Time to broaden your catastrophe risk landscape thinking

Moody’s RMS’ Robert Muir-Wood highlights plausible catastrophe scenarios that are worthy of further analysis.

When analysing catastrophes, there can be a tendency towards a recency bias, over-influenced by actual events of the past 10 or 20 years, their locations, impacts and consequences.

But we know from stochastic modelling that each actual event is a sample from a wide range of possible events, all of which may be equally likely. Contemplating whether some recent catastrophe could have been more, or less, impactful through small variations in its trace, source, or severity is helpful for avoiding the belief that any actual event is somehow ‘iconic’, to be employed for special portfolio analysis or used as a key benchmark.

Selecting new potential catastrophic scenarios, or even adjusting the parameters of events that have happened, can help to highlight catastrophe potential and how an event could impact portfolios.

To encourage an appropriately balanced perspective on catastrophe risk, Moody’s RMS has selected a set of seven less familiar potential catastrophes, without recent examples, that could each bring significant losses to the (re)insurance market.

We endeavoured to identify credible events which are not simply replicas of recent catastrophes. For instance, these may be events with the potential to be particularly devastating because they are not being prepared for.

If you visit https://www.rms.com/blog you can find out more about six new catastrophe scenarios with significant loss potential, ranging from a New England hurricane and European convective storms to flooding in major industrial parks across Southeast Asia, and more.

As a taster, let’s look in more detail at a Category 3 or 4 New England Cape Cod hurricane, which also hits the city of Boston.

The last hurricane to affect Boston was Hurricane Bob, which first made landfall on Rhode Island on 19 August 1991 at Category 2 strength. Starting life as an area of low pressure in the Bahamas three days earlier, it intensified as it tracked the East Coast. The only landfalling hurricane in the contiguous US in 1991, it caused $1.5bn in damages.

Our proposed scenario is an intense, fast-moving Category 3/4 borderline storm, comparable to the Category 5 Great New England Hurricane of 1938 with its northerly track, only landfalling further to the east on Cape Cod. The track continues to the east of Boston bringing Category 2 winds over the city, accompanied by a storm surge, bringing storm flooding to the city. Also directly hit are Newport, Rhode Island and Long Island resorts – with the Hamptons to the left of the track.

The southern parts of Boston are at the highest risk of flooding, including the seaport area, and many areas in surrounding towns to the north of the city that border the Mystic and Chelsea Rivers.

This region has regular tropical storms making landfall, with two events in 2021. Check out our list of plausible events that we think are worthy of further analysis as part of an effective broadening of risk assessment practices.

Robert Muir-Wood is chief research officer at Moody’s RMS