A severe thunderstorm is a single complex weather system that is able to produce at least three different perils:  tornadoes, straight-line winds, and hail. Canada defines severe thunderstorms as storms that have tornadoes, wind gusts of at least 90 kilometers per hour (km/h), hail of two centimeters in diameter or greater, and/or a rainfall rate greater than 50 millimeters in one hour. Taken together, the damage caused by the three major severe thunderstorm perils has been responsible for the majority of natural catastrophe losses incurred by Canadian insurers over the past 25 years.

Severe thunderstorms cause significant losses
Canada experiences more tornadoes every year than any other country, except the United States. On June 22, 2007, a tornado near Elie, Manitoba, reached F5 intensity, the highest rating on the Fujita tornado damage scale, making it the first officially documented F5 tornado in Canada. By way of comparison, two tornadoes in southern Ontario in August of 2005 had an intensity of F2. They generated wind gusts between 180 km/h and 250 km/h and, having touched down in a more populated area, caused insurance losses of $500 million (CDN), the highest in the province’s history.

Although tornadoes are much more prominent, due to media exposure, straight-line winds actually occur much more often and, cumulatively, are actually responsible for most severe thunderstorm wind damage.

For example, a severe thunderstorm north of Winnipeg, Manitoba, in 1996, produced winds of 120 km/h. They toppled 19 hydro transmission towers and threatened a massive blackout in the city. The towers weighed three tons each.

Like straight-line winds, the significant damage caused by hail is not generally appreciated. Yet, every year hailstorms destroy as much as 2% of annual crop value alone. As for property damage: In Calgary, Alberta, a severe thunderstorm in September of 1991 brought a hail storm that lasted 30 minutes and covered 130 square kilometers. Hail 10 centimeters thick fell, splitting trees and killing birds in addition to damaging property. A record of 116,000 insurance claims were filed and insured losses came to $342 million (CDN), making this the second-costliest storm in Canadian history.

Severe thunderstorm risk in Canada
Severe thunderstorms produce some of the most violent weather on the planet. The Canadian severe thunderstorm season is at its peak in late June and July. Meteorological conditions can come together at this time (a cold front associated with strong jet stream winds) such that a large number (or “families”) of storm events will take place over the course of several days, thus increasing the risk associated with this extreme weather.

A typical thunderstorm is 15 miles in diameter and lasts an average of 30 minutes. Its basic structure consists of intense currents of updrafts and downdrafts that vigorously churn a thick layer of the atmosphere. These currents can extend upward from near the ground to heights of 50,000 to 70,000 feet.

Severe thunderstorms develop from the “supercell” type of thunderstorm. Supercells are highly organized thunderstorms characterized by extremely strong, rotating updrafts. It is estimated that something over 100,000 thunderstorms develop over North America every year, about 10% of which become severe.

Regions most affected
The threat from severe thunderstorms in Canada is most pronounced in two regions. The first stretches from Lake Erie north and east along the St. Lawrence Seaway and includes the cities of Windsor, Toronto, Ottawa, and Montreal. Warm, humid air from the Gulf of Mexico gets carried by prevailing winds to this region where it then interacts with other fronts already there. When these interacting systems then engage the jet stream—which commonly flows over this part of southern Canada during mid- and late-summer—conditions are set for severe weather in the area.

The second region of severe thunderstorm activity covers the southern plains of central Canada, from the Rocky Mountains across to southeastern Manitoba and includes the cities of Edmonton, Calgary, Regina, and Winnipeg. Storms are initiated along the Rockies when air is lifted as it flows over the mountains. As these storms migrate eastward, they too can become severe if they are able to interact with the jet stream.

While these two regions are most at risk, most of southern Canada has some level of risk from severe thunderstorm events. Additionally, since severe thunderstorm systems in sparsely populated areas often go unreported, the level of risk from hail, tornadoes, and straight-line winds is even greater than suggested by recorded data.

To mitigate losses, manage the risks
Severe thunderstorm events are uncertain with respect to the time and place of their occurrence, duration, and severity. Such uncertainty is a definition of risk. Many insurers treat losses from severe thunderstorms, however, as simply a cost of doing business. Some believe that severe thunderstorms are so erratic and their potential damage so localized that it is not possible to manage the risk associated with them—even though they might try to manage similarly erratic and localized earthquake risk.

Since severe thunderstorm events are more frequent than earthquakes or hurricanes, insurers tend to believe that their past claims appropriately represent their potential losses. However, an insurer’s claims experience typically does not adequately represent both the least frequent and the most extreme events—events that, in the case of severe thunderstorms, are entirely possible meteorologically but for which insurers have little or no claims experience.

How to manage the risks
Because of the relative infrequency of severe thunderstorm events, and also because of changing exposures, actuarial techniques based on past loss experience may not fully account for the actual potential for large losses these events hold. Rather, accurately estimating possible future losses from such storm systems requires an understanding of the storms’ meteorological characteristics, how those characteristics interact, and how they impact property.

High-resolution catastrophe models capture the risk from severe thunderstorms at a localized level. Such models incorporate science, relevant engineering principles, and insurance industry expertise to estimate the frequency and severity of severe thunderstorms and the potential financial losses attributable to them. Insurers can use these models to make better risk management decisions and increase the profitability of their portfolios. Specifically, modeling helps insurers minimize accumulations of risk, strategically price their policies, and determine various reinsurance and risk transfer strategies.

What catastrophe models provide
Catastrophe modeling provides insurers with an estimated loss potential for individual risks, for books of business, or for an entire portfolio. Insured losses are calculated by applying individual company policy conditions to the total damage estimates derived from the model. Policy conditions may include deductibles by coverage, site-specific or blanket deductibles, coverage limits and sub-limits, loss triggers, coinsurance, attachment points and limits for single or multiple location policies, and risk-specific reinsurance terms. Model output can be customized to any desired degree of geographical resolution down to street address.

Catastrophe models produce complete probability distributions of losses (also known as exceedance probability curves). This information includes distributions of both gross and net losses for both annual aggregate and annual occurrence losses. Additionally, model output can be used to run sensitivity tests, develop underwriting guidelines, analyze policy conditions, make informed decisions regarding the purchase of reinsurance, estimate consistent loss costs for catastrophe-prone areas, and otherwise assist in overall catastrophe risk management.

Catastrophe modeling software also provides summary reports of exposures and comparisons of exposures and losses by geographical area. Finally, the software provides detailed information on potential large losses caused by extreme “tail” events.

Canadian insurers face significant risk from severe thunderstorms. Consequently, they need to prepare responsibly for large losses. Catastrophe modeling can provide the information they need both to fully understand the risk they face—and to take the action necessary to manage it successfully.

Tim Doggett, principal scientist, Atmospheric Science and Shiraj Khan, senior engineer
at AIR Worldwide Corporation.