This article summarises the scientific findings on global warming and tropical cyclone hazard, highlights their significance for the western Pacific region and shows that reinsurance is an important m

Recent studies indicate an increase in the frequency and intensity of tropical cyclones due to global warming. The typhoon and hurricane seasons in the western Pacific and North Atlantic in 2004 and 2005 give rise to serious concerns, since the recorded typhoon intensities and frequencies together with losses for the respective insurance markets reached all time records. Additionally, the volume of potential losses is rising dramatically due to the rapid growth of the Asian economies.

Fundamentals of global warming

As shown by the Third Assessment Report of the UN's Intergovernmental Panel on Climate Change, the global mean temperature increased by about 0.7 deg C during the 20th century. The World Meteorological Organization currently classifies 2005 as the second warmest year since the beginning of thermometer based measurements in 1861, and the last five years are among the six warmest on record. In general, the industrial age is marked by an unprecedented, steep increase in global mean temperature, which continues at an accelerating pace today. At the same time, atmospheric carbon dioxide concentrations rose from a pre-industrial level of 280ppm to 380ppm by 2004, combined with increases in the level of other greenhouse gases, such as methane and dinitrogen oxide (nitrous oxide). Increasing greenhouse gas levels caused by the burning of fossil fuels alter the radiation properties of the atmosphere and thereby serve to heat up the atmosphere and the surface layers of the oceans.

A study in 2005 by T.P. Barnett published in Science provided convincing evidence that the warming of the surface layer in all ocean basins (including the North and South Pacific) over the past 45 years can only be accounted for by including the increase in greenhouse gas levels. Especially in the western Pacific, we have observed an increase in summer sea surface temperatures of about 0.5 deg C since 1970.

Increase in tropical cyclone intensity

Due to global warming and the associated increase in sea surface temperatures, the probability of high intensity tropical cyclones occurring globally (and in the northwest Pacific) is increasing. A renowned scientist from the Massachusetts Institute of Technology, Prof Kerry Emanuel, in 2005 showed that, in the western Pacific, the increasing annual power release of tropical cyclones in the form of strong winds - an intensity measure - correlates with higher sea surface temperatures.

What Emanuel discovered in his study seems to bear out what Tom Knutson of the Geophysical Fluid Dynamics Laboratory at Princeton University expects to occur in the future: that the continued release of CO2 into the atmosphere and the associated global warming will raise the intensity of tropical cyclones and the associated rainfall by 6% and 18% respectively by the middle of the 21st century.

This will lead to a higher probability of category 5 storms, according to T.R. Knutson and R.E. Tuleya in the Journal of Climate in 2004. But, as Emanuel has shown, a shift to higher intensities can be detected in both the North Atlantic and the western Pacific even now. During the 2004 and 2005 hurricane seasons in the North Atlantic, four of the ten strongest hurricanes on record in terms of central pressure were observed, three of them in 2005 (Katrina, Rita and Wilma). Prof Peter Webster and his colleagues at the Georgia Institute of Technology have found that the average number of category 4 and 5 storms worldwide has increased from eight to 18 per year since the 1970s, while the overall average number per year has remained relatively stable at 80. This means that the proportion of tropical cyclones in the top categories is increasing.

There is currently much debate on the quality of the data from the northwest Pacific used in Emanuel's and Webster's analysis, and it might eventually turn out that poor data quality (for example, different weather services classified the same cyclone differently) obscures some of the scientific results for the Northwest Pacific. But at least - and this seems to be reliable - a gradual increase in the length of the tropical cyclone season in the northern hemisphere has been observed. Over the past 50 years, the season has become about 40 days longer in the North Atlantic and the eastern North Pacific, and has also increased substantially in the West Pacific (from about 300 days in the early 1950s to about 320 days in the late 1970s and about 340 days in the early 1990s, but all with a high measure of variability).

Typhoon risk situation in Asia

These findings also imply a changing risk situation in the western Pacific region and the adjoining Asian insurance markets. In 2004 and 2005, the US Atlantic hurricane season in particular was at the focus of attention because of record insured losses of estimated $30 billion and $80 billion respectively. Nevertheless, the typhoon seasons in the western Pacific were also very destructive.

In 2004, Japan was hit by 10 tropical cyclones between June and October, the highest ever number of landfalls in one single year for this country. Typhoons Chaba, Songda and Tokage alone caused economic losses exceeding $14 billion, of which the insurance industry carried about half. In 2005, Vietnam in particular was severely hit by Typhoons Damrey and Kai Tak, and in 2006, Xangsane hit Manila as one of the strongest storms in the last 10 years before making landfall in DaNang. Current estimates quote more than $600 million economic losses in Vietnam.

Two severe tropical storms and five typhoons hit the People's Republic of China in 2005, with economic losses estimated at RMB 65 billion ($839 million). In 2006, Typhoons Chanchu and Saomai broke meteorological records. Chanchu was the strongest ever typhoon recorded in the South China Sea in May and Saomai made landfall with the highest intensity observed since Wanda in 1956.

Although these are already quite substantial figures, we must remember that the typhoons in 2005 were relatively weak, with intensities ranging from tropical storm strength to category 2 at landfall and that this year's typhoons did not hit major economic centres like the Yangtze or Pearl River Delta with cities like Shanghai or Hong Kong. What makes the situation even more precarious is that in the last 50 years stronger typhoons than those mentioned above have been documented and are, therefore, likely to happen again.

The strongest recorded storm in Hong Kong in recent decades was Typhoon Wanda in 1962, which at the time of landfall was a category 3 typhoon. According to the Hong Kong Observatory, it killed approximately 170 people, sank or destroyed about 2,000 ships and caused significant damage to property. Additionally, in 1937, there was a perhaps an even stronger, unnamed typhoon, which is less well recorded than Wanda. An estimated 11,000 people were killed in the storm surge caused by the typhoon.

Since then, major cities like Hong Kong have changed significantly. Its economic and insured assets have increased dramatically since the 1960s. If a typhoon similar to Wanda occurred today, computer models suggest a loss for the Hong Kong insurance market in the range of HK$5 billion ($643 million). However, Wanda was only a category 3 typhoon at landfall. Market-wide insured losses from a category 4 or 5 typhoon in Hong Kong would possibly far exceed these expected losses, particularly as it is not completely known how existing high rise buildings would behave under such exceptional circumstances. The development in Hong Kong is put in the shade by mainland China's exploding economy, which has achieved annual growth rates in the range of 10% over the last 10 years. Growth has been particularly strong in the coastal regions, which are the zones most exposed to typhoons and associated storm surges. Computer simulations suggest that if typhoons like Wanda in 1956 or Hope in 1979 with an estimated category 3 intensity occurred today, each would generate insured losses of RMB 8 billion for the mainland China market. And, as in Hong Kong, a category 4 or 5 typhoon could significantly exceed these estimates.

In summary, two developments in Asia give cause for concern with respect to typhoon risk and insurance. First, the economies in east and southeast Asia have grown considerably in recent decades and are expected to continue growing in the future, especially in regions exposed to typhoons. Second, the intensities and frequencies of typhoons are expected to increase due to global warming. This makes it even more difficult to draw conclusions from the observations of the last 50 years, especially with respect to rare events or combinations of events like windstorm and storm surge, of which Hurricane Katrina was a striking example.

How to cope with the changing risk

Since typhoons cannot be prevented, the impacts on both human life and property can only be reduced by implementing risk management and prevention procedures. This includes not only early warning systems, improved protection measures, introduction and supervision of building codes and land use planning on the government side, but also financial instruments, such as natural catastrophe insurance.

The events of 2005 showed that the combination of increasing values and typhoon intensity can lead to new loss dimensions. Reinsurance is indispensable for the survival of primary insurers in the event of such catastrophes. A prerequisite for this is a functioning risk partnership between policyholders (private people and businesses), the insurance industry (primary insurers and reinsurers) and governments.

For the insurance industry, it is important that reinsurance in particular should not just be seen as an additional cost for primary insurers, but as a basis for developing the business in a sustainable way. Insurers will have to ask policyholders for risk-adequate premiums and control the size and geographical distribution of their portfolios as their contribution to the risk partnership.

- Thomas Thumerer and Dr. Eberhard Faust are with the Geo Risks Research Department, Munich Re Group.



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