A wake-up call on typhoon risk in Japan – revisited

Typhoon Jebi hit the Osaka region of Japan in September 2018. Jebi became a wake-up call for the insurance industry. It forced the industry to reassess typhoon risk in Japan, where the 1991 Typhoon Mireille had become a far too distant benchmark.

A re-evaluation of the long term historical past illustrates that 2018 was, in fact, not so exceptional after all. Rather it underscores that the recurrence of severe typhoon events like Jebi are to be expected. When we look at typhoon activity  throughout the 20th century, we can see typhoons with the strength of Jebi or more recurring at a probability of 1 in 25 to 35 years. We discuss these findings in greater detail in the Swiss Re Institute's recent publication on the topic.

As result, it didn't come as much of a surprise when Typhoons Faxai and Hagibis swept across the Greater Tokyo area in the second half of 2019. While these events are not yet fully evaluated, they already add new perspectives and reinforce our earlier learnings. We can summarise them in four key take-aways:

Typhoon Hagibis puts a spotlight on the flood risk potential in Japan

Following the devastating typhoons of the 1950s and 1960s, Japan invested heavily in coastal and inland flood defences. It has been thought that the country has since kept the risk of flooding largely under control. Typhoon Hagibis, however, has challenged this assumption: while flood protection measures successfully prevented major damage in the denser portions of Greater Tokyo, at least 55 levee breaches and overflowing rivers showed that a substantial part of the local flood risk is only partially mitigated.

Out of the USD 7 billion to 11 billion1 in insured losses, the majority stems from flood losses. If we go back in history, there were many typhoon events that caused severe flooding, most prominently Typhoons Kathleen (1947) and Ida (1958). Both events are not remembered as severe wind events today, but they both caused severe flooding in Greater Tokyo and the surrounding regions. Today's flood protection does mitigate losses, but it is certainly not perfect. So a recurrence of Kathleen and Ida is possible and could lead to even higher losses than those caused by Hagibis.

Typhoon Faxai reconfirms Jebi's claims severity in urban areas

Typhoon Jebi highlighted the magnitude of insurance claims from a typhoon that initially appeared to be an average typhoon. There are multiple reasons for the high severity of claims, including changes to the vulnerability of Osaka's building stock since the last severe Typhoon Nancy hit the region in 1961.  While claims data needs to be carefully analysed to understand vulnerability drivers, early indications of claims from Typhoon Faxai suggest that this is a systematic trend rather than an isolated single event. Higher windspeeds would lead to higher average losses than typically assumed for smaller events of the past two decades. 2018 and 2019 typhoon claims data provides a huge opportunity to inform risk assessment by the industry towards higher severity.  

Re-examining the frequency of moderate to severe typhoons

With Hagibis, Faxai and Jebi occurring in close succession to one another, and adding Typhoon Ida and Kathleen to the mix, we can confirm our views on the level of severe damage and return periods in the long term. While losses are still developing for Typhoon Faxai and Hagibis, we can consider USD 7 billion (5 to 9 billion range) and USD 9 billion (7 to 11 billion range), respectively as middle numbers from recent estimates2.

Based on hazard characteristics of Typhoon Ida, it can be said it will cause a similar order of magnitude of losses as Hagibis. Typhoon Kathleen (1947) was also a severe flood event but is expected to cause fewer losses than Ida.  Based on historical experience, regardless of time-horizon, it can be said events with JPY 500 billion (USD 4.5 billion3) of severity occurs once in 10 years or more. At higher severity of JPY 750 billion (USD 6.8 billion) or JPY 1000 billion (USD 9.1 billion), an inclusion of Ida in the sequence of large typhoon losses of the sorts of Muroto 1934, Vera 1959, Nancy 1961, Jebi 2018 and Hagibis 2019 points to high probabilities of occurrence based on historical evidence.

Historical loss experience as a reality test for the industries' cat models

The typhoon activity in 2018 and 2019, combined with the rich historic experience of typhoons from the past 100 years, constitutes a reality check for the industries' cat model results. Such model results are governed by assumed frequency and severity of typhoon events, as well as an underlying portfolio of exposed buildings and its capturing in input data to the model. There are multiple models in use, and being used both on a market level as well as on an individual insureds' portfolio level.

At a market level, such models suggest a return period for a JPY 1000 billion loss at 1:20 up to 1:35 years, aligning with long-term historic experience. The insurance industry on individual portfolio basis seems to operate in a different and more optimistic space, assessing a similar severity level as a 1 in 50 years or rarer event, making a link to historical observations more difficult and less credible. There can be multiple explanations for this, including different exposure assumptions between market portfolio and individual portfolios. After 2019, we must take the opportunity to enhance the credibility of our models by updating hazard and vulnerability models, informing the way we capture our underlying portfolio and how we use our models.

Despite all uncertainties, the typhoon risk we observed in 2018 and 2019 is not a complete surprise. Rather it's a continuation of an active past which needs to be the basis of any sound risk assessment for sustainable underwriting in the future. More lessons will unfold as we fully assess the most recent disaster events, but the impact we've seen already calls on the insurance industry to more substantially reflect on the historical typhoon risk confronting Japan.

1 RMS estimates for Typhoon Hagibis, November 1, 2019

2 RMS estimates for Typhoon Faxai, September 26, 2019

3 Approximate exchange rate of 1 USD =110 JPY is used