One of the greatest threats to the balance sheets of property and casualty (re)insurers in the Asia Pacific region comes from tropical cyclone events, more commonly referred to as typhoons.
As a carrier with significant exposure to tropical cyclone loss in Asia Pacific, we at Peak Re have invested heavily in understanding and managing this risk. In addition to licensing commercial models, in 2015 Peak Re initiated a strategic partnership with the Shanghai Typhoon Institute. As a result of this partnership Peak Re have provided clients with two typhoon activity forecast reports per year: one in May before the typhoon season starts; and one mid-season update in August.
These reports use state-of-the-art statistical and climactic modelling to forecast a short term view of typhoon activity compared to the long term average. These reports can be used by underwriters or risk managers to fine-tune risk rating and risk management objectives based on a sophisticated and independent view of the current climate and prevailing ocean-atmospheric conditions.
The pre-season report for 2020 forecasts lower than average formation of tropical storms and tropical cyclones over the northwest Pacific and South China Sea (see Table 2 for an explanation of tropical storm classification). The number of tropical cyclones that develop into strong typhoons is also expected to be below the long term climactic average.
With specific reference to the China mainland, the number of tropical storms or tropical cyclones making landfall or otherwise affecting the coast are expected to be slightly higher than the long term climate average (see Table 1).
This output is the combined view of several climate models, each using very different methodologies. However, all models are largely in agreement that the overall tropical cyclone activity is expected to be below the long term average.
The climatological signal driving this forecast view comes from observations of equatorial sea surface temperatures over the western Pacific. While these temperatures have been above average, they have not yet reached the levels necessary to be classified as an El Niño event. This ENSO (El Niño Southern Oscillation) – neutral state is forecast to hold until at least the summer. Forecasting sea surface temperatures further into the year is highly uncertain so this forecast will be refined and updated in the mid-season report.
There is always a large amount of uncertainty involved in long term forecasting. This is especially true when no clear ENSO signal is present. While it is still possible that a signal could develop that would ultimately drive tropical cyclone activity either above or below the long term average, the current best estimate is that below average activity is more likely than above average activity. While this is true for the whole north-west Pacific and South China Sea, the forecast for mainland China is that higher activity is slightly more likely than below average activity.
Finally, it is always worth reminding readers that overall trends in activity do not necessarily correlate with insured losses: a single large event can cause catastrophic loss in an otherwise “quiet year.” It is always advisable to monitor activity throughout the typhoon season.