Monthly Archives: June 2016

Cat Losses, The Atlantic Basin, & Technology

Technology can be a powerful ally in the battle to successfully assess and manage risk. From new, high-definition models to fully hosted solutions that shrink costs and timeframes, risk professionals now have access to the tools they need to successfully manage their portfolios.

Advances both in the collection of data and computational strength have enabled more precise and comprehensive analytics than were previously possible, thus allowing a more complete and accurate risk profile.

The more you know about risk and exposure, the more they can be managed. Unmanaged or undermanaged, risks, and exposures can become problems and even turn tragic or fatal.

Global insured losses from catastrophes totaled $37 billion in 2015 according to Swiss Re’s most recent Sigma Study. The 2015 figure, at just over half the inflation-adjusted previous 10-year average of $62 billion in insured catastrophe losses, was substantially tied to a quiet Atlantic hurricane season.

“The relatively low level of losses was largely due to another benign hurricane season in the US. El Niño in 2015 contributed to weather patterns deviating from average climate norms,” said the Swiss Re report.

(Re)insurers’ financial results for the past two years have been dotted with the phrase “benign catastrophe losses,” demonstrating how they have benefitted from quiet Atlantic storm conditions producing below-average claims activity.

That period of below-average catastrophe losses for (re)insurers may be coming to an end as researchers and forecasters are pointing toward a more active Atlantic hurricane season for 2016.

When (not if) catastrophe losses do return to their 10-year average, that’s $25 billion across somebody’s balance sheet. What might the 2016 Atlantic hurricane season hold for the U.S. and those who insure it?

With ports lining the U.S. coast from Texas to New York, even one landfall could wreak havoc on marine activities and infrastructure as the country moves into the winter holiday and heating oil seasons.

More Active Season?

While 2015 saw only 11 named storms with just four hurricanes, early indications suggest that the 2016 season will exceed those totals.

An April 14 update from the Climate Prediction Center of the National Oceanic and Atmospheric Administration (NOAA) said that the current El Nino conditions, known to inhibit hurricane activity, are likely to abate.

El Niño is dissipating and NOAA’s Climate Prediction Center is forecasting a 70 percent chance that La Niña—which favors more hurricane activity—will be present during the peak months of hurricane season, August through October.

“Nearly all models predict further weakening of El Niño, with a transition to ENSO-neutral likely during late spring or early summer 2016. Then, the chance of La Niña increases during the late summer or early fall,” the Center said in its update.

The Colorado State University Tropical Meteorology Project issued a forecast that included an estimated 12 named storms and five hurricanes, again greater than observed 2015 totals.

The Weather Company’s Professional Division issued a report stating the 2016 Atlantic Hurricane season would be he most active since 2012. This report forecasts 14 named storms, eight hurricanes, and three major hurricanes, more than the 30-year historical average of 12 named storms, six hurricanes, and three major hurricanes, according to The Weather Channel.

Most recently, NOAA followed its earlier report on El Nino with its annual Atlantic Hurricane Forecast, stating that this year’s hurricane season will see closer to Normal activity after three slow years.

“A near-normal prediction for this season suggests we could see more hurricane activity than we’ve seen in the last three years, which were below normal,” said Gerry Bell, Ph.D., lead seasonal hurricane forecaster with NOAA’s Climate Prediction Center.

The NOAA forecast predicts a 70% likelihood of 10 to 16 named storms, of which 4 to 8 could become hurricanes and 1 to 4 major hurricanes (Category 3, 4, or 5). In addition to a near-normal season being most likely with a 45% chance, there is also a 30% chance of an above-normal season and a 25% chance of a below-normal season.

Another ominous harbinger was the formation of tropical storm Colin on June 5—the earliest third storm on record in the Atlantic basin. Colin then made landfall on June 6 along Florida’s Big Bend with maximum sustained winds of 50 mph—the first named storm to make landfall in Florida since Andrea in 2013.

Earlier this year, Hurricane Alex became only the second hurricane on record to form in the month of January, sweeping through The Azores as a tropical storm.

Prepare for the Worst

The insurance sector has been substantially re-shaped since the last large catastrophe loss—by M&A, the influx of new capital—meaning new people, new relationships, even new claims procedures and personnel

It’s an entirely new landscape, entirely untested—how will it respond when a catastrophe hits and claims and losses mount?

From first responders to catastrophe modelers, one piece of advice never changes—be prepared.

That means understanding your exposures and accumulations and owning your own view of risk.

You can’t control or avoid catastrophes, but you can manage and mitigate their effects. Being prepared is the first step.

The Orlando Shootings – and What They Tell Us About the Evolving Threat from Islamic State

This month saw what the President of the United States described as “the most deadly shooting in American history” with the killing of 49 innocent people at an Orlando nightclub, carried out by a man suspected of having leanings towards radical Islamist ideology.

Although information is still emerging, there are some clear threads and patterns, which link this attack to the increasing activity surrounding so-called Islamic State (IS).

1. Assaults Using an Automatic Rifle Becoming More Common

For somebody committed to terrorizing the population, there appears to be a growing tendency to use automatic weapons. Off-the-shelf military weapons are inherently more reliable than improvised explosive devices. In contrast to the atrocity in Orlando, a 2007 plot against the Tiger Tiger nightclub in London failed because the IED (improvised explosive device) failed to detonate.

2. The Increase in “Lone Wolf” Attacks as a Response to Surveillance

A “lone wolf” attack has been defined as a single individual or a group of two to three people driven to hateful actions based on a particular set of beliefs without a larger group’s knowledge or support. The FBI believes that most U.S. domestic attacks are carried out by lone actors to promote their own grievances and agendas.

Militants involved in such attacks are home-grown “self-starters” that are inspired by the jihadi movement, but may have little or no actual connection to these groups. Instead, many use the internet and social networking tools to find propaganda and research attack methods.

Mass interception of communications (as revealed by Edward Snowden’s leaks of National Security Agency files), particularly in North America, has raised the chances of terrorist conspiracies being detected. This has led to a move away from plots involving multiple attackers. There has been a corresponding rise in the United States in the risk of lone-actor attacks, which have a comparatively small chance of being found out and stopped.

3. Attacks Inspired by Islamic State

The Orlando terrorist contacted police via cellphone around the time of the attack to announce his allegiance to IS. There are strong indications that he has been deeply influenced by the group even if he had no contact with it. As IS concedes territory it controls in Iraq and Syria it is looking to organize or inspire atrocities overseas. There are two likely reasons for this. Firstly, striking on foreign soil helps to divert attention from its losses in the Middle East in order to retain credibility and an aura of potency. Second, the jihadi operations overseas are designed to deter further attacks by Western forces in IS strongholds in Iraq and Syria.

4. Targeting of Venues Which Extremists Claim Symbolize Values They Decry

Bars and nightclubs may feature in the attack plans of terrorist organizations because there are high concentrations of people in a public, accessible venue. Such locations are also targets for such extremists who may view them as representing Western lifestyles of which they disapprove.

5. Increased Attacks over Ramadan

The murders in Orlando happened a week after the start of the holy month of Ramadan. Radical Islamic militants tend to increase their operations during this period.  A recording released online from IS spokesman Abu Mohammed al-Adnani has claimed any martyrdom operation during the festival of Ramadan will bring more “rewards.” An increase in the tempo of Islamist terrorist activity would thus not be unexpected.

The increasing proliferation of extremism and global attacks is concerning. Our modeling team closely monitors the evolving risk landscape. By examining all attacks to capture greater insight into the workings and thinking of the terrorist groups, including targeting preferences and weapon selection, we can continue to offer terrorism models that enable our clients to deepen their understanding of terrorism risk and strengthen their terrorism risk management.

This post was co-authored by Weimeng Yeo and Gordon Woo. 

Weimeng Yeo

Principal Modeler, Model Development
Weimeng Yeo is a principal modeler on the Model Development team at Risk Management Solutions (RMS), and is a key member of the team responsible for the development of RMS’ terrorism modeling solutions. Prior to his tenure at RMS, Weimeng worked at the International Center for Political Violence and Terrorism Research at the Institute of Defense and Strategic Studies in Singapore. He received his bachelor’s degree in Political Science from Colby College in Maine and a Master’s degree in International Affairs from Georgetown University in Washington DC at the School of Foreign Service.

Is this the year that breaks the streak?

Sports fans around the world have witnessed impressive winning streaks throughout history. After capturing two consecutive UEFA European Championships (2008, 2012) and a World Cup championship (2010), the Spanish National Football Team entered the 2014 World Cup in Brazil as the top-ranked squad in international competition. The dominant Spaniards were among the international sportsbooks’ favorites to bring home the trophy once again.

Instead, surprising defeats at the hands of the Netherlands and Chile eliminated Spain at the group stage. Spain’s streak of dominance came to a sudden end, marking the earliest World Cup exit for a defending champion since 1950.

From a meteorological perspective, the United States is currently riding its own streak: ten Atlantic hurricane seasons without a major hurricane (category 3 or above) making landfall, the longest such stretch in recorded history. With another hurricane season upon us, many will be keeping a keen eye on the Atlantic this summer to see if this impressive streak will continue.

Global forecasting groups, such as Colorado State University and Tropical Storm Risk, have issued their tropical storm and hurricane activity forecasts for the 2016 Atlantic hurricane season. Christopher Allen of the RMS Event Response team has authored an excellent summary of their forecasts in the RMS 2016 North Atlantic Hurricane Season Outlook published this week on RMS.com.

You can also listen to my summary of the season’s forecasts during my talk to AM Best TV’s John Weber. In summary, most forecasts are predicting anywhere between near-average to above-average activity in the Atlantic basin, reflecting conflicting signals in the key indicators that influence hurricane formation.

Will we have increased hurricane activity?

One factor that may support increased hurricane activity this season is the anticipated state of the El Niño-Southern Oscillation, or ENSO. As reported on this blog several months ago, many ENSO forecasts project a transition out of last year’s historic El Niño phase into a La Niña phase, which is historically more favorable for hurricane development. Wind shear, detrimental to tropical cyclone formation, typically is reduced in the Atlantic basin during La Niña phases of ENSO.

Mid-May 2016 observations and model forecasts of ENSO, based on the NINO3.4 index, through March 2017. Positive values correspond with El Niño, while negative values correspond with La Niña. Source: International Research Institute for Climate and Society

Conversely, some forecasts predict a cooling of Atlantic sea surface temperatures (SSTs), which would oppose any support provided by a forecasted La Niña and reduce the potential for an active hurricane season. This cooling has been driven by a lengthened positive phase of the North Atlantic Oscillation (NAO), which causes stronger than normal trade winds in the tropical North Atlantic and upwelling of deeper cold ocean water near the surface.

February-April 2016 sea level pressure anomalies in the North Atlantic Ocean (hPa, anomalies with respect to 1981-2010 climatology). Anomalously high pressure evident in the Azores and the mid-latitude North Atlantic signals a positive phase of the NAO. Source: National Centers for Environmental Prediction Monthly Reanalysis (Kalnay, E. and Coauthors, 1996: The NCEP/NCAR Reanalysis 40-year Project. Bull. Amer. Meteor. Soc., 77, 437-471).

The Atlantic Multidecadal Oscillation may also be transitioning into a prolonged phase detrimental to tropical cyclone development, a theory often mentioned on this blog, although one that is still debated in the scientific community.

If considered in isolation, La Niña conditions and cooling Atlantic SSTs exert conflicting influences on Atlantic tropical cyclone development. However, forecasts contain key caveats that will ultimately determine this season’s activity:

  • Although a transition into a La Niña phase is widely anticipated, a late arrival would limit its ability to support development in the basin.
  • Further, forecasts of Atlantic sea surface temperature during August and September, the peak of hurricane season, remain conflicted.

Does the season’s early storm activity signify more activity?

Forecasts predicting above-average basin activity are understandable, given the early activity observed prior to the season’s official start. Tropical Storms Bonnie and Colin both formed before the second week in June, bringing heavy rainfall to South Carolina and the Gulf coast of Florida, respectively. Bonnie and Colin followed Hurricane Alex, the first January hurricane since 1938.

Bonnie’s formation marked the first time since 2012 that two named storms developed before June 1, the official start of hurricane season. The 2012 season ended with 19 total named storms, the third-most on record, including Superstorm Sandy, which caused more than $18 billion in insured losses.

Would the industry be prepared for the next major hurricane landfall? According to Fitch, the answer is yes: insurers and reinsurers in 18 coastal U.S. states would be equipped to handle one major event this season, although this resiliency has not been recently tested. More worrying, though, are the prospects of a large tail event or even multiple landfalling events, which may be supported by the right combination of oceanic and atmospheric influences.

With the hurricane season now officially underway, we will watch, wait and see how the season’s activity unfolds over the next few months. What is certain, though, is that streaks are made to be broken. It’s just a matter of when.

Mandatory reporting of cyber-attacks would improve understanding of cyber risk

The recent call by the Association of British Insurers (ABI) for the U.K. government to mandate the reporting of cyber-attacks is another welcome attempt to improve the collective learning opportunities presented by the continuous stream of cyber events. Every attack provides new data which can be fed into probabilistic models which help build resilience against this growing corporate peril – so long as we are able to find out about those attacks. Thus initiatives like this, which will lead to the sharing of valuable information and insights, are paramount.

Reporting cyber attacks is already mandatory in most U.S. states where laws require companies to notify their customers and regulators as soon they suffer a security breach. In 2018 a similar EU law, The European Network Information Security Directive, will make it mandatory for certain firms to provide alerts of cyber incidents.

However, having more information on data breaches still only provides just part of the picture required to fully understand cyber as a peril.

Current security breach notification laws, where they exist, do not require companies to report the many other types of cyber-attack that are increasingly being used to target organizations. Cyber extortion, for example, is a growing trend. Firms typically choose not to report this type of attack to limit damage to their corporate reputation.

Historical attacks not a good indicator of the future

While having access to data on historical cyber breaches is valuable, the threat is constantly evolving, such that previous attacks have rarely been a good indicator of future events. Even a small shift in the balance between the capabilities of hackers and cyber defenses could lead to a significant shift in the frequency and severity of cyber attacks.

Staying on top of the myriad of threat actors and their motivations and resources, as well as having a broad view of the range of viable attack methods that exist today, is crucial to understanding and managing cyber risk. But is challenging to manage.

As a first step to help insurers better understand their existing cyber risk loss potential, RMS recently launched its Cyber Accumulation Management System. This tool provides insurers with a framework to organize and structure their data, identify their accumulations and correlated risk, and stress test their portfolios against a range of cyber loss methods. Having this capability enables insurers to understand the potential size of cyber catastrophes and set their risk appetite to safely grow capacity for this line of business.

Cyber attacks are an increasingly significant threat to the global economy. The combination of new cyber risk management solutions combined with initiatives such as mandatory reporting will help the insurance industry to continue to play itscrucial role in ensuring the resiliency of our economy.

Contact the RMS cyber team for more information cyberrisk@rms.com.