Storm Warning: Managing the Risk of Increasing Hurricane Catastrophes

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Text, Wednesdays with Woodward (registered trademark) Webinar Series. This text appears on a laptop screen next to a red mug with an umbrella logo.

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JOAN WOODWARD: Hi, good afternoon. Thank you for joining us today. I'm Joan Woodward, President of the Travelers Institute, which is the public policy division and educational arm of Travelers. So welcome to Wednesdays with Woodward. A webinar series where we convene leading experts like we have today to talk today about the biggest challenges facing us in our personal lives and our professional lives, of course. So before we get started with today's program, I'd like to share our disclaimer about the event.

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Text, About Travelers Institute (registered trademark) Webinars. The Wednesdays with Woodward (registered trademark) educational webinar series is presented by the Travelers Institute, the public policy division of Travelers. This program is offered for informational and educational purposes only. You should consult with your financial, legal, insurance or other advisors about any practices suggested by this program. Please note that this session is being recorded and may be used as Travelers deems appropriate.

Slide, Title, Storm Warning: Managing the Risk of Increasing Hurricane Catastrophes. Logos for the MetroHartford Alliance, Travelers Institute, the American Property Casualty Insurance Association, and UConn School of Business.

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So a big thanks to our partners today for the program, the MetroHartford Alliance, the American Property and Casualty Insurance Association, and the Master's in FinTech program at UConn School of Business. So thank you and welcome to all of our members, students and alumni. We really appreciate you joining us today.

As many of you know, June 1 marks the beginning of the Atlantic hurricane season, which runs through November the 30th. For insurance professionals, but more importantly, for all of those who live near the Atlantic coast, it could be a really unnerving time. We're coming off the sixth consecutive above-normal Atlantic hurricane season, with last year being the third most active year on record in terms of named storms. So every year, the World Meteorological Organization prepares a list of 21 potential hurricane names for the named storms.

So, for the first time ever, we've had two consecutive hurricane seasons where all 21 names were used. And this begs the question, what can we expect for the 2022, and beyond? So unfortunately, we don't-- and neither does anyone-- have a crystal ball really to see in the future, but we do have the next best thing with us today. I'm joined by three leading authorities in hurricane forecasting and risk mitigation today.

So we're going to spend the next hour exploring the latest advances in hurricane modeling, forecasting and mitigation to help insurance professionals, businesses and communities, all of us, better understand and prepare for these hurricane risks. So we have three fantastic speakers joining the program today and let me introduce them.

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Slide, Speakers. Photos of Eric M. Nelson, Senior Vice President, Enterprise Catastrophe Risk Management, Travelers. Dr. Phil Klotzbach, Research Scientist, Department of Atmospheric Science, Colorado State University, and Karen Clark, Co-founder and CEO of Karen Clark and Co.

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First up, we have Eric Nelson, my colleague and friend, who's Senior Vice President of Enterprise Catastrophe Risk Management at Travelers. Eric coordinates the evaluation of risk and partners with our business units really to develop pricing and underwriting strategies related to CATs.

In conjunction with his role at Travelers, he also served as Chairman of the Board for the Insurance Institute for Business and Home Safety, IBHS. Eric is an advocate for coastal mitigation strategies and really has been leading the way. He's testified before Congress on the benefits of strengthening building codes, so we're really grateful to have you with us today, Eric. Next up is Dr. Phil Klotzbach, a research scientist in the Department of Atmospheric Science at Colorado State University. Phil holds a PhD from CSU and has worked in the Department of Atmospheric Science for the past 21 years.

If you ever read about hurricane forecasting in the news, chances are Dr. Klotzbach has something to do with them. He's world-renowned in this space. He's a co-author of CSUs Atlantic Basin Hurricane Forecast, through 2005. And in 2006, became the first author of CSUs Seasonal Hurricane Forecast. So throughout his career, he's authored over 90 articles in peer-reviewed journals, such as the Journal of Climate and Weather and Forecasting.

Finally today, we're joined by Karen Clark. Karen is the co-founder and CEO of Karen Clark & Company, a leading authority on catastrophe risk assessment and management. Karen founded the first CAT modeling company and is credited with creating the CAT modeling industry. So catastrophe modeling techniques and innovative technologies she pioneered decades ago, revolutionizing the way insurance companies like ours, reinsurers and other financial institutions assess and manage their CAT risk.

She's incorporated this CAT modeling into Karen Clark & Company, and produced more transparent and accurate models for multiple innovative technologies. She was most recently named the 2021 catastrophe modeling firm of the year by Inside P&C magazine for precision, accuracy and successful innovation in science of catastrophe risk modeling. Karen also has been recognized for contributions to the insurance industry.

And just to name a few, she was awarded Woman of the Year by the Association of Professional Insurance Women. She was honored with an award certificate for the 2007 Nobel Peace Prize, bestowed on her Intergovernmental Panel on Climate Change. So we're really thrilled to have you with us today, Karen, Phil and Eric. To begin our conversation, I'm going to ask each of our speakers to give us a high-level brief overview of what they're seeing for the hurricane season this year.

And then we're going to have a moderated discussion. Put your questions in that Q&A feature. We're definitely going to get to those at the bottom of the show. So, Eric, welcome to our virtual floor. And we'd love to hear your thoughts on hurricane season.

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A satellite photo of the swirling clouds of a hurricane. Text, Evolving Risk Landscape.

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ERIC NELSON: Great, thank you so much, Joan, for that introduction. So we're going to talk about the evolving risk landscape. And so what I'm going to do is just talk about some trends before I turn it over to Phil to get into the specific forecast, and I know we're all interested in hearing about. So let's just talk about long-term trends. 

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A graph appears titled U.S. Industry Tropical Cyclone Losses, showing losses by decade. The 1990s show 113 billion dollars, the 2000s show 391 billion dollars, the 2010s show 482 billion dollars, and the 2020s show 129 billion dollars so far with projection of 645 billion.

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And so what you see on the graph here in front of you is industry economic losses. Economic losses from events greater than a billion dollars.

And what we tried to do here is show the trends over time. And so when you see the trends over time, you can see they're increasing rather significantly. And as Joan did a great introduction to talk about the recent events, but I just want to talk about some of the factors that are leading to this increase. Well, it's certainly a population migration to higher-risk areas. We know inflation does impact the numbers, we're all feeling that today. But also the aging infrastructure. That plays into what potential losses can be.

Building code adoption and enforcement. Most people do not realize we do not have building codes in every state in the country. Hard to believe, but we don't. And so we also have less effective enforcement of building codes in some areas. We're also a very prosperous country. And so sometimes when you get a major event, you might have post-event demand surge. Contractors are already-- in today's economy-- are employed quite well. There's even shortages in some spots.

And so when you have post-events demand surge, you're trying to go after a smaller pool of contractors. Regulatory changes can occur. That's fine. Regulators try and do something that they view is in the best interests of their consumers, but at times, that regulatory change does increase the cost over time. In the last one that Karen's going to touch upon a little bit in her conversation is weather volatility and climate trends.

So all that comes into factors into why we're seeing increase in losses over time.

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A map appears titled Texas to Maine Coastal Population Growth 2010 to 2020, showing color-coded areas of growth with highest growth in Florida, the Texas and Alabama Gulf Coasts, South Carolina and Rhode Island Coasts.

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Little bit about the population growth change because this is probably the biggest impact that's occurred over time. And so what you see about is just an example on the left, from 2010 from the Census Bureau, to 2020, talking about the states with the highest growth.

And so you can see that's Texas, Florida and South Carolina. Apparently, for those of us like me that live in the Northeast and are looking for some sun one day, there's a big migration down to the South at times. Beautiful weather, low-tax environments, and so if you look at Florida, it has more than doubled its population in the last 20 years. Majority of the population now lives in coastal areas.

Since 1980, 71% of the overall population increase is driven by coastal states. And then lastly on there is estimates put Florida migration as about 850 new residents a day, through 2026. So if we go on the next slide, I'll explain why does this matter.

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Two pie graphs titled U.S. Economic Catastrophe Losses, 1980 to 2021, showing tropical cyclone as 61% of losses. Of the tropical cyclone loss, Florida and Texas bear 40% compared to all other states.

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And so, if you look over to the right, let me just start with that. If you look over to the right, and you look at the historical numbers on economic losses, about 40% has occurred in Florida and Texas over the last 20 years.

If you unpack that a bit, though, you have to recognize from 2006 to 2015, we really had a drought of hurricanes, not many hurricanes occurring in Florida. And so if you think about that more on a normalized basis, Florida was lucky for that period. If you think about a more normalized basis of what you expect, we expect a lot more hurricanes to impact Florida over time. And so, probably on a prospective basis, I would guess that more like two-thirds of the potential losses will occur in Florida and Texas, absent of that continued population migration.

So what I'm trying to say is, Florida and Texas have a much higher likelihood of severe hurricanes. And so therefore, as more and more of the U.S. population shifts to those areas, as a country, we're now going to see more hurricane losses. If I move over to the left for a minute, let's just put hurricane or tropical cyclone in perspective. And again, this is 1980 compared to 2021. Just a billion-dollar events or greater adjusted for inflation over time. Well, tropical cyclone has represented about 61% of those losses.

And for example, severe storm, tornadoes, hail, severe wind, has been about 18%. If you were to normalize this for all types of events, even below a billion dollars, we're talking about maybe about 40% would be from tropical cyclone and about 40% from those severe storms. So this just gives you a perspective. Tropical cyclones, again, big events make up the majority of the economic damage we see. If you adjust it, it becomes a little bit smaller as a portion of its own. Let's go to the next slide.

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A map titled U.S. Tropical Cyclone Landfalls from 2012 to 2021 showing the paths of hurricane and tropical cyclone events over the Eastern and Gulf Coasts of the U.S..

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So we talked about this a little bit. Let's do one more click. And so if you look at the losses that have occurred over time, everyone can think about Harvey, Maria, Sandy, Ida, Irma, Michael, the big events that have occurred over the last 10 years, and those are the red lines. But if you think about the black lines are where landfalling events have occurred in the United States. And it's really-- what I'm trying to display with this graph is, it's everywhere. You have a potential-- across all states, I'm saying-- you have the potential to see hurricanes in all states.

You can look at the damage that's occurred in the Southeast and the Gulf that we've all heard about, but there's also events that have hit as far up as New England. So none of us are immune to hurricanes and tropical cyclones. And with that, if we click to the next slide,

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A chart titled 2022 Forecast as of April 7, 2022.

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I'm going to turn it over to Phil to go through the forecast to give us some impression of where we think we're going. Phil, I'll turn it over to you.

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PHIL KLOTZBACH: Thanks so much, Eric. Yeah, so we at CSU put out our first forecast on April the 7th. And we'll actually be doing our next hurricane forecast. We'll put it out tomorrow at 10:00 a.m. Eastern. So I'll talk about the April outlook and I'll discuss a little bit about what we've seen since the April outlook in the next few minutes. So our forecast that we put on April 7 was for an above-normal Atlantic hurricane season, predicted a total of 19 named storms. Those are systems named by the National Hurricane Center. 

Winds of 39 miles per hour or greater. Of those 19, nine becoming hurricanes. And of those nine, four becoming major category three, four or five hurricanes. Hurricanes with winds of 111 miles per hour or greater. That compares with the average season, which has about 14 storms, seven hurricanes and three major hurricanes. One thing I did want to point out, too, is we also forecast an integrated metric known as accumulated cyclone energy. That's an integrated metric that accounts for storm frequency, intensity and duration of storms.

So you may hear myself or others discussing accumulated cyclone energy. This gives you a little bit of an idea as to what we're predicting there. So now we can move ahead to the next slide.

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A global map with heat color-coded over the oceans.

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I'll talk a little bit about what we currently see. And so some of these features are similar to what we saw with the early April forecast.

And there's been a few changes as well. So, here are current, basically, sea-surface temperature anomalies, or differences from the long-term average. So kind of the way you would expect, blues mean colder than normal. Oranges and reds mean warmer than normal. And if we look at these two rectangles, these are highlighting two of the areas that we really focus on during the peak months of the hurricane season. The red rectangle is what's known as the Atlantic Main Development Region. That's the area of most tropical cyclones form in the Atlantic.

And the blue rectangle is kind of what we monitor to assess the state of weather we have, El Niño or La Niña. So La Niña is colder than normal water in that rectangle, El Niño is warmer than normal water in that rectangle. If you look at the Atlantic, we can see warmer than normal waters. A lot of them, not necessarily in the tropics, but farther north into the subtropical and middle latitudes. And I'll discuss why that's important a little bit later.

But first of all, let's focus on the Tropical Pacific. So if we can advance to the next slide.

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A closer color-coded heat map of the tropical Pacific Ocean.

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If we focus on the Tropical Pacific Ocean, that blue rectangle highlights what's known as the Niño 3.4 region. Not a particularly exciting name, but that is the region that NOAA uses to basically monitor the strength of either El Niño or La Niña.

So when temperatures in that box are half a degree Celsius colder than normal or more, NOAA will declare a La Niña event. Half a degree Celsius, one degree Fahrenheit, that's not much. But small temperature changes in the ocean can make big differences in how the atmosphere then responds. So you tend to get fairly small temperature changes in the tropics, but the atmosphere can have big changes in how it responds. So if we have a La Niña, what that tends to do is it tends to create wind patterns high up in the atmosphere, 20-30,000 feet that are more conducive for hurricanes.

Alternatively, when you have an El Niño, which is basically the opposite of La Niña, so warmer than normal water in this rectangle, that increases winds high up in the atmosphere that tend to tear apart hurricanes. And that's one of the first features that Dr. Bill Gray noted when he started doing these seasonal hurricane forecasts, all the way back in the early 1980s.

So now we're talking about late May, but a lot can still change between now and the peak of the Atlantic hurricane season. While today's the official start of the season, it really doesn't ramp up, historically, until August. Over 90% of your major hurricane activity occurs during the three months of August, September and October.

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A graph titled Early May 2022 C.P.C. slash I.R.I. Official Probabilistic E.N.S.O. Forecasts showing season and probability percentages for La Niña, El Niño, and neutral forecast.

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So if you move to the next slide, we can look and see what we have for current outlooks for El Niño and La Niña going forward. So this is the early May outlook. This slide will actually be updated next Thursday with the new NOAA outlook. So NOAA, for August through October, the peak months of the season, gives us a 5% chance of El Niño. So unfortunately, we do not think El Niño is going to be present. Again, El Niño tends to tear apart hurricanes. Whereas, this year it looks fairly likely like we'll have La Niña.

We may also have what's known as neutral conditions, which means water temperatures near average in the Pacific. And then really what matters is what's going on in the Atlantic. If you have neutral conditions, the Pacific isn't necessarily going to be as impactful of a region for what goes on in the Atlantic.

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A line graph titled Model Predictions of E.N.S.O. from May 2022.

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But if we move along to the next slide, you can see why NOAA, with our most recent outlook, said there's really low chances for El Niño.

So these are a whole pile of different models. If you like acronyms, certainly, there's alphabet soup there for you on the right. Here's all these different models for August through October. Most are calling for, or basically none of them are calling for El Niño for that August through October period. You can see none of those lines are above the El Niño threshold. About half are calling for neutral conditions, most of them below zero. So that's known as cool neutral, or La Niña conditions.

And overall, the cooler the waters in the Tropical Pacific, in general, the more active the Atlantic hurricane season.

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A color-coded heat map of the Atlantic Ocean.

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So now moving on to the next slide. I just briefly wanted to highlight the Atlantic because, obviously, that's where the hurricanes are. So warmer than normal water in the Tropical Atlantic is conducive for an active hurricane season because it provides more fuel for developing tropical storms and hurricanes.

But if you look at the current sea-surface temperature pattern, you see the Tropical Atlantic is a little bit warmer than normal. But if we look farther north, in the eastern part of the Atlantic and the subtropics in the middle latitudes, there's a lot of warm water there. And that's really important. When you have water temperatures there that are warm in April, May into June, what that tends to do is it tends to cause lower atmospheric pressures.

It weakens a semi-permanent area known as the subtropical high. That high pressure gets weaker. And consequently, the winds blowing across the Tropical Atlantic, known as the trade winds, are weaker. Those weaker trade winds tend to cause less mixing and churning up of the ocean surface, which warms the Tropical Atlantic providing more fuel for storms during the peak months of the hurricane season.

And we can see that if you move along to the final slide for my presentation.

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A color-coded heat map of the Atlantic titled June Atlantic Sea Surface Temperature Correlations with Atlantic Accumulated Cyclone Energy.

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Here's a plot showing sea-surface temperatures during the month of June, correlated with Atlantic-accumulated cyclone energy that integrated hurricane activity metric. You can see that where the dark reds are is where the correlations are the highest and you can see there's a lot of high correlations off of the west coast of Portugal, even all the way up to France and England.

So again, those warmer waters there this time of year, tending to lower the pressures and then leading to weaker winds blowing across the Tropical Atlantic, making likely for a more active Atlantic hurricane season. And we'll have a lot more to say with our updated outlook, which is, again, coming out tomorrow, June 2 at 10:00 a.m. Eastern. And so with that, I'd like to turn it over to Karen Clark.

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Photos of a thin tornado, a canyon, and a hurricane. Text, Managing the Risk of Increasing Hurricane Catastrophes.

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KAREN CLARK: Thank you, Phil. And hello, everyone. And also, thank you, Joan, for that very kind introduction. I am very happy to be here participating in the Travelers Institute. And I'm going to go back to talking about losses.

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A bar graph titled Insured Losses Today from Historical Hurricanes in U.S. showing billions of losses by year.

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Dr. Phil-- Phil, hopefully you don't mind, I'm going to call you Dr. Phil-- took us through the forecast for the year, with respect to hurricane frequency.

And what I'm going to talk about now is what we can expect or what the outlook is for losses back, and specifically on insured losses. So if we start with this graph, this is a historical perspective, but it might be a little bit interesting to you. It goes back to 1900. You can see on the x-axis. And what it's showing are what the insured losses would be today if the most severe hurricane from each of those years were to happen today.

And what you can see immediately is the tallest bar is from 1926. And that's the Great Miami Hurricane of 1926, which was a category 4 that made a direct hit on Miami. The other interesting thing you could see here is that the other, three of the other five are also in Florida. The Lake Okeechobee, the Fort Lauderdale and Hurricane Andrew, what you'll also notice is that most of them are in the earlier time period. And of course, this may be counterintuitive because you always hear on the news we have a record-breaking losses.

It seems like every hurricane causes record-breaking losses, every major one. But of course, that's because of what Eric talked about earlier, which is the increases in population and property values. So again, if we go back to 1926 in Miami, I don't think there was much there. Miami was probably pretty much an extension of the Everglades. But, of course, today, if that storm hits again, the losses are going to be about $160 billion.

And you can see that Hurricane Andrew, which happened in 1992, because of the growth since then would be almost $70 billion, when at the time it was $15 billion. Now the reason I show this is because we tend to think of frequency as highly correlated with losses. But it's not-- I mean, frequency is of course, important, but you can see the last five years, they are lower bars than these other years where we had a major event hit a populated area.

So we can go to the next slide.

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A graph titled Industry Losses from 100 Year Hurricane showing landfall location and industry losses in billions.

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What we see, what I like to say, those of you may know, what are the three most important things for real estate, it's location, location, location. So I like to say, hurricanes are like real estate. It's all about location. So insured losses depend not so much on how many hurricanes we're going to have in a year, but where they make landfall. Now on this chart, we're looking at industry losses from the 100-year hurricane. Now let's talk first about what is the 100-year hurricane?

Scientists, insurers, we like to talk about return periods. 100-year, 50-year, 1000-year, but that can be misinterpreted because by the 100-year hurricane, we don't mean the hurricane that's going to happen like clockwork every 100 years. But we actually mean the hurricane with a 1% chance of occurring this year.

And what's also important to keep in mind is that sounds like a low percentage. It's only 1%. But that's in one year. Over 10 years, we have almost a 10% chance of having that hurricane. So, this is not an extreme event that we should think won't happen. It will happen. The question is when, and insurers need to be prepared. So if we look at this chart, this is looking at the 100-year hurricane.

And we can see the peaks are, of course, where we have populated areas. Galveston/Houston and Miami. In both of those areas, the 100-year hurricane would cost over probably $250 billion, and that's insured. The next biggest peak is in Tampa. You have New Orleans in the Northeast. Now some of you may be asking, well, why is the Northeast only $100 billion? Wouldn't that be a Cat 5 hitting New York City and wouldn't that cost more?

Well, the answer to that is that the 100-year hurricane is not the same intensity all along the coast. It would be a Cat 5 along the Gulf and in Florida. But in the Northeast, the 100-year hurricane because the water temperatures are cooler, we don't expect a Cat 5 or even a Cat 4 with that frequency, would be a Cat 3 in the Northeast. The other thing to look at on this are the red bars.

I've highlighted Panama City and Homestead. Why Panama City? Well that's where Hurricane Michael hit in 2018, which was a Cat 5 hurricane. So you can see, we don't even hardly even think of Michael. Of course, people in Panama City do. But the losses were on the order of about $15 billion, insured. Where you see if that had been in other places along the coast, say around Tampa, the losses would have been much higher.

I also have Homestead highlighted, which is where Hurricane Andrew made landfall. So again, you can see if Hurricane Andrew had hit only about 50 miles north, the losses would have been four times higher. And I didn't mention what the x-axis is here, but of course, you can see its landfall location. And each bar is at each 10 miles along the coast. So if we can go the next slide, please.

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A graph titled Assessment of the Current Climate, How Much Have Global Temperatures Increased To Date?, showing rising temperature change relative to the 1850 to 1900 mean in recent years.

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So now let's talk about the future. And of course, what's on most of your minds is climate change. How is climate change going to impact hurricane losses in the future? Well, let's start with global temperatures. How much have they actually increased since 1900? And you can see on this chart that while there is fluctuation from year to year, the trend line has been about a 1.1 degree Celsius increase in temperature since 1900. Now what does that mean for hurricanes? Well scientists that study this have concluded that a 1.1 degree Celsius increase leads to about a 2.7% increase in hurricane wind speeds.

Now again, that doesn't sound like a lot, but losses increase exponentially with wind speeds. So you will see in a little bit that losses do increase a lot more than you would anticipate from that. So that's what we've seen to date. If we can go to the next slide,

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Graphs titled, Impacts of Climate Change on Hurricanes to Date and Historical Landfall Rates Versus Adjusted For Global Climate Trends to Date.

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we'll see what that means in terms of major versus non-major hurricanes. First of all, if you look on the left of this, what I'm showing here are the number of hurricanes going back to 1980 that achieved, not necessarily at landfall, that achieved somewhere in their life cycle over 170 mile per hour wind speed, which is actually an extreme Category 5.

And you can see that this is happening more frequently. So this is how scientists believe that increase in wind speed is going to be manifested, which is more intense storms. You can see Dorian, Irma, Katrina, and if you look over on the right, what that means is if you look historically all the way back to 1900, the data you'll see that about 32% of hurricanes are considered major Category 3, 4 and 5. But if you adjust the historical data for the global climate trends, the major jumps to 36%.

And so what you can see is that there's a shift from the Category 1s and 2s to the 3s, 4s and 5s with climate change. And of course, that is going to impact losses. So that's to date. Again, so what about looking ahead on the next slide.

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A chart titled What Will Happen in the Future. I.P.C.C. shared socioeconomic pathways, S.S.Ps.. A graph showing increasing temperature change relative to 1850 to 1900 mean in recent years.

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So how do we know what's going to happen in the future? Well of course we don't with certainty.

But what the Intergovernmental Panel on Climate Change has done, that's the global body of work of the scientific consensus around the world, they've come up with-- in their most recent report-- what they call SSPs, Shares, Socioeconomic Pathways. And what those SSPs depend on is what happens with emissions, with greenhouse gas emissions.

So of course, that depends on what we're going to do as a society. So they have different scenarios starting with 1.9. I'm not going to go into the science, what radiative forcing means. But you can see that as that gets higher, that's worse. So at the 1.9, it means that we are going to achieve net zero emissions by 2050. So that's a great scenario when we do whatever we need to do that. On the other extreme is 8.5, where we have rapid global economic growth. We keep investing in fossil fuel. We basically do nothing. 4.5 is about a middle of the road where we're largely business as usual, but we are making strides with our more sustainability goals.

And what you can see on the right is how scientists have projected out the temperature increases under those different scenarios. So what we do as a catastrophe modeler is we take all this science and what the consensus is, with respect to temperature changes in the future, and then we can apply that-- if we go to the next slide, please.

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A chart titled, K.C.C. Scientists Produced Nine Projections for Different S.S.Ps. and time frames. It compares temperature increase relative to 2020 to wind speed increase.

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We can apply that to what will happen with the wind speed increases.

So there are a lot of numbers on this chart, don't worry about that, but we project out to 2025, 2030 and 2050 under three, the best-case scenario, worst-case scenario and middle-of-the-road scenario for these SSPs. And you can see the temperature increase on the left three columns and then what that means for wind speeds on the right. And so we built that into our models and we can come up with the loss projections.

Well, first of all, if you go to the next slide, please, we'll see what that means with respect to the shifting-- as I said before-- from weak hurricanes to the more major hurricanes. And these colored bars all correspond to the 2025, 2030 and then the three different scenarios for 2050. So we first go back to our hurricanes and we make the shift to intensity. And then we can see what happens with losses. So if we go to the next slide, we can see what happens to our losses, first for 2025 and 2030.

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A graph titled What This Means for Insured Loss Increases by 2025 and 2030, climate change only, showing decreasing percent change relative to for return periods.

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Now some of you may not be that familiar with catastrophe models. So very quickly, the models give return periods of losses of different sizes. So here, we're showing the 5-year, the 10-year, the 20-year, all the way up to the 250-year return period losses. Corresponding, as I said before for example, to the 100-year return period. We have the 10-year and the 5-year return period. So these bars are showing the percent change in losses.

And what you can see very clearly is that the bars rise higher at the lower return period, the 5- and 10-year return periods more than the 100-year. Now what that means is that we're going to start seeing a lot more 20, 40, $50 billion hurricane losses because this is where we're going to have more severe storms everywhere along the coastline. So we shouldn't-- I mean, a 10-year, just to put it in perspective, we should be expecting a $10 billion hurricane loss about every other year. And a $40 billion loss about every 10 years.

So, we shouldn't be thinking about these large events, Ida and Laura, as extreme events. This is what we will be seeing with a lot more frequency, again, with climate change.

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A graph titled Insured Loss Increases by 2050, Climate Change Only, No Exposure Increases Included, showing decreasing percent change relative to 2021 for return periods.

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My last slide just takes it out to 2050, which there is a lot more uncertainty. But you can see there's also uncertainty on those SSPs and the loss increases will depend on how effective the global societies, global economies are in holding down those greenhouse emissions.

Now one final point I'd like to make is that this is just the increase due to climate change. And while that's significant, as Eric said in the beginning, population continues to move to the coastal areas. So the increases we're going to see out to 2050, due to pure exposure changes, will actually dwarf these. So we're likely to see at least a doubling of losses due to exposure changes, given current trends. Not just in population, but in building construction costs and the sizes and values of properties that we're essentially building in harm's way. So, I'll leave it there. And I think Eric is going to come on now and talk about how we might be able to mitigate some of these losses.

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Text, Narrowing the Path of Potential Destruction.

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ERIC NELSON: So boy, dire predictions at times, but I do think it's within our control. We can decide where we want to live, we can decide how we want to live. And so I want to just talk about narrowing the path of potential destruction. The National Institute of Building Sciences estimates the cost-benefit ratio of building an IBHS, so that's the Institute for Business and Home Safety, has a standard that they talk about, "code-plus." I'm going to talk about that in a minute.

But talking about that building a mitigated home for hurricane has a 5:1 cost-benefit ratio. So mitigation is a way we can considerably lower the amount of potential damage that occurs in the country. And just to plug, go beyond just thinking about reduced insurance costs, put that aside for a minute. It's about preserving the way you live. It's about preserving your communities. It's about preserving all of those mementos you have. It's about life safety.

And so we in this country could decide to build homes and buildings much more resilient than we are today. And so beyond building, that's new construction, right? And even on retrofit, there's some things that you can do that we'll talk about. But there's also something that you can be prepared for an event. So there is things that you can do as we go into hurricane season, I just want to remind folks, you can go on Travelers' Prepare & Prevent website. Many insurance companies also have websites on how to be prepared for hurricane season.

So my quick tips are: Make sure you have a plan. Do periodic checks of your insurance coverage. Close the openings that are out there. Do pre-season cleaning of gutters. Prune back your trees, that's so important. Prune back your trees-- 10 feet away from the house. And of course, secure any outside items. That patio furniture is a flying projectile in hurricanes. So make sure you put that furniture away.

And so if we talk about mitigation programs and resources, I also want to stress that the states are really, really putting their step forward on this. There's My Strong Home programs in several states. There's a Strengthen Your Roof program that's been available in the past, some of these are awaiting future funding or additional funding. But North Carolina has had a great program, South Carolina has had a great program.

There's also nonprofits that are out there. And so there's many different mitigation programs out there. And this list just keeps on getting longer and longer. And so let's talk about mitigation in a little bit more detail. Go on to the next slide.

(DESCRIPTION)
Logo for FORTIFIED, a program of I.B.H.S.. Drawings of a laptop and book titled Superior Building Standards.

(SPEECH)
And so if you go on DisasterSafety.org, that is IBHS's website that talks about a FORTIFIED home. And a FORTIFIED home is based on 20-years plus of storm damage data.

The scientists at IBHS and the insurance industry have been studying this a long time, and they've-- we've developed standards that are stronger than the typical building codes. So superior to building codes, we can build homes that are more resilient. Go to the next slide.

(DESCRIPTION)
A color-coded map of the United States showing FORTIFIED program statistics by state.

(SPEECH)
And so this program, we have a FORTIFIED roof, talking about improving the resiliency of your roof, FORTIFIED Gold, FORTIFIED Silver. So that's just different degrees of what you can do when you're building your home. And so that program has been out there for several years, and we've had a great success. So we've had 38,000 homeowners have taken advantage of this program and built more resilient.

Now, if you look in a little bit more at the details, you can see Alabama is by far the state that's gone the furthest because one, in a lot of the coastal communities, they've now adopted those standards, too. They set up the education for their builders, for their realtors. And three, they have the programs to back it up. And so I'm very pleased with how the Gulf Coast states, especially Alabama, has moved towards embracing this "code-plus." And I'm going to show you what that means in a minute.

But typically, a FORTIFIED roof cost is typically $1,000 to $3,000 of additional costs. And what that's going to do is-- just to describe the roof because I've actually done this on my own house-- is you're going to tape the seams when you think about when the plywood comes together. So what happens is-- and you also put on an additional water barrier. And so if there-- if your shingles fly off, you almost have that second layer of defense to prevent interior water damage.

And believe me. From my own personal situation, it came in so handy in a New England storm. Where my shingles blew off, I greatly reduced the amount of damage that I had in the house from that.

(DESCRIPTION)
Text, Which house would you rather own, build, sell, insure?

(SPEECH)
And so if you go to the next slide, we want to just show a video. Let me just show-- without going through all the details, you can read the website on that. A video is worth so much more than the words. So let's hit it, and let's show the video here.

(DESCRIPTION)
A video plays showing 2 houses built inside a warehouse. One of the houses collapses.

(SPEECH)

[VIDEO PLAYBACK]

And so this was actually the first test that I ever saw at IBHS.

(DESCRIPTION)
The roof flies off the house and the structure folds in on itself and blows away with debris flying.

(SPEECH)
And what you saw here in the video is that is a home that's built on the left-hand side. It's a typical construction standards, and you can see the significant damage. This is the IBHS lab down in South Carolina. I call it "Mother Nature in a box."

[END PLAYBACK]

(DESCRIPTION)
The video ends. Text, Fortified Home dot org.

(SPEECH)
We can create hurricane-force winds and test the building resiliency. So I'm very proud of what that organization has been able to achieve in developing standards for "code-plus," and they've proven to work. So please go check it out-- fortified.home, disastersafety.org-- two different websites. They have both, so some great information there.

So with that, Joan, if-- turn it back to you for any questions and moderation you want to do.

(SPEECH)
JOAN WOODWARD: Thank you. Thank all three of you. And please come back on camera. We are just so lucky to have your insights over the last half hour. So, just fascinating slides and lots and lots of interest here.

So, I have a couple of questions myself before we get to some audience questions. Dr. Phil, so you said tomorrow, we'll expect an update to your April forecast. So, in three months, what changes?

So in April 2022, you made these forecasts about how many and how severe they might be. So in three months, is it the-- basically the climate, the temperature of the waters changing? What else are you looking for to make your changes, your tweaks, shall we say?

(SPEECH)
PHIL KLOTZBACH: Yeah. Yeah, so we do, as you mentioned, we'll update the forecast tomorrow. And so one of the big things that we look at especially during the spring is how are things transitioning with La Niña. So often, if you're going to get a transition from La Niña to El Niño, or El Niño to La Niña, it happens during the spring.

And so there's a phenomenon known as the springtime predictability barrier, which is loads of fun when you're trying to do seasonal forecasting. It's really hard to predict the El Niño during the spring. That predictability barrier is thankfully coming towards an end, and it really does look like, unfortunately for the hurricane season, that we won't have El Niño conditions. So like I mentioned before, the update comes out tomorrow, but certainly we don't think the numbers are going to be going down. The odds of El Niño just are lower even than they were during April.

Also, when the Atlantic in early April, the tropical Atlantic was actually a little bit cooler than normal. Now, it's a decent bit warmer than normal, and these slides I sent in were about a week old now. And even since then there's been some additional warming faster than normal. I mean, obviously the Atlantic always warms up from winter to summer, but it's warming up faster than normal.

So, with that, again, we don't expect to be reducing our numbers tomorrow overall conditions. Unfortunately, it'll look like another busy Atlantic hurricane season. However, just because it's a-- even if it is a perfect forecast and it's a busy season.

In general, more active seasons have more landfalling hurricanes. But you can get lucky and have a year like 2010, where we had 12 hurricanes in the Atlantic basin and not one of them made U.S. landfall. On average, it's about 1 in every 4 hurricanes that forms, hits the continental U.S.

(SPEECH)
JOAN WOODWARD: 1 in every 4. OK. Eric, I want to talk to you a bit about you've been at Travelers a number of years now. And your job and looking at risk and looking out the models that come out for our own internal purposes, you're helping our underwriters price our products as you look through all the models. What are you really focused on when you're looking at the models and these storm-related losses, the insured losses that we see every year? How has that evolved for you in your job over these years?

(SPEECH)
ERIC NELSON: Well, it's certainly for not just my job, I would say my team and the teams at Travelers that look at this, not just my team, the teams in the business and claim department. I think what you have to understand is the world is becoming increasingly uncertain. And so in the past, we may have relied upon a vendor point of view to understand the risk because as Karen talks about this, it's very complex.

But what I've done now over time is we want to get a lot of different opinions of this. And that's where both Phil and Karen, we've expanded our relationship with other outside experts to get their opinion and get their understanding. As well as we've hired our own meteorologists in-house to really make sure we understand things. And we've spent a lot more time thinking about the consumers and thinking about what should the consumers do? And how-- I get that question when I was traveling the field in past jobs-- how can customers reduce the risk?

And so we've really partnered as an industry to think about those questions. How can the-- how can we reduce risk? And that's where IBHS is key.

(SPEECH)
JOAN WOODWARD: Great. So, Karen, you've been at this. You're the mother of modeling, we heard in your introduction. Other than insurance companies like ours, who else uses your models?

And what do they do with looking at all of these granular forecasts that you put out? Are there regular bigger companies or governments looking at this? Or how do you interact with non-insurance groups?

(SPEECH)
KAREN CLARK: Oh, well, first of all, Joan, for the insurance industry itself, I mean, catastrophe modeling not just for hurricanes, but Eric mentioned all these other perils we have, it's really the global standard way that insurers and reinsurers price underwrite and manage risk. So that I talked about this EP curve. It includes a lot of metrics that you need to understand and manage risk.

But yeah, it's getting-- I would say climate change is having an impact on the types of industries that are demanding this type of modeling because, it's been very surprising to me, but last week, I was at the Bermuda Climate Summit. And so there were a lot of consulting firms there and government officials and from the U.S. Treasury, what have you.

And they-- it seems like-- ya know, we take CAT modeling for granted. Eric's like, well, yeah, we've done that for decades. But other industries do not have this very rigorous framework, and that's what it really is. I mean, it's a very rigorous framework for taking events.

What are their intensities? What will be the damage? What'll be the financial implications?

So it's this amazingly powerful technology that it's just opening eyes. And I think other industries, all industries, they really didn't think they needed it. But now when they're being required through ESG to account for climate risk, they're seeing that this would be a very beneficial technology for them to be able to tell their shareholders, their production facilities around the world how vulnerable are they to tropical cyclones, to earthquakes, to sea-level rise.

So we're seeing that there is going to be a very big expansion of this technology that really the insurance industry started-- really embraced from the beginning because of course, I mean, the insurers, we enable economies to thrive and survive because we basically protect them from extreme event risk. So it's definitely expanding in terms of the users of this technology, Joan.

(SPEECH)
JOAN WOODWARD: OK. Is there room for improvement then, Karen? Is there-- what are the potential innovations down the road for you and your models? Is there an ingredient or some piece of the puzzle that you don't have a clear picture of in your modeling? Or what could we expect over the next 10 years for the industry to evolve?

(SPEECH)
KAREN CLARK: Well, sure. Well, you can-- they can always be improved. And of course, that's what the KCC Scientific and engineering teams are always doing is improving them. And of course, the science of these hazards, you can see Dr. Phil. He's forecasting.

I mean, scientists, we understand the kind of the science pretty well. Obviously on the vulnerability side, as Eric says, that's changing all the time. So when events happen, we get a lot of claims data that enables us to bring any learnings from that into the model.

But the biggest challenge, really, where there're the unknowns is what I already talked about is climate change. Everyone wants to know exactly what's going to happen in the future. And for that, there is a lot more uncertainty. But I think the challenge is, as I said, not just for insurers but for all these industries, give them a template they can work with.

There's a lot of confusion like, do we take 2030 or 2050? Do we-- which SSP do we look at? So I think there is a need for kind of a standard, like this is what we're going to look at, knowing that it's uncertain and knowing that we're going to have to update our models a lot more frequently than we have in the past, like every two years, if not every year.

(SPEECH)
JOAN WOODWARD: Someone put in the Q&A here, what is SSP? I know you have it in your charts. I just want to be clear for the audience. What is SSP in you chart?

(SPEECH)
KAREN CLARK: Well, hopefully I said it correctly because sometimes I say Shared Sociopathic Pathways. But actually, it's Shared Socioeconomic Pathways. It's a mouthful.

And just like-- a scientist loves acronyms, as Dr. Phil already told us. And that's-- these were put together by the IPCC in order to categorize their projections. So they have these different assumptions.

(SPEECH)
JOAN WOODWARD: OK. Thank you for that. So, Phil, back to you on your job. And so you get this fanfare on June 1, and then June 2, you have your new forecast coming out. And so I imagine you're pretty busy through November through the hurricane season. Tell us about your off-season modeling and what you're doing when the hurricanes are rearing their ugly head for all of us to see.

(SPEECH)
PHIL KLOTZBACH: Yeah, so we do a variety of different things. So one of the things we do during the off-season is so these hurricane forecasts, you put out the numbers. I didn't get into today, but we have a variety of different models that we use to come up with our forecasts.

So we use historical weather and climate data. We use model forecasts from various climate models, so not on the, say, 50 to 100 years, like the climate projections, but climate models forecasting out several months. And those models can give us some information about how the water temperatures and the wind patterns are going to look like for the hurricane season. So we're always working on model development.

We also do a lot of work on trying to better understand what makes hurricanes tick. And well-- I didn't talk about it much in my presentation-- also looking at basically how hurricanes have changed in the past and how they're likely to change in the future. So looking at some of these questions that Karen and Eric have already talked about-- how hurricanes are going to change in the future, how that's going to change the drivers of damage. We also do a lot of work on what are the drivers of the damage on an individual hurricane season as well-- El Niño versus La Niña and other climate patterns.

(SPEECH)
JOAN WOODWARD: So take us inside the hurricane. You always hear about the eye of the hurricane, Phil. And you hear that planes fly into the eye of a hurricane. Tell us how this works.

Who's flying those planes? How do they collect the data about the wind speed? So give us a behind-the-scenes look at when the hurricane is happening. What is NOAA doing?

What's the government doing? What is your organization doing? And tell us about the guy who acts to go fly that plane into the eye of the hurricane.

(SPEECH)
PHIL KLOTZBACH: Well, unfortunately I've yet to be on one of those. I would love to be in one of the hurricane hunter aircrafts, so I can't actually tell you exactly what it's like to fly through a hurricane.

But there are-- so these aircraft-- basically some of the aircraft reconnaissance started all the way back in the early 1940s. A guy basically got his navigator. He was like, hey, we're going to go fly into a hurricane off the coast of Texas. And they realized, hey, we survived, and it was pretty cool. So let's go and actually try to get better data.

So basically, when hurricanes are approaching either the United States or they're flying or potentially impacting the Caribbean or Central America, they will fly planes into storms. And a lot of these are flown by the U.S. Air Force. There's also planes flown by NOAA. And so they will get really important information, basically information on the winds in the hurricane. They'll also get information on what the pressure pattern is like in the hurricane, since a lower pressure is associated with generally a stronger storm and actually correlates better with the damage than the actual wind speed because it takes into account the size of the storm.

And then what they'll do is then they'll relay that information to people on the ground-- Hurricane Center forecasters and other interested parties. And so, you actually can track their planes when they're flying into the storm and see the data that they're gathering in real-time. Those are pretty cool devices.

So they'll fly into a hurricane at about 10,000 feet. And as they fly into the hurricane, what they do is they actually have a device that will actually look at the churning up of the ocean water, basically measuring effectively the amount of sea spray. So obviously the stronger the hurricane, the stronger the winds, the more sea spray. And they'll use that to actually estimate how strong the winds are in the hurricane.

So it's a really cool method. And so when we aren't flying planes into hurricanes, we're estimating hurricane intensity from satellite, which works reasonably well. But getting the plane in there and getting that ground-truth information really does help pinpoint really how strong these storms are. And that information is valuable because then it goes into the forecast models that are there, what the Hurricane Center then uses for their forecast or future intensity and track of the tropical cyclone.

(SPEECH)
JOAN WOODWARD: OK. Karen, we have a question coming in from the audience. Does your company have a proprietary model platform, or is it a blended model using RMS or AIR other--

(SPEECH)
KAREN CLARK: Oh, yeah. No, we have our own proprietary models that we've been developing over the past several years. So no, we have our own proprietary models. And we feel that they're the second generation of models. They're more transparent. They're more efficient and seems to be we have evidence that they're more accurate, which are what companies want. So we have our own.

(SPEECH)
JOAN WOODWARD: OK. Wonderful. Another question coming in for Phil here. So, let's talk about La Niña forecast. So this definitely affects the industry. Does the La Niña forecast bode well for a wet, rainy season on the West Coast, or does it indicate a dry season for the West Coast, or can you make that correlation?

(SPEECH)
PHIL KLOTZBACH: Well, and so in general, the wet season again will be coming up this fall or winter. And so at this point, the odds of what's going to happen this winter is more uncertain. But if we were to get a La Niña, continued La Niña, typically the canonical pattern is that makes for a fairly wet northwestern United States and dry in the Southwest U.S.

But, there's a lot of caveats of that. As you get farther away from, so El Niño and La Niña happens in the Tropical Pacific, there's these relationships that happen most of the time, but it's not necessarily a slam dunk. For example, last year was obviously we had La Niña throughout the winter from 20-- in 2021 into 2022.

And if you look at, say, California, it was an extremely wet December, like record rain, record snow in the mountains. And then it got extremely dry after that. So they kind of have these relationships that work reasonably well most of the time. But even if, say, we do get La Niña again, it's not a guarantee to say that it's going to be super wet in the Pacific Northwest and dry in the Southwest. There's other climate and factors than just weather patterns that come into play there.

(SPEECH)
JOAN WOODWARD: OK. All right. Eric, here's one for you. Both RMS and AIR have secondary characteristic fields for IBHS. When will FORTIFIED recognition, the premium credits, more favorable terms, be integrated into the underwriting process? Good question.

(SPEECH)
ERIC NELSON: Right. Good question. We have integrated at Travelers. We do offer in our homeowner's product a FORTIFIED discount. And so that's with our Quantum 2.0 product, homeowner's product, that's available in most states. So some states may not have that discount available yet. So let me couch that by saying most states offer that. And we try and do these-- Travelers Institute is a broad audience here.

Full transparency: Many insurance companies today will offer a FORTIFIED discount. And that's what we want. We want society to change. We want folks to be willing to do "code-plus." And so those discounts are available. I would contact your agent.

(SPEECH)
JOAN WOODWARD: OK. Well said. Phil, how about this one for you? How much can a catastrophe such as a massive volcano eruption or an earthquake and tsunami mixing into the water affect the weather and how fast?

(SPEECH)
PHIL KLOTZBACH: Well, so let me talk about this from the hurricane perspective because I know we're running out of time. So if you get a massive volcanic eruption in the tropics, that's usually what will actually cause-- basically you get enough basic aerosols injected high up into the atmosphere that will then cause significant cooling. And that could potentially overall reduce, say, the amount of Atlantic hurricane activity you get.

A lot of the bigger volcanic eruptions we've had recently-- obviously there is that one at Iceland. I'm not going to try to pronounce that volcano's name. That's basically too far poleward that basically that it gets mixed out a lot faster in the mid-latitudes than it does in the tropics.

We've had a couple more recently, but the amount of basically ash that's been injected hasn't been enough to really cause more than just a very, very brief couple of days cooling. But if you do get a really, really big volcanic eruption, there are some ideas. Basically, if you have a big volcanic eruption, basically the increase in the aerosols basically will cause reflection of the sun. Basically, the radiation is coming from the sun and more of that will get reflected out in the space, leading to cooler waters and in general a quieter overall hurricane season, but there's not a lot of them. Not a lot of them thankfully that have happened, so the data is fairly limited.

(SPEECH)
JOAN WOODWARD: OK. Great. Eric, last one for you. Is Travelers involved in any parametric products or research? And what is parametric?

(SPEECH)
ERIC NELSON: Yes, so parametric is going to be-- we are experimenting with parametric. And so today, what happens is if you have a loss at your home, you have to have physical damage at your home to trigger coverage, your home or business to trigger coverage.

And so sometimes if you have a power outage for a business with an extended period of time, folks want to know that they have coverage not just from physical damage. So they may decide, as a business, they want parametric insurance. And so parametric would be tied to, say, wind speed triggers. And so, say, there's a wind speed trigger with an anemometer in a certain location in a state, it would trigger coverage based on wind speeds instead of based on physical damage at your property location.

And so I think parametric is a very intriguing new insurance product. It's just hard to explain to the average consumer. And so I think the parametric products will be there for more sophisticated--

(SPEECH)
JOAN WOODWARD: Buyers?

(SPEECH)
ERIC NELSON: --larger insurers over time.

(SPEECH)
JOAN WOODWARD: Good.

(SPEECH)
ERIC NELSON: I hope that market comes out and gets bigger over time. It's very intriguing.

(SPEECH)
JOAN WOODWARD: Yeah, it's very innovative, very, very fascinating. I can't believe it. The hour just flew by. So I want to thank our speakers tremendously.

The good news is that we have a replay that will come out in the next week or so. So watch your inboxes. This was a terrific session. So Eric, Karen, Phil, thank you so very much for your time, your insights.

And we're going to look tomorrow morning at 10:00 a.m. Eastern for that updated forecast. It doesn't sound like you're going to improve it. It sounds like we might have to batten down the hatches. So thank you all. I appreciate it.

And to my viewers and listeners, I want to talk about the next few weeks at the Travelers Institute. Next Wednesday, we have a session on cybersecurity again. And this one specifically about how to build your incident response plan. So after you've been hacked, what is your plan? And we're going to talk specifically about that next Wednesday, June 8.

And then on June 29, we're going to talk about the exponential rise of nuclear verdicts. Everyone is talking about this. We have two experts-- inside expert at Travelers and an outside expert-- to talk about the rise of nuclear verdicts and what we can all do about it.

And you can register for any of these programs at travelersinstitute.org. You can connect with me on LinkedIn. I'm very active on LinkedIn, posting our replays and our invitations. Again, these are all free and open to the public, so share our invitations with your friends.

And if you haven't already, take a moment in the chat, we have a link to the survey about today's program. So let us know your thoughts and who else you might want to see on our show. Have a terrific week. And again, thanks to my terrific speakers. Well, who all were terrific.

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(DESCRIPTION)

Text, Watch replays. Travelers Institute dot org. Connect, LinkedIn, Joan Kois Woodward. Take our survey, Link in chat. Hashtag Wednesdays with Woodward. Travelers Institute (registered trademark).