A little background information on seasonal hurricane forecasting
The “pre-season” discussions already started last December when the Department of Atmospheric Science of Colorado State University (CSU) published a first qualitative discussion of the 2019 Atlantic seasonal hurricane activity. CSU is regarded as one of the expert institutions on hurricane forecasting, together with Tropical Storm Risk (TSR) of University College London and the National Hurricane Center of the National Oceanic and Atmospheric Administration (NOAA). The first quantitative seasonal hurricane forecasts, which include figures on how many storms and hurricanes are forecasted, followed in early April. Updates are then typically published every month, with the latest update published in early August. Not surprisingly, forecast accuracy is highest for forecasts issued in July or August, close to the start of the “peak” of the hurricane season. The US hurricane season officially begins on June 1 every year, and ends on November 30. Historically, August and September have been the “peak” months of the hurricane season with the highest storm and hurricane activity.
For more than 100 years, hurricane forecasting has included scientific elements used to predict storm and hurricane activity. In the beginning, it simply focused on detecting approaching storms early on in order to warn and prepare citizens. Seasonal forecast models have only been in operation for around 20 years, but have since greatly improved with enhanced data availability and computing power. Thanks to today’s highly sophisticated statistical forecast models, late season forecasts typically have significant “forecast skill”, which means they are better at predicting storm and hurricane activity compared to when only relying on climate statistics.
The main focus of hurricane forecasting is still to monitor developing storms and accurately forecast their short-term track and strengthening in order to warn and prepare citizens along the US coast or on affected islands. So why do research institutes bother at all with long-term seasonal forecasts? According to CSU, this is done because “it is possible” and because “people are curious to know.” However, there are also more practical and business-relevant applications of seasonal hurricane forecasts: as early as 2003, Niklaus Hilti, the current CEO of Credit Suisse Insurance Linked Strategies Ltd, together with Mark Saunders from TSR and David Simmons from Benfield Group, co-authored a study1 that showed that reinsurance buying based on late-season hurricane forecasts delivered superior results compared to a static or climatology-focused buying strategy. Since then, and with the rapid development of the ILS market, seasonal hurricane forecasts have become more important for market participants and can influence buying and hedging strategies. It should be noted, however, that an ILS portfolio will enter into most of its US hurricane transactions during the January and May/June renewals when only early-season forecasts with lower forecast skill are available. Late season forecasts, therefore, are most useful in order to make adjustments to existing US hurricane exposures.