A couple of weeks back, I discussed the importance of physical risk data in relation to the massive floods that occurred recently in central and eastern Europe.
With the onslaught of hurricanes now battering the United States, regrettably, it remains a relevant topic.
It’s not exactly a direct comparison, however, as the effects of storms such as hurricanes are more difficult to predict than the effects of floods. This is because there are more comprehensive records on the effects of floods than those of hurricanes. As well, the measurements presently being used for storms have changed from earlier measurements. For example, there are records of the certain height the River Danube, say, or The Rhine, reached in a particular storm, as well as the expanse of hectares within an area a flood reached. These kinds of precise records don’t necessarily exist for storms.
Looking at the data from the last century, for example, it is difficult to determine whether the frequency of storms has increased, however, within the last thirty years, the frequency of severe storms has definitely done so. Certainly, there are more Category 4 and 5 storms than ever, in part due to rising sea levels and temperatures.
Paths are projected to change, too: temperature increases are expected to cause an extension towards areas further North, which has not been affected much in the past.
Needless to say, the economic impact is immense. It is estimated that the insurance payouts as a result of Hurricane Milton, which was Category 5 and made landfall in Florida last Thursday as Category 4, could total $36 billion according to the Financial Times.
Insurance payouts, however, are only a fraction of the true damage, not only in the private sector, but for businesses as well.
For asset managers, it’s become critical to follow the data concerning physical risk data and incorporate it into their investment strategies. Having this level of knowledge enables more accurate assessments of the likelihood of natural disasters and their effects within specific geographic areas.
Ultimately, it’s all about not putting all your eggs in one basket – that is, having reliable comprehensive physical risk data to drive your investment strategy and to monitor your portfolios.