​Advancing our understanding of the impacts of hurricane clustering in the North Atlantic

The ISCM along, with the Institute and Faculty of Actuaries (IFoA) and Lloyd’s of London, recently hosted a panel discussion on the impact of hurricane clustering on the (re)insurance industry. A packed Lloyd’s Library listened intently as industry representatives, academia, researchers and catastrophe modeling company experts brought the audience up to date on the latest thinking on this important and topical subject. The panellists, Dimitris Papachristou from the Prudential Regulation Authority (PRA) of the Bank of England, Junaid Seria (SCOR), Nick Barter (Chaucer), Susanne Kolwinksi-Ward (AIR), Ivan Kuhnel (CoreLogic) and Steve Jewson (RMS), with frequent interaction from an engaged audience, discussed and debated for two hours if anything has changed in our understanding of the impacts of clustering, in light of the events of 2017 and 2018.
 
The topic for the session, “Hurricane Clustering in the North Atlantic: A Discussion”, was introduced and expertly moderated by Emma Watkins, from Lloyd’s. The panellists were given a number of questions to consider including:

• Does clustering exist?
• Is it linked to specific climate factors or cycles?
• Is the impact of clustering material?
• Should we consider including it explicitly on catastrophe models?

 
Each of the panellists approached the questions from a different angle, as one would expect given their different roles in the catastrophe management world: some focussed on hazard, some on loss impacts while others on whether the hazard presented by clustering is changing in a significant way. This enhanced the quality of the presentations, allowing the presenters to go “deep” on their questions, encouraging further discussions by panellists and audience alike, adding to the overall experience! The research conducted by the PRA indicates that the frequency of hurricanes in the past two years does represent a significant shift from clustering we would expect to see in the basin over time. AIR also indicated that the change in hazard was indeed statistically significant, based on their research, on a U.S. country-wide basis, for major (category 3-5 on the Saffir-Simpson scale) hurricanes. RMS stated that, considering wind only, also on a U.S.-wide basis, the impact of clustering on loss was not material, and was not needed for consideration of reinstatements.
 
There was a lot of discussion of the application of clustering in an insurance industry context. All the modelers implement clustering, allowing it to flow through to their financial models – AIR and CoreLogic use the negative binomial distribution to represent clustering in their models; RMS uses the poisson distribution for the non-clustered view, and a combination of negative binomials for the clustered view. Data availability and reliability was a common theme throughout the session – all agreed we simply need more data, with the resulting uncertainty not having changed much since clustering was first seriously considered in 2004 and 2005. The industry representatives, from SCOR and Chaucer, both stated that collaboration between researchers, modelers and business was critical to progress our understanding. Further research is also needed to understand whether any changes in clustering are “real” and would have a material impact on losses in the future.
 
The session also featured an update on the partnership between the ISCM and iCAS (Casualty Actuarial Society) to develop a joint program of credentialization for people working in the catastrophe management industry. As we wrapped the discussion up in the Library, a group of attendees adjourned to continue the discussion at One Under Lime, outside on a chilly and blustery night in London. All agreed that it was extremely valuable to be brought up to date with the latest perspectives on clustering, and that we had not heard the last of the clustering debate!