Climate and Insurance.org | takefive with Rade Musulin

Rade Musulin is Head of Aon Re Services Australia and Senior Actuary for Aon Re Australia. He is responsible for overseeing technical services to Aon clients in Australia and New Zealand.

Prior to joining Aon in May 2006, Mr. Musulin was Vice President – Operations, Public Affairs & Reinsurance for Florida Farm Bureau Insurance Companies in Gainesville, Florida. In that role, he was responsible for the company’s actuarial, strategic planning, underwriting, policy processing, training, public affairs and reinsurance functions.

Mr. Musulin has spoken at a number of actuarial and insurance industry meetings on property insurance, natural disasters, and the use of catastrophe models in ratemaking, loss reserving and concentration management.

Takefive:
Mr. Musulin, you recently co-authored a paper published in the Natural Hazards Review entitled, “Normalized Hurricane Damage in the United States: 1900-2005.” Can you briefly describe the methodologies that you and your colleagues used in constructing the paper and explain how the paper built upon previous research?

Rade Musulin:
We examined the historical record of total economic damage from hurricanes making landfall on the US East and Gulf coasts from 1900-2005. We used a methodology developed over a number of years which considers two methods of “normalizing” past losses to reflect current conditions. The first adjusts past losses for changes in inflation, wealth, and population; the other adjusts for inflation, wealth, and housing units. This paper brings together the two methodologies and compares the results. It also updates past work for recent storm activity and more recent index values.

The key contribution of this research is to provide a transparent, easily followed methodology to identify the key drivers of apparently increasing losses from hurricanes in the Atlantic basin. Losses adjusted only for inflation show a clearly increasing trend, leading some to erroneously conclude that losses are becoming ever larger, perhaps due to global warming or other climate factors. Our research did not detect trends over time in normalized losses, which is consistent with other research showing no trends in hurricane frequency or severity at landfall. There are cyclical variations in hurricane activity due to the Atlantic Multdecadal Oscillation (AMO), but no overall trend.

Takefive:
In the conclusion of your paper, you note that the analysis “should provide a cautionary warning for hurricane policymakers.” Can you explain what you and your colleagues meant by that statement?

Rade Musulin:
Our research shows that losses even as large as Katrina are not outside of the range of normalized losses from historical storms, and that demographic pressures are leading potential losses to grow at rates which may place severe strains on the system’s ability to fund them over time. Changing this pattern will require a shift in population patterns or much better building practices.

Takefive:
Prior to joining Aon Re Australia, you worked as an actuary for Florida Farm Bureau Insurance Companies and witnessed first hand the damage from the 2004-2005 hurricanes in Florida. What implications does your paper hold for insurers and policymakers in regions like Florida that have significant hurricane exposure?

Rade Musulin:
As noted above, a large loss is likely at some point in the future due to the exposure that already exists on the ground and continued population growth. Florida has been fortunate, despite some terrible losses, to have avoided a repetition of the 1926 Great Miami Hurricane, which our research indicates could cost hundreds of billions of dollars by the 2020s if current trends continue.

Florida, along with other coastal states, is in a race to retrofit and harden its infrastructure before a major loss happens. Just in the past 20 years we have seen Andrew almost hit the Miami-Ft. Lauderdale area and Floyd make a turn at the last minute. Either storm could have caused losses larger than anything we have seen to date in Florida with a landfall in a place like Ft. Lauderdale.

Takefive:
Now that you have re-located to Australia, can you describe for us what you believe to be the major climate-related risks in your new homeland?

Rade Musulin:
Australia is already the world’s driest continent, and recent years have seen severe drought even when climate conditions should have favored good rainfall. Australian farmers are experiencing large economic losses, water levels in reservoirs are low, and economic growth is being affected. Australia will need to adapt to the possibility that drier conditions may persist for some time and learn to use water more efficiently.

Also, in a pattern reminiscent of Florida in the 1960s and 1970s, cyclone (hurricane) prone areas of Queensland are growing rapidly. Fortunately for Australia, following the near destruction of Darwin in the early 1970s by Cyclone Tracy very tough building codes were enacted. If they work as planned, Australia’s new construction may fare better than some of Florida’s did in recent events. Even with good codes, rapid growth in high risk areas may lead to large losses at some future point.

Takefive:
Finally, Australia’s new Prime Minister Kevin Rudd appears to be more interested in the issue of climate change than his predecessor, having recently signed the Kyoto Protocol on global warming. In your opinion, what other climate-related initiatives are we likely to see coming out of Australia in the future?

Rade Musulin:
Australia is looking to develop a carbon trading scheme to reduce greenhouse emissions. As Australia is economically and culturally close to the United States, things that are developed successfully here may be strongly considered by the United States in coming years.

An interesting question involves nuclear power. Australia has huge reserves of uranium, though historically the country has been opposed to nuclear power. Will concerns about greenhouse gases prompt the country to rethink that stance? And as noted above, Australia will have to adapt to the possibility of drier conditions through better use of water, such as installing rainwater tanks on houses and adopting low water use agricultural techniques.