Severe convective storms present big possibilities for ILS market
Severe convective storms present the most opportunities for the insurance linked securities market today in terms of the best risk-adjusted returns, a catastrophe modelling pioneer told an audience at the ILS Bermuda Convergence 2024 conference.
Karen Clark, founder of Karen Clark & Company, said: “This is because the demand for severe convective storm reinsurance is rising, while the supply is shrinking.”
She spoke in a panel exploring how various industries leverage scientific advancements to shape market dynamics.
Severe Convective Storms typically consist of severe thunderstorms, wind and hail.
During the Midwest Derecho in August 2020, Nebraska, Kansas, Iowa, Illinois and Indiana saw wind gusts reach 140mph, the equivalent of a Category 4 hurricane, during a severe thunderstorm.
With losses of $11 billion, it is widely considered to be the costliest SCS in the US.
Ms Clark said the traditional reinsurance market has been backing away from SCS because it lacks confidence in its ability to underwrite or price the risk.
The cat modeller said this skittishness is partly because reinsurers cannot employ the traditional modelling approach of using historical data to predict what SCS are going to do, like they can for other risks, such as hurricanes.
“At KCC, we built our SCS model new from the get go,” she said. “We model the environment. We use numerical weather prediction, and we create our catalogue, again, by perturbing environments and coming up with environments conducive to that.”
She said there is more accuracy with this approach, but reinsurers still worry about the future.
“It is very difficult to project SCS forward,” she said. “At KCC we only use the most current atmospheric data. We do not go back 50 years. We only have to go back ten or 15 years. We can use a physically based model to project forward.”
KCC is working with the top ten property and casualty insurers to produce a model loss transaction that will cover SCS.
“There is good news,” she said. “There is lots of opportunity and we can model this as an industry. We can cover this.”
Ms Clark said there is no standard meteorological definition of an SCS event.
“We can go to the historical data and see all the hurricane events and the earthquake events, but weather happens every day across the US,” she said. “Weather patterns can also last for days and weeks. What we like to have in our reinsurance contracts does not necessarily fit with mother nature when it comes to SCS.”
She believed that cover for SCS should be written on an annual aggregate basis.
However, Matthew Swann, director of Head of Research, Integral ILS, said aggregate contracts can become very expensive.
“There is a challenge there to reconcile,” Dr Swann said.
The conference continues tomorrow at the Hamilton Princess & Beach Club.
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