Extreme Weather Events and the Insurance Industry: Opportunities and Challenges for the Atmospheric Sciences Community

In recent decades, the insurance industry has become increasingly aware that extreme weather events are more than just theoretical abstractions. Insured property losses in the tens of billions of US dollars have been experienced and some primary insurers have even been forced out of business. Potential losses from current property exposures and the rapid development along vulnerable areas, such as coastal regions, represent an increasingly troubling liability to the industry. Weather phenomena responsible for the greatest insured losses are hurricanes in the US and extra-tropical cyclones in northwest Europe. Most damage to property from these storms is caused by wind.

The insurance industry, which includes primary and re-insurance companies, has traditionally quantified risk using actuarial (i.e., statistical) techniques. When data exist for a large number of events, such as automobile accidents, this approach serves the industry well. The number of extreme weather events is not sufficient to apply actuarial techniques without compromise. An approach developed in which accounting for risk from these phenomena directly was largely ignored. This approach dominated until a number of large storms devastated northwest Europe (e.g., storm Daria in 1990) and the southeast US (e.g., hurricane Andrew in 1992).

One result of these extreme events has been the emergence of catastrophe modeling. This paper will address the opportunities and challenges that now exist in this industry because of advances in numerical weather prediction modeling and computing technology.