Quantified uncertainty can be valuable, but with Ian the details matter: Aeolus’ Dailey

When it came to analysing hurricane Ian’s approach and potential landfall impacts, the uncertainty in modelled outputs on the storm can be helpful, but really the details and parameters of this major hurricane matter most, Aeolus Capital Management’s Pete Dailey explained yesterday.

Speaking at the ILS Bermuda Convergence 2022 event, Dr. Pete Dailey, Head of Research, both from insurance-linked securities (ILS) and reinsurance investment manager Aeolus Capital Management, gave an engaging keynote on climate modelling and how, along with catastrophe models, the technologies are advancing.

With hurricane Ian firmly top-of-mind for the insurance-linked securities (ILS) sector, it came up twice in Dailey’s talk, where he highlighted that there is value in quantifying model uncertainty, but also the importance of the specific parameters of a storm, such as the origination point, known as genesis, and the orientation of the impacted coastline, when it comes to forecasting the hurricane’s loss potential.

Discussing model uncertainty and the wide a range of forecasts you often see when a named tropical storm is forming and approaching land, Dailey explained, “That level of uncertainty is actually super important and valuable to the industry as a whole and to the climate modellers and the forecasters because it reminds us of all the factors and complex interactions which go into forecasting the risk of loss.

“We know, even now in the aftermath of Hurricane Ian, there’s still a wide range of potential losses.

“Loss estimates come at the end of a long chain of estimation, from measuring the hazard, to measuring the damage, to estimating the impact to the industry.

“There’s still a range of potential loss, despite the fact that the hurricane happened more than a week ago, and that’s because there are so many component-level uncertainties falling within that process of estimation, and so understanding that range, and how it converges over time, is actually very informative.

“If the range today were wider, or narrower, it would give us a sense of what that relativity between the prediction and the uncertainty around that prediction really is. The factors beyond what we can measure directly, like the wind, such as social, economic and litigation factors, all contribute to the size of that range and the confidence we can assign to the expected loss.”

“So given that, it’s actually not only useful the direction of the estimate, but also the uncertainty around it.”

Later in his keynote speech, Dailey moved on to talk about some of the specifics of hurricanes, highlighting the embedded uncertainty in the natural climate system and how using technology to understand changes in their characteristics is vital.

“Other aspects of risk when it comes to hurricane landfalls include: where do they begin, known as genesis, how do they track, where do they end up, which is the landfall piece, and other factors like the nuances of the coastline. All of the above make it a challenge estimating hurricane risk, before they happen and even well after.” Dailey explained.

Continuing to say, “When you look at Ian for example, just a 10, 15 or 20 mile deviation to the west could have made all the difference in terms of exposure at risk, landfall location and insured loss, and in fact we might not even be talking about Ian right now.

“A lot of sensitivity exists simply due to the orientation of the Florida coastline to the track; something so arbitrary really, can make a big difference when it comes to hurricane risk, and reminds us of the importance of CAT models which can play out all of these scenarios in advance.

“All of these pieces come together in the models, and it’s important to have a view on all of them.”

Which is a fantastic point from Dailey, that had hurricane Ian’s track shifted by a relatively small distance, the landfall could have been in a far less impactful area of Florida’s coastline, or for that matter more so had the track turned to Tampa, driving home the importance of leveraging the latest technology and ensuring you have the scientific and meteorological expertise in-house to understand their output.

At Aeolus Capital Management, Dailey has been building out the investment managers’ climate research capabilities, ensuring that the latest science, technology and data are deployed in the firm’s decision-making.