04 Different loss distribution

These strong changes, reflected in both the number of tropical cyclones and the number of landfalls, can only mean that we must expect a different loss distribution in the current warm phase since 1995 compared with the distribution in the prior period.

We should recall that we observe an increase in terms of the annual frequency of major hurricanes in the order of 170% from the foregoing cold phase (1971 to 1994) to the current warm phase since 1995. In terms of landfalls the increase is of the order of 230%.

Even if we compare the loss distribution of the current warm phase with a loss distribution based on all years since 1900, which can be called indifferent towards the natural climate cycle, we should expect a large difference. This is strongly indicated by a comparison of hurricane intensity distributions calculated for the whole period 1900 — 2005 versus the current warm period 1995 — 2005 (Fig. 6). It is plain to see that the current warm phase is marked by a higher proportion of strong hurricanes (Categories 4 and 5 on the Saffir-Simpson Scale) and a lower proportion of weaker hurricanes (Categories 1 and 2 on the Saffir-Simpson Scale). Category 4 and 5 hurricanes account for 14% and 6% respectively in the distribution since 1900 and have increased to 20% and 10% in the current warm phase distribution. On the other hand, the Category 1 and 2 hurricanes account for 37% and 23% respectively in the distribution over all years since 1900 and have decreased to 34% and 17% in the current warm phase distribution.

None of the loss models available commercially incorporate such a change in the distribution. So it is a major challenge for the insurance industry to respond to the present-day hazard distribution and — as a consequence of this — the present-day loss distribution and to take them into consideration adequately in its risk management.