imaginable combination of storm trajectory and intensity is factored in. As the report explains, event-based portfolio management makes it possible to write more business whilst deploying the same amount of capital or to write the same business with lower amounts of capital.”

A copy of the report can be obtained on the company’s Web site at: www.swissre.com.