Risk Management Reports

April, 2000
Volume 27, No. 4

I never thought that you could predict the future by putting your head in the sand! But that is exactly what a researcher at Louisiana State University has done. According to the Economist (February 26, 2000), papers at the annual meeting of the American Association for the Advancement of Science addressed our growing ability to predict major hurricanes. Forecasters are more accurate in predicting storm paths but their intensity remains difficult to determine. Given the enormous influx of people and property to the Atlantic and Gulf coastlines of the US in the past fifty years, our better knowledge of storm paths and intensities helps officials to know when to call for evacuations. But as storm-related deaths and injuries drop, property damage erupts, in part from the failure to prohibit building on suspect terrain and to enforce realistic building codes in storm and water threatened areas. The radical change in actual and potential damages also threatens insurance companies. We are learning, however, about the effect of thermoclines, the layers of cooler water beneath the surface, on hurricane intensities, and we now can build reliable models to assist insurance companies to determine fair rates for property owners in storm-prone areas. Firms such as EQE and Risk Management Solutions cater to major financial service companies worldwide. They search for new information on major

storms, trying to determine if there is a distinct long-term pattern for these events. A Florida State University researcher has discovered such a pattern for “big” storms, those that respond to Pareto’s Law: 20% of all storms produce 85% of losses. Ocean circulation affects the position of the normal high pressure zone that sits off the Azores and this zone in turn affects the spawning of cyclonic depressions that spin westward toward the Caribbean and the US coast. Other researchers confirm an overall cycle of 20 to 40 years in which major storms range from a low of about 1.65 a year to a high of 3.5. Finally, Kam Biu Liu, at Louisiana State University, has plunged a proverbial head in the sand to look for traces of old hurricanes in preceding centuries. Since the big ones surge over coastal dunes, dumping their debris into inland ponds, he dredged into these ponds and discovered that, over some 5000 years, at 22 different US sites, the big ones (category four or five) occur on average about once every 300 years, with a higher frequency along the US Gulf Coast. If these data are correct, and if global warming does not have a significant effect on the conditions that spawn big storms, two big “ifs”, insurance companies should be able to face future losses with greater predictability and cover the resulting losses without fear of bankruptcy. All this research has a lovely name: paleotempestology.

Copyright H. Felix Kloman and Seawrack Press, Inc.

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