Performing Sensitivity Studies
The uniform profile requires less information about the event and is an easier approach to take. If the simpler uniform profile gives the same change in occurrence loss distribution as the downscaled profile, then the uniform profile should be used.
To perform this sensitivity study, the downscaled and uniform methods are used to create hourly loss profiles for each country for each event and each year in the 10,000-year catalog. An n-hour window is then scanned along each annual loss profile to determine the maximum loss accumulated in n hours. The process is carried out for 72, 96, 120, and 168 hours clauses on the entire model domain of the AIR Extratropical Cyclone Model for Europe. In a second sensitivity study, an n-hour window was scanned over loss profiles for each individual event to quantify the impact of the event-based hours clause.
Comparison of Downscaled and Uniform Methods when Measuring the Impact of the Hours Clause on Loss from Multiple Storms
Figure 3 shows that the 72 hours clause can lead to an increase of 2% to 13% in the European industry occurrence losses across the 0.5% to 5% exceedance probability range (10- to 50-year return periods). The increase is greatest in the 10%-50% range (2- to 10-year return periods). Impact is measured as the change in maximum annual loss due to the n-hours clause relative to the maximum annual loss without the hours clause. Therefore the greatest impact for a given return period will be observed when storms of similar loss occur within n hours of each other.
Low-loss storms are more likely to occur than high-loss storms and therefore clustering storms are more likely to be low-loss storms. High-loss storms are less likely to cluster with other high-loss storms because high-loss occurs when a strong storm hits a major city and it is very unlikely that two strong storms hit two major cities in Europe within 72 hours of each other. This explains why the hours clause has less of an impact at lower exceedance probabilities.
Figure 3. Change in Europe’s industry occurrence loss by exceedance probability for 72, 96, 120, and 168 hours clauses. The change is relative to the occurrence loss without the hours clause. (Source: AIR)
For longer hours clauses, the behavior is similar to that observed for the 72 hours clause, but the impact is exaggerated in the 10% to 50% range (2- to 10-year return period). Longer hours clauses lead to higher annual occurrences because more losses are accumulated within more hours. For high-loss storms, the peaks in the loss profile that contribute to most of the loss occur within a relatively short period of time, so lengthening the hours clause has less of an effect on the accumulated loss.
The results in Figure 3 were created using the downscaled profiles. Figure 4 shows that the uniform method gives as good an estimate as the downscaled method for Europe-wide losses and that the discrepancy reduces as the hours clause lengthens. The uniform method was also found to be adequate when investigating individual European countries—Austria, France, Germany, Switzerland, and the UK—and European regions—Benelux (Belgium, Netherlands, Luxembourg), Eastern Europe (Czech Republic, Hungary, Poland), and the Nordics (Denmark, Finland, Norway, Sweden).
This finding suggests that to quantify the impact of typical hours clauses on occurrence losses, loss profiles over individual countries can be assumed to be uniform. Knowing when the storm entered and left the country and the total loss to that country is sufficient. (This data is available to clients who license AIR’s ETC model for Europe.)
Figure 4. Change in Europe’s industry occurrence loss by exceedance probability for 72 (lighter) and 168 (darker) hours clauses based on the downscaled (blue) and uniform (yellow) methods. (Source: AIR)
Event-Based Hours Clause
In an event-based hours clause, the loss is sourced from a single storm. Figure 5 shows that the typical time spent by an ETC in the model domain is between 30 and 60 hours. Just over 5% of the ETCs in the model’s stochastic catalog spend more than 72 hours in the model domain and the losses associated with these more enduring events is just over 7% of the total. For these events, the event-based hours clause will reduce the event loss by shortening the event.
Figure 5. Histogram of the time spent by each ETC in the model domain; 72 hours is denoted by the dashed line. (Source: AIR)
In Austria, Switzerland, Germany, and the Baltics, damage from ETCs lasts no more than 72 hours, therefore this hours clause has no impact on loss metrics. The remaining countries and regions experience ETCs lasting more than 72 hours, one of which is the UK where 9% of ETC losses are caused by storms lasting more than 72 hours. However, when the maximum accumulated 72-hour loss was calculated for every ETC, it was found that the hours clause had a negligible impact on the average annual loss, and the greatest impact it had on the annual aggregate and occurrence losses was -2.5%.
Conclusions
Typical hours clauses can increase the 2- to 10-year occurrence losses from European windstorms by as much as 10% to 20%, so it should be accounted for by insurers who write such policies. The uniform method is sufficient to quantify the impact and only requires the country-level loss plus the entry and exit times of a storm, all of which is readily available to model licensees. These findings can aid regulators, model developers, and insurers alike. It should not be too taxing to collect this information from a real windstorm event and regulators may wish to request it in future. Ultimately, insurers can use these findings to compare their claims experience with the models and better understand the impact that the hours clause has to their portfolios.