Otherworldly forces can affect the market and hurt it just as much. Hurricane Ian continues to bring surges, winds, and flooding to Florida, and we have our own hurricane swirling around the set. That’s right, we’re bringing two forces together this week in a mashup of two previous pods with Hurricane Hunter Dr. Jeff Masters and Re-Insurance pro Chris Mckeown. We’re revisiting what Dr. Jeff has to say on hurricanes and how you can track them, and we’re also talking catastrophe bonds with Chris McKeown.

You’ll want to add this special episode to your playlist to learn more about; building weather models, the financial impacts of a storm, fat tails outside of financial markets… yes they are there too (let’s just say it’s a complex system), off-loading risk via reinsurance, CAT bonds, structural issues in an upside market, and so much more — SEND IT!

From the episode:

Check out Dr. Jeff Masters on Yale Climate Connections blog Eye on the Storm, follow him on Twitter @DrJeffMasters, and visit wunderground.com Visit VantageRisk.com for more information on Re-Insurance, Chris McKeown and his team

 

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Check out the complete Transcript from this week’s podcast below:

Hurricanes, Cat Bonds, and the Billions at Risk with Dr. Jeff Masters and Chris McKeown

Jeff Malec  00:07

Welcome to the Derivative by RCM Alternatives, where we dive into what makes alternative investments go analyze the strategies of unique hedge fund managers and chat with interesting guests from across the investment world. Okay, hi everyone got a little something different today. I’m from Florida as I’ve probably led on in some of the past pods. I got family down in Fort Myers. And our eyes have all been peeled on hurricane Ian battering Florida yesterday. And today, I can’t stop watching the coverage. And I like talking about hurricanes and digging into the details of how the paths are modeled how the insurance and cat bond work and all the rest. So I tell everyone I know to follow Dr. Jeff masters formerly of Weather Underground and the cat six blog now of Yale Climate Connections in the eye on the storm blog, where he weaves in data and modeling and graphs and charts and everything else when looking at these things. When we started the pod, I knew I wanted him on it. And we made that happen shortly after the pod launch recording with Jeff in October of 2020. And with the hurricane hitting yesterday, I thought let’s go back and revisit what Dr. Jeff had to say on hurricanes and tracking them. A year after that we had on Chris McCown to talk about cat bonds, which is short for catastrophe bonds, where reinsurance package risks like Tampa getting 10 billion and insured hurricane losses into a bond that pays the investors a yield up and until that happens, if it ever happens. That’s really interesting selling the mother of all tails. So with the hurricane happening yesterday, we went back and grabbed the best parts of the pods with Dr. Jeff and reinsure Chris, to give you in today’s pod. Send it Hi, everyone, welcome back. It’s not only tweets and retail option traders that affect the day to day movement of the markets. otherworldly forces can affect the market and hurt it just as much. On today’s topics, one of those worldly phenomenons, hurricanes, billions of dollars in damage, oil refineries shutting down crops destroyed all from the wrath of a giant storm we named Sally or Teddy or something. So to break down the who, what why of these storms and the math and modeling involved in protecting us from them. We’ve got the hurricane master, Dr. Jeff masters joining us for today’s podcast. Jeff is a hurricane scientist who’s hunted down and reported on them for over 34 years, also co founded the Weather Underground and the author of one of my favorite blogs on the internet. Back in the day, the cat six blog, which I used to read like a kid with his first Harry Potter novel anytime there was a storm brewing. So Jeff now writes for the nonprofit website, Yale Climate Connections, and we’re excited to have him on today’s podcast. Welcome, Jeff.

 

Dr. Jeff Masters  02:44

Well, thank you very much.

 

Jeff Malec  02:47

So I have to start with your old old job of flying hurricane hunters. Tell us tell us everything. How’d you get into that? What was it like? Was it as insanely dangerous as it sounds? What kind of person you got to be to fly into the storm?

 

Dr. Jeff Masters  03:02

Yeah, I started that way back in 1986. I was just a young fearless kid at age 25 and had a master’s degree in meteorology and wanted to go, you know, see the world’s most impressive weather. And I thought it was a dream job. And what I did is I worked as a meteorologist on two weather research aircraft that flew out of Miami, Florida, run by NOAA, the National Oceanic and Atmospheric Administration. And in the summer, we chase hurricanes in the winter, we’d go do winter storm projects. In the spring, we’d look at severe thunderstorms. So it was really an ideal job for meteorologists. I mean, you got to fly all over the world and see the most incredible weather phenomena and work with the greatest scientists in the field. Because each of these field projects featured some of the biggest names in weather. And early on, I got to work with Dr. Ted Fujita, inventor of the Fujita scale for tornadoes. And then when I flew into hurricanes, I worked with all the top hurricane scientists, including Bob referee, who went on to become the director of the National Hurricane Center, and some of the other heads of the nose research division. So really a dream job and really wasn’t as dangerous as you might think, flying into the eye of a hurricane. When you’re out over the water, there isn’t that much that you have to worry about with respect to intense thunderstorms. You don’t get the kinds of shearing motions and large hail that you see in a Midwest Severe Thunderstorm all over the water. It’s not cold enough.

 

Jeff Malec  04:35

Just pure wind speed is the issue there. But that’s fine. The plane just handles it.

 

Dr. Jeff Masters  04:40

Well. It planes don’t like wind shear. I mean, wind shear when you’re flying is bad because that means you’ve got a different loading on one part of the aircraft versus the other. Say you got 100 mile per hour wind blowing on the nose and a 40 mile per hour wind blowing on your tail then that’s going to skew the aircraft. It’s going to kind of yeah It’s gonna connect, skim through the air. And even worse is in the vertical if you get kind of updrafts and downdrafts. If your tails in a downdraft and your noses in an updraft that really gives you a bucking motion, and in a hurricane, you can get some pretty intense G forces if you go into the eyewall. What’s the most intense part surrounding the calm eye? And there have been a few missions in the past before I joined the hurricane hunters where the plane got in trouble and intense turbulence in the eyewall. And you worry if you’re flying too low, and the pilot can’t control the aircraft and you’ll splash into the ocean.

 

Jeff Malec  05:34

Not ideal.

 

Dr. Jeff Masters  05:38

And generally, you don’t fly in at low altitude, you go in at 10,000 feet. And that gives you a lot of room for error. If you get a big downdraft. I mean, a lot of times you’ll hit a downdraft and the pilot can’t control it. You know, you go down 500 feet are 1000 feet in just a few minutes. Wow. So yeah, if you’re flying, you know, 1000 feet and you’re in the ocean.

 

Jeff Malec  06:01

Do you ever lose your lunch? You ever get sick? Was it kind of bucking all the time?

 

Dr. Jeff Masters  06:06

You know, I personally did not, but we certainly carried barf bags on every flight and you know, we always have reporters on board. They always want you know, oh really right. Yeah, they ride in the back and take photos and you know report on what it’s like to fly through a hurricane and there were a few reporters who weren’t used to the turbulence would lose their lunch and

 

Jeff Malec  06:27

and that’s to this day, they got reporters on them. Oh, sure. Pretty much

 

Dr. Jeff Masters  06:30

sure. Yeah, I mean, you can get in line and fly down to Florida and get on hurricane hunter flight if you if you’re a journalist I don’t know if you qualify there but right.

 

Jeff Malec  06:44

I can do that. Yeah, right. Yeah. Go for kind of planes are we talking to these specialized planes are there

 

Dr. Jeff Masters  06:50

they’re for engine turboprop planes. And they were originally built for anti submarine warfare for the Navy p3 Ryan’s that’s what no flies in the air force fly C 130s, which are also for engine turboprops. And a turboprop is really pretty ideal for hurricane flying because you’ve got the power of a jet engine, that’s the turbo part. But you’ve also got a propeller blade, which means that it flies slower. And that gives you more control. So it’s better to fly slower through intense turbulence because that means that the wind shear on the airplane is less. If you’re flying faster, that means you’re going through intense changes in wind more quickly and it provides more shear on the aircraft surface which is more dangerous. So the P threes are really ideally suited for hurricane flying.

 

Jeff Malec  07:42

Alright, awesome. So then you hung up your spurs on that and started Weather Underground. Well, what was what drove that decision?

 

Dr. Jeff Masters  07:51

Well, the thing that drove me to leave the hurricane hunters was my final flight, which you didn’t ask about. I don’t know if you read my story of flying into Hurricane Hugo, what wasn’t your final final flight since your well in a very permanent sense it very well could have been. We were flying into what we thought was going to be a category three hurricane out over the Atlantic. And we went out at low altitude 1500 feet thinking it was going to be a category three. And it turned out to be a category five, and you shouldn’t be in a category five at 1500 feet very dangerous. And sure enough, as we were penetrating through the eyewall we quickly realized we were in over our heads we started getting, you know to G accelerations where you’re twice the force of gravity pushed into your seat and then zero G’s where you’re dangling weightless. But once you’re in the eyewall you got no choice but to get it out and make it all the way through to the comm IB. Because you really can’t do much maneuvering, you’ve just got to go for it and get through it. So during this Two Minute penetrations, it started getting worse and worse. The winds were 140 150 160 miles per hour 170 and we’re just hanging on the pilots having trouble controlling the aircraft. We’re bucking all around, we’re skewing through the air. And at times I don’t think he was really in control of it. But finally, we got right near the eye which of course is calm and you can start to see it brightening up and I said oh it’s brightening up out there. We’re gonna make the eye but right then the plane hit the most catastrophic updrafts and downdrafts ever encountered by the hurricane hunters, we hit a oh a 40 mile per hour updraft followed by a 20 mile per hour. downdraft followed by a 30 mile per hour updraft, all in the space of seven seconds. Wow, that’s a tremendous amount of wind shear. And at the same time in the horizontal, the winds went from about 180 miles per hour down to 70 miles per hour. So the planes skidding through the air and bucking. We hit 5.7 G’s of acceleration, the planes only rated to six G’s. The pilot lost control of the aircraft we started plunging down towards the ocean, and our number three engine caught on fire at that time too. And so fortunately, well Yeah, I was thinking this is it. I was thinking like, you know, this is what it’s like to die in battle, I was saying my prayers, literally. Fortunately, we popped into the calm I write, then the pilot was able to pull us out of the dive about 900 feet above the ocean and extinguish the fire in the engine that it caught on fire. But then you had to go back through the wall? Well, yeah, that’s not good, because we have to do it all again. Yeah, you barely made it through four inches. Now you get to get to now you got to get out on three. And we looked over and that room not much. Inside wasn’t much room because the I was only about 10 miles in diameter. And a big plane, like the p3 needs about a seven mile circle in order to circle. And as it turned out, we weren’t really sure where we were in the eye. And we saw a wall of clouds in front of us. And we had to turn to avoid that thinking it was the eyewall. Well, we were off to one side, and the pilot turned us right into the eyewall. Again, and he was able to bank us over at a really steep angle, like 30 degree angle. So we stayed out of the eyewall. But you know, we’re sticking one wing in the eye while wandering out the planes bouncing around, we’re like going oh, crap. And the the engine needle on the one good engine and that wings going into the red. But fortunately, he was able to pull us out of that sharp turn level us out in the eye. And then for an hour, we circled inside the eye trying to gain altitude to get out of the eye at a calmer spot.

 

Jeff Malec  11:31

Wow. So that that was that you said Enough of this nonsense.

 

Dr. Jeff Masters  11:36

Yeah, that was my last flight. And yeah, we managed to exit out of the eye thanks to some help from the Air Force, hurricane hunters who actually sent a plane in to find a soft spot for us. They penetrated in and out of the eye a bunch of times force we finally you know, follow them out where they found the common spot. What?

 

Jeff Malec  11:55

Why are there two sets? Why don’t they just have one? The NOAA, right? Why does the Air Force also doing?

 

Dr. Jeff Masters  12:02

You know, they were there for the National Hurricane Center for operational data, you know, to help them with their real time forecasts. And we were doing a research mission. So we were doing a non standard flight pattern going in and out of the hurricane to take data to better understand how they work and to, you know, help hurricane researchers make better forecasts in the future.

 

 

 

Jeff Malec  12:22

Now, have you ever flown commercial again? Did you say no more flying ever? Or you just said no more hurricane flying?

 

Dr. Jeff Masters  12:29

No more hurricane flying? No, I was happy to fly commercial again. But to this day, I don’t like getting on a roller coaster.

 

Jeff Malec  12:35

I bet the ultimate roller coaster. So then hung up those wings, so to speak, and started Weather Underground?

 

Dr. Jeff Masters  12:43

Well, I went back to PhD school back at the University of Michigan and I was majoring in air pollution science. And while I was in PhD school, this was back in the early 1990s. I found out about hey, we got this cool thing here called the Internet, which I had heard of but didn’t know much about. And so I found out we had a satellite dish on our roof that brought in all the world’s weather data. And there wasn’t really any good way to look at it. So as part of a

 

Jeff Malec  13:10

graduate, University of Michigan, you’re saying? Yeah, yeah.

 

Dr. Jeff Masters  13:14

So as part of a course I was taking, I wrote a little C program to take the incoming data format and make a nice little menu based text system, where you could type in a three letter airport code and get them the latest National Weather Service forecast. So you type in, you know, O R D, and you get the forecast for Chicago from the National Weather Service. And that was cool enough that, you know, we launched it as a service available, not only just to the university, but we figured out how to make it available worldwide, just because of the magic magic of Unix, you can have anybody on the internet, access your computer. So we did that. And you know, within a few months, it was you know, going viral, basically, back in 1991 92. And we were getting people from all over the world, you know, accessing this little it was called a Telnet session for weather. So from that humble beginning, you know, my my PhD advisor, Perry Sampson said, hey, you know, I bet I can get a grant proposal from the National National Science Foundation to take this idea and expand it. And over the course of the next few years. Yeah, from that humble beginning, we made an educational project called Weather Underground, that did K through 12 weather education, based on the internet, and it was kind of the perfect marriage of science, education and the internet because you know, what better way to do real time science than to do weather stuff on the internet. And the National Science Foundation was very enthusiastic about it. We got several billion dollars for the grants up until 1995 and started doing graphics and in 95 when the commercial web came along, we said hey, you know, let’s make a business out of it. And University and National Science Foundation Simba vote both very supportive of that, in fact, you know, that’s kind of one of their missions is to, you know, spin off companies like that. And that was the genesis of the Weather Underground as a company. It was a university based project that got its start from a little program I wrote three days,

 

Jeff Malec  15:17

the weather.com, and black skies and all this stuff.

 

Dr. Jeff Masters  15:22

Yeah, we were we were there before the Weather Channel was online. In fact, they sent you know, some of their people up to the University of Michigan campus to talk to us to figure out, you know, how do these guys do that? And, you know, we end up probably giving away more than we should have, because they ended up finding a very successful website that was then our competitor.

 

Jeff Malec  15:39

Right? And then they ended up buying you right?

 

Dr. Jeff Masters  15:42

Yeah, that was I mean, that was the ultimate tribute to your opponent is to not only imitate them, but actually take them over. And they did by us back in 2012.

 

Jeff Malec  15:55

And then, so in the, somewhere in there, you started writing the category six blog, was that from the beginning, or that was just always part of Weather Underground? I don’t remember exactly when I first started coming across it. But um, yeah, I loved all the deep dives on everything to do with, which I would call hurricanes. Would you call them tropical cyclones?

 

Dr. Jeff Masters  16:16

Yeah, sure. I mean, it blogs weren’t around back when we founded the company. Really, that didn’t start until the early 2000s. And in 2005, some of my co workers said, hey, you know, Jeff, why don’t you? Why don’t you start writing a blog? And I’m like, What’s a blog? That sounds really good. I hate that word. What’s a blog? They said, Well, you know, you just, you know, write to online about current topics, and people comment on it. And it’s social media. Well, I thought this was a dumb idea in my first few posts showed very low effort. I think my second poster was only two sentences. And I basically wrote about the atmospheric phenomena like rainbows and halos. And I didn’t know what to write about. But so who cares about this stuff? Yeah, right. And then finally, I figured out Oh, hey, I know a topic to write about, because back then, our competitor AccuWeather, tried to pressure the legislature to pass a law to basically make it so only private companies could issue weather forecasts, outlaw the National Weather Service for making weather forecasts. And I thought that was a horrible idea. And so I use the blog as a platform to agitate against that. Yeah. Which is, that was

 

Jeff Malec  17:30

the genesis of our blog back in the day of complaining about regulators missing some frauds in our industry and whatnot. Like, when you have a bee in your bonnet, so to speak, the words just flow out, right.

 

 

 

Dr. Jeff Masters  17:41

Yeah, I mean, that was a great platform, because, you know, a lot of people were interested in that it was very politically explosive. And it really got me into writing for an audience. And then the hurricane season of 2005 came along, you know, a few months later, I started that blog in April. And then by June, I was talking about, okay, we got our lien. And now, you know, then a whole cascade of, you know, the 2005 hurricane started coming. We had Cindy, we had Dennis, we had Emily. And then eventually Katrina came and Rita and Wilma is just nuts. So I spent the whole rest of the year basically blogging and didn’t do much else.

 

Jeff Malec  18:26

And it seemed, over time, it seemed become more data driven more, and maybe it was always that way. But in my mind, it seems to become more data driven. And you started getting more into heat content and wind shear and all the rest, like was that from the beginning? Or did it become more data driven as time went by,

 

Dr. Jeff Masters  18:47

it became more data driven as time went by, I mean, I was not trained as a tropical meteorologist, my background was in air pollution. So I was kind of feeling my way along very carefully, not knowing exactly what I was doing. And I focused mostly on putting storms in historical context, which is something I really liked doing. And I to this day, that’s kind of my forte is putting extreme weather events in historical context, you know, how unusual is this? How extreme is this? So yeah, as time went on, I gradually learned more and more and got more technical, because I wanted to share with people just what I was understanding and, you know, make make it so they can make their own forecasts, draw their own conclusions,

 

Jeff Malec  19:31

right, which I’ve always appreciated. I felt that so you succeeded in that because I would read the stuff and make my own conclusions of, you know, not from a weather standpoint, but like, Okay, this could build and you kind of had that probability as well, function of this could become something much more dangerous than you’re currently getting credit for.

 

Dr. Jeff Masters  19:51

And what I like to do is I like to take people to other sites. I mean, what you see typically, back then De weather sites would only showcase their own stuff. But I want to really take people, okay, here’s, you know, this researcher with the hurricane research division of no one what they’re doing. Here’s what the National Weather Service says, Here’s what a colleague at a university is doing, really tried to make it to show you, you know, the cutting edge stuff that was happening in all of meteorology, to get people excited about research going on, and get people to understand about how climate change was affecting storms.

 

Jeff Malec  20:40

So let’s talk about that a little bit of the research that’s going on in the modeling, I saw your post a while back on how successful were the 2019 models, and kind of analyzing the tracking error, so to speak. So maybe first just give us a general overview of what those models are doing? Who came up with them. And we can, we can dig in from there.

 

Dr. Jeff Masters  21:08

Okay, we’ve got about five or six main computer models that are used by the National Hurricane Center to generate their forecasts

 

Jeff Malec  21:17

their singular. So is that an ensemble of those five, you’re saying?

 

Dr. Jeff Masters  21:22

Well, typically, what the if you look at the National Hurricane Center forecasts they put out, it’s never all that different from if you average together four or five of these top models. It’s called a consensus forecasting technique. And it’s one of the things that they learned over the past 20 years as to how to make a better forecast, don’t rely on one model, take a combination of models, average them together, maybe throw out one that’s kind of a outlier. And if you go with that, then you can make a really successful forecast. And over the past 20 years, nhc has cut down their forecast error by over a factor of two. And that sort of ensemble or consensus forecasting technique is a large reason why the other reasons why our computer power has improved massively over the last 20 years. And also, we’ve learned a lot more about how to make models of the atmosphere, and more about what’s going on inside of a hurricane. So improved understanding of the storms. Also factoring into that is improved data from satellites and buoys and ground stations, things like that. So a lot of factors are coming together to make these successful forecasts.

 

Jeff Malec  22:39

So better processing better inputs, and better modeling equal better outputs. And

 

Dr. Jeff Masters  22:47

you are asking about what the what these models are and where they come from. I mean, there’s one that comes from the European group, that’s the best model out there, the European Center model, the American model is not quite as good, but still pretty top notch. It’s called The GFS model. And then we’ve got some labs run by NOAA, like the GFDL Lab, which does the two of our top intensity models, one called HW RF, and one called the they keep changing the acronyms on me. The name escapes me now. We’re acronyms, yeah, we won’t

 

Jeff Malec  23:27

write it down. And so how many inputs are going into these models? It’s hundreds or 1000s? Or is it relatively simple? What What’s it look like?

 

Dr. Jeff Masters  23:36

I mean, you’ve got millions of points of data to to start out the model. So you subdivide the atmosphere into a grid, a three dimensional grid. And each of these grid cells is a few kilometers on a side, say 15 kilometers on a side covering the entire globe. And then vertically in the atmosphere, you’ve got, like 50 or so layers to. So if you multiply all that out, you’re talking somewhere, I can’t do the math right now. But we’re talking millions of different grid points. And each of those different grid points, you have to solve the fundamental physical equations that govern the flow of the atmosphere. So you’re doing these calculations every few seconds, and pushing them through time out to seven days or so. And at the very start, you’re taking data from satellites, from ships, from aircraft, from ground stations, from buoys, and coming up with a initial picture of what the atmosphere is. And that’s really a hard problem. And it’s something that Europeans are doing the best. It’s called Data Assimilation, because you’ve got all these heterogeneous sources of data that are being taken off at the same time. And you have to get all that together and come up with an initial point for your model to start making its forecasts from that’s kind

 

Jeff Malec  24:47

of a Internet of Things type of problem, right of like, yeah, you have all these connected devices and connected things, but how do I bring all that data into one repository and model it, right? So how

 

Dr. Jeff Masters  24:59

does It’s interesting that a big part of that data source is data from commercial aircraft. And ever since the COVID, 19, pandemic hit, we have fewer aircraft up there flying, taking vertical soundings of the atmosphere. And that has degraded the quality of our models over the past six months or so.

 

Jeff Malec  25:17

Really, that’s something you don’t think about everything. So how does that work? The airplanes are logging that and then it gets downloaded when they land or it’s real time going to

 

Dr. Jeff Masters  25:26

real time it’s in the data, real time they’ve got sensors on, the most important data they take are takeoff and landing, sounding through the atmosphere. And probably we’re seeing, you know, a few percent degradation in the models, maybe as much as 5%, in some situations due to that lack of data.

 

Jeff Malec  25:42

And then the data is all free. Anyone can build a model and use it or read or everyone’s putting it out there, or is it government by government? As at work?

 

Dr. Jeff Masters  25:52

Mostly, it’s free? Yeah, if you’re making your own model, certainly, it’ll be free. But if you’re a commercial entity, then you usually have to pay for the European Center data. The US data is always free.

 

Jeff Malec  26:06

Any hedge funds reaching out to you saying hey, can you build a model for us? So we can do this on our own? Right? That’s a big thing in our space of alternative data is what they call it, right? There’s a satellite, counting how many cars are in a Target parking lot? Things like that. But it seems this would be right up their alley of hey, that’s better than any of it.

 

 

Dr. Jeff Masters  26:25

Yeah, I mean, the data is free and out there. And the techniques are well known. Certainly, you could build a better model with the investment.

 

Jeff Malec  26:35

And it’s so funny to me, why is it called the European model just there’s a bunch of Europeans in a room or it’s like their European weather service or something.

 

Dr. Jeff Masters  26:42

Right. It’s Consortium. It’s called the European Centre for medium range weather forecasting. And all the countries in the EU got together and provided funding to have this laboratory that goes and runs supercomputers and makes modeling efforts.

 

Jeff Malec  26:59

And this, this is for the entire climate and weather patterns, not just for hurricanes,

 

Dr. Jeff Masters  27:06

or is this for the whole world is for not just for hurricanes, it’s for all kinds of weather forecasts, anything you might want to look at.

 

Jeff Malec  27:13

Okay, so the European model is not just when that hurricanes coming in towards New Orleans, it’s going to hit six miles east or west, and the cone of uncertainty all that is just part of their normal model that saying there’s going to be rain in Frankfort tomorrow. Yeah,

 

Dr. Jeff Masters  27:29

I mean, it’s a global model that’s got grid boxes, 15 kilometers on a side. So all you got to do is look at the 15 kilometer grid box over New Orleans where they expect the hurricane and there you’ve got your forecast.

 

Jeff Malec  27:40

Right. But we’re talking so are those different things that are then tomorrow’s forecast and the intensity models and the hurricane track and the cone of uncertainty all that?

 

Dr. Jeff Masters  27:52

You know? Yeah, there are specialized hurricane models. Okay. There are two kinds of models that the National Hurricane Center uses for the hurricane forecasts, what are the so called global models, okay, that includes the European model that includes the American GFS model, those models subdivide the entire globe into a 3d grid. And those models are also used by everyone to, you know, make forecasts for wherever they happen to be in the world. But there’s also a specialized hurricane model, that only zooms in on the hurricane itself. For instance, this HW RF model, it’s got a nested grid, that goes down to I think, like a comment or half zoomed right in around the corner of a hurricane. And then it’s got another grid that of course, resolution, going out a few 100 miles from the hurricane and then a third grid at even coarser resolution covering most of the globe. So that’s very specialized. And they use very special techniques to initialize what the hurricane is doing. The European model doesn’t have any of that it’s not specialized, it just runs forecasts for the whole globe.

 

Jeff Malec  28:58

And that is, and some of these hurricane hunters are dropping instruments into the, into the eyewall.

 

Dr. Jeff Masters  29:05

That’s right, the one specialized hurricane model, HW RF takes data from the hurricane hunters and puts it into its model. And that data, some of it, we’ll get into the European model and the global GFS model, but not all of that. So the hurricane hunter data is absolutely critical for making a good intensity forecast. And the best source of intensity forecasts we have is what are some of these specialized models that can utilize the hurricane hunter data?

 

Jeff Malec  29:41

And let’s talk about that intensity for a minute. It seems to me from reading your stuff there. In my naive view of this all it used to just be all about the wind speed. And at least as I become more educated on it, that’s just one of you know, three main factors which is the surge the letting possibility I think we’ve seen more and more recently right if that storms just stalled over Texas, it seems but any area, the flooding is the worst the rain is the worst threat. So do we need a new scale instead of cat five or right that takes all the pieces into effect? Because it seems like you could have a fast moving cat five that might hurt a little teeny place on the landfall, but then it’s rather non event for everywhere else. Whereas you could have a cat one that dumps tons of rain and is way bigger issue.

 

Dr. Jeff Masters  30:31

Absolutely. Yeah, the 12345 SAFFiR Simpson scale will use to rate hurricanes is based only on wind and doesn’t take into account some of the chief hazards which can be storm surge and flooding rains. So it’s wholly inadequate, we really need to go away from rating 12345, just based on winds, because as you noted, well, for instance, during Hurricane Harvey, I mean, that stalled for days over Texas and dumped up to 60 inches of rain and caused 100 plus billion dollar disaster. Most of the time, while it was doing that it was just a tropical storm. So catastrophic impacts. And it just a tropical storm, hurricane Florence back in 2018. Similarly, only a category one at landfall. But it also said all time rainfall records in multiple states 2030 inches of rain in some of the Carolinas and over $20 billion in damage. Again, very slow moving dumped a lot of rainfall, there really should have been a different warning put out for you know, I was saying in my blog, hey, you know, it only says category one. But this is a Category Five flood threat, we really got to come up with a better system of making that known

 

Jeff Malec  31:44

might Yeah, my vote would be basically average the three threats and give that it’s a cat four, because it’s only a cat one win, but it’s the cat five flood event. So we’re calling it a cat for whatever

 

Dr. Jeff Masters  31:58

you have in the European system that maybe we could go to they just got yellow, orange and red alert. And basically, Red Alert is unprecedented. So for Florence, we would have given a red alert for North Carolina said, you know, this is going to be unprecedented rains, you’re going to see a rainfall flooding event like you’ve never seen before.

 

Jeff Malec  32:23

There’s these hedge fund world catastrophe bonds. Are you familiar with them? So, you know, so essentially, the insurance companies don’t have the balance sheet or the desire to write all this insurance on all this high priced real estate and coastal regions. So these financial gurus came around and said, hey, we’ll sell we’ll help you sell catastrophe bonds, which basically the investors in those bonds, if there’s no hurricane damage, will they’ll get a yield and they’ll get a return if there is they could lose the whole value of the bond. So instead of a company going bankrupt, there’s a catastrophe, their bond goes bankrupt. But the fine print there. So in a Florence or a Harvey, it was flood damage, not not hurricane damage, and so the bomb doesn’t. So it seems like a pretty big mismatch between what’s what’s trying to be done there. And you you’ve been very good at quoting like the financial impacts. Do you see that growing? Dramatically? Like is that because just inflation overall? So I, I threw a lot at you there. But let’s start with the financial impacts. What do you see in overtime there?

 

Dr. Jeff Masters  33:33

Yeah, it’s a difficult problem to figure out just how much of the increase we’re seeing in financial damages is due to storms getting stronger, and how much is just due to the fact that more people live by the coast, they have more stuff, and therefore the losses are higher. I think that’s the dominant influence the fact that we’re more prosperous, more people are in harm’s way. But storms are getting stronger. I mean, it is an expected consequence of climate change, you put more energy into a system, you’re gonna get stronger events. And particularly with respect to hurricanes, that means higher winds and bigger storm surge and more flooding rains. So yeah, we’re already seeing an increase in damages. And that’s going to continue, particularly with respect to storm surge, because not only are the winds that are gonna pile up, the storm surge gets stronger, but we got sea level rise going on too. I mean, it’s only about three millimeters per year now, but it’s accelerating. And I expect by mid century, we’re going to see sea level rise is on the order of a foot, maybe a foot and a half over most of the coast. And stronger storm surges are going to be coming in on top of that causing incredible amounts of damage. I remember seeing a study by Lloyds of London on Hurricane Sandy’s damage in New York City. They found that if it hadn’t been for sea level rise over the past century storm surge in New York City would have had $2 billion less damage. So 2 billion storm surge can make a big difference in your damages.

 

Jeff Malec  35:10

And how are they calculating these damages? Or how do you get those numbers that’s insured losses are just total estimated damage.

 

Dr. Jeff Masters  35:18

That’s total because insured losses. A lot of people don’t have flood insurance. And they aren’t required to carry it for places, for instance, behind levee systems, where they supposedly have one in one or two year protection. So the National Flood Insurance Program requires you to carry flood insurance if you’re going to get a mortgage if you’re in a one in 100, or greater risk area. But those risk areas are not very well delineated. Now, those maps are old, in a lot of cases, they haven’t been updated for multiple years, even though they’re required to be, and they don’t give you the true risk, because climate change is continually adding to that risk. So a lot of there’s a lot of flood insurance that isn’t being carried. So I was just looking at total damages, not insured damages, to get get gives you a truer picture of what’s going on. It’s

 

Jeff Malec  36:06

nobody never really knows what the total damage. Right? It’s it’s still some sort of estimate.

 

Dr. Jeff Masters  36:11

Yeah, it is. I mean, the rule of thumb that the hurricane center always uses is that total damage from a hurricane is double the insured damage. So that’s probably within a factor of two. But in some cases, it won’t be I’m sure.

 

Jeff Malec  36:25

Do you personally have issues with like the insurance not covering? Right? Oh, that was a flood caused by Hurricane still seems like covered by your hurricane insurance? You want to wait?

 

Dr. Jeff Masters  36:37

I mean, with these sort of Multiwave threat? Storms? I mean, it should be made clear what the what the insurance is for? I mean, yeah, if you’re not getting flood coverage as part of your damage, then it invites abuse of the system.

 

Jeff Malec  36:57

Yeah. What What about you living in Michigan, and we see 10 years of increased activity on the coasts, and the federal government has to keep rebuilding and bailing these people out like, yeah, like they’re, you know, I know, issues. They’re like, why are we covering? Why do they keep rebuilding there, and we keep exactly

 

Dr. Jeff Masters  37:14

as I mean, I had a meeting with my, my rep in the House of Representatives, where I brought up to her, hey, you know, we’re subsidizing these people to live in risky areas along the coast, us in Michigan, we don’t have hurricane exposure here. yet. We’re taking our tax dollars and paying for people to build them barrier islands, paying for people to build and floodplains, paying repeated repetitive, less loss properties. I mean, I remember reading about one place on Dauphin Island, in Alabama, a barrier island off shore, where the some of these properties which are rental properties, the owner doesn’t even live there had been rebuilt four or five, six times over the past 20 years. And the amount of money that taxpayers have put into it, or several times the value of the property. It just doesn’t make sense. We should be retreating from barrier islands not rebuilding.

 

Jeff Malec  38:08

That’s probably an unpopular opinion in the developer world, right.

 

 

 

Dr. Jeff Masters  38:13

Yeah, that’s very unpopular. I mean, politics is king and money talks. But what’s going to be happening is, pretty soon, we’re not going to be able to spend the money to defend everywhere along the coast that’s going to need it, we’re going to get storms hitting over wider stretches of coast at higher intensity causing more damage, and there simply won’t be enough money in the pot to rebuild everywhere. I mean, the National Flood Insurance Program was already over 20 billion in debt. And that’s after multiple debt forgiveness is over the past few years.

 

Jeff Malec  38:46

So to protect or to rebuild, you’re saying are both?

 

Dr. Jeff Masters  38:49

Both. We’re going to need to do a lot of protecting we’re going to need to build a lot of sea walls and in the future. We already have a few I mean, New Orleans, they spent 14 point 6 billion after Katrina to rebuild that levee system. There are several in New England as well that were all built in response to Hurricane disasters, the 1950s Providence New Bedford, for example. One in Galveston, we’re going to need one in Tampa Bay, we’re going to need some in Florida, there’s going to be a lot of coastal defences that are going to be needed. Because if we don’t do it, we’re going to suffer astronomical losses.

 

Jeff Malec  39:26

And but is that even realistic, right, like so let’s take New Orleans so they spent 14 billion what can it withstand?

 

Dr. Jeff Masters  39:33

It can withstand a category three hurricane. So basically something that’s got a one in 100 chance of happening in a given year, which means over a 30 year period, it’s got about a 26% chance of happening. So not great protection, but you know better than it was. So it’s questionable whether that money was worth it. I mean, so far it’s worked out good. I mean, New Orleans was has withstood a couple of storms. Since the rebuild, but it’s not gonna last forever. I mean, it’s gonna get overwhelmed at some point and we’re gonna have to abandon New Orleans.

 

Jeff Malec  40:07

Right and like, I grew up in Vero Beach, Florida, which was that oh five or Oh, far when they had two hits right there. Oh four. Yeah, yeah. So every year they add sand to the beach every year gets swept away. And they right they kept trying to defend the boardwalk there. I don’t know what the cost of taxpayers was there. But it was like, it’s just insanity. It seems like of keep adding sand keeps getting washed away. And whole houses, our house was on the beach and eventually sold moved awake. And it’s was maybe 300 feet between the front of the house and the boardwalk down to the beach now is maybe 50. Which is just natural erosion. But that seems insane. And I wanted to touch on one in 100 year storm that gets used a lot in finance. And I think incorrectly perhaps, usually when someone saying oh, we could have never foreseen this loss this month, there was a one another and you’re, you know, move in XYZ asset. Do you feel like that’s a true thing in the weather and climate? Or is it kind of used in the same thing of just kind of meaning unlikely,

 

Dr. Jeff Masters  41:13

you know, a better way to look at it is that it’s a 1% chance of occurring in a given year. So, you know, 100 years on, odds are it’ll happen once. But you have to understand that if you keep on adding together that 1% Chance each year, that accumulates, like I said, over a 30 year period, a 1% chance yearly event is going to happen 26% of the time. So that’s probably a better way to look at the risk. And the risks aren’t stationary, they’re shifting. I mean, I want an 100 year storm, due to climate change is going to be more like a one and 20 year storm. Maybe in 30 years from now, it’s going to be that bad, that the risk will increase because you’re making stronger storms, sea level rise is happening. So the damages are going to go up. And we’re going to see a lot more damaging storms one and 100 year storms in the future.

 

Jeff Malec  42:05

But do you think even extreme weather hurricanes are normally distributed? So one and 100 year probability is based on a normal distribution, right? So if we’re talking about the height of people, right, that works, if we’re talking about financial markets, it doesn’t work. Right one and 100 year, things happen way more frequently, the tails are fatter. So I guess is whether or the tails fatter than what we would expect and what we’re building levees based on a hunt 100 year storm.

 

Dr. Jeff Masters  42:32

Yeah, the fat tails are the big issue here. It’s not the everyday, you know, sort of somewhat extreme events, it’s the tails are going to kill us. And those tails are a lot fatter than we think. And there’s synergistic effects that we don’t understand that are going to bite us that are making those tails fatter. Let me give you an example. Okay, this this summer, we had a just insane wildfire event in California in Oregon. We had, you know, yeah, so going on. Really intense drought intense heatwave some of the hottest temperatures ever recorded, and bad fires. Okay, well, you’d expect to see that with a climate change warming up things and drying out vegetation. Okay, yeah, we’re gonna get worse fires. But these were so much more worse than even those expectations brought us to believe because of the winds that came. Now. Why was it so windy? Well, we had a really unusual jet stream behavior. during that event, the jet stream kicked into this position where you had a really intense ridge over the western US and a deep trough over the Rockies. So intense, in fact that two days after Rapid City, South Dakota recorded at 102 degrees Fahrenheit, they had snow on the ground. So we’re talking by the repression of the most extreme variety you can imagine. So okay,

 

Jeff Malec  43:56

climate change in Rapid City, South Dakota, you

 

Dr. Jeff Masters  44:00

know, they know, Colorado also, they had, you know, five, six inches of snow two days after getting 100 degrees. And that extreme event, what it did is generate this really powerful once in a generation sort of wind event over Oregon, where you had incredibly strong tropical storm force winds blowing offshore, fanning these fires causing the firestorm that we saw in this ridiculous air pollution episode, catastrophic losses. Okay, so why did jet stream do that? Okay, well, now here’s where we get into the synergy between what climate change may be doing to us to fatten the tails of these distributions, these extreme events. For one thing, Arctic sea ice was at a second lowest value on record this year. We saw a massive heat event in Siberia over the summer, ridiculous temperatures. It got to 100 degrees in Siberia for the first time on record this summer, north of the Arctic Circle, all that heat caused a lot of melting, and made the Arctic sea ice coverage, the second lowest next year 2012. Now there’s a lot of research showing that when you take away that much Arctic sea ice, it has a synergistic effect on the atmosphere and climate that causes the jet stream to do weird stuff. Could it have caused a jet stream to do the weird thing we saw in South Dakota and drive this offshore wind event over Oregon? Perhaps the jury’s still out on that. But what we do know what caused the jet stream to behave that oddly, was the fact that there was a huge typhoon that hit South Korea three or four days before that. And that typhoon moved all the way up into Russia. And it caused a ripple effect on the jet stream. So it made the jet stream kind of go boiling and caused this oscillation. Okay, well, typhoons do that all the time. But what was uneasy, usual about this typhoon is it was at near record strength because of near record warm waters, and second good warm waters off the coast of Japan and Korea. Japan had its hottest temperature on record this summer in August, they hit an all time high over 105 degrees. And those record warm waters caused a near record strength typhoon, which then jumped into the Jetstream, causing it to go Boeing causing this weird oscillation over North America that drove this offshore wind event and this catastrophic firestorm that we saw.

 

Jeff Malec  46:23

So you’re saying it’s a complex system.

 

Dr. Jeff Masters  46:27

It’s a complex system that we’re pushing hard, in really unknown ways that are going to combine together to cause crazy things that we didn’t know could happen.

 

Jeff Malec  46:37

When we’re based. In financial world. When we talk about these complex system, we’re increasing the fragility right. So yeah, the more complex it is, the more thing, little things can cause something else to break elsewhere, essentially.

 

Dr. Jeff Masters  46:53

Yeah, and the complexity is also in the human systems that we have. Now, if we’ve got, for instance, a pandemic going on, right, yeah, that changes our response and our risk and our vulnerability. We didn’t see you know, the pandemic coming. That’s caused a lot of troubles that we didn’t anticipate in some of these natural disasters that have come at the same time as the pandemic. There are all these interlocking systems that have failure points that we don’t understand. And they’re gonna come bite us.

 

Jeff Malec  47:33

Favorite hurricane, if that could be such a thing. I don’t know if like,

 

Dr. Jeff Masters  47:37

Well, my least favorite was Hugo, obviously, since Yeah, nearly killed me. You know, hurricanes are fascinating. And certainly the stronger they are, the more fascinating they are. And the one that kind of boggles my mind is Hurricane Patricia of a few years ago, 2016 off the coast of Mexico, 215 miles, sustained winds, that’s like, if there were a category seven, it’d be a category seven. So that’s what we have to look forward to in the future or plan for in the future, more hurricane patricius. Because eventually one of those is going to form and hit the coast. And it’s going to be a real eye opener. I mean, that’s, we’re talking once it comes in, that’s like EF four tornado damage over a path 30 miles wide, something like that.

 

Jeff Malec  48:24

And so on up in the Gulf of Mexico,

 

Dr. Jeff Masters  48:27

or in the eastern Pacific off the coast of Mexico. Okay. And it turned out that weekend right before landfall, it only hit with 150 mile per hour winds, but still cost a lot of damage. And it didn’t hit a very populated section, the coast. But something like that could have just as easily formed in the Gulf of Mexico hit Tampa Bay or Houston. And the day is coming when we’re going to see a half a trillion dollar storm hitting the coast of the US.

 

Jeff Malec  48:55

It’s a lot, it’s a lot of dollars.

 

Dr. Jeff Masters  48:58

Well, it’s gonna cause a recession. I mean, yeah, the day is coming. I mean, Hurricane Katrina was 1% of GDP. And that was 150 ish dollar billion dollar storm. So think about maybe a 5% GDP storm that’s going to come and you can’t solve that with debt or right, the Fed can’t solve a hurricane. The Fed can’t.

 

Jeff Malec  49:22

What do you what about some people’s idea to detonate a nuclear bomb inside there?

 

Dr. Jeff Masters  49:30

You know, it seems to me like you’d get a lot of radiation spread all over the world, probably a bad idea. Plus the fact that that hurricanes generate like 100 nuclear bombs of energy per second, the hurricane just going to look at that and go, Oh, what’s that? It’s a little pinprick. It’s nothing. It’s not going to do a thing that causes a massive catastrophe of nuclear contamination. And what is there any way to cool down the waters? That’s there is yeah, you could potentially cause a hurricane to weaken by run Get over an area of ocean where you pump up cold water from deep. Using pumps at the surface. There have been some modeling studies done on it. It is feasible. But I worry about what’s that going to do when there’s not a hurricane? Or how’s it gonna affect weather program or weather patterns? Is it gonna cause a drought, it could very well cause circulation patterns that cause drought, drought is as big a deal as a hurricane more. So like I said, drought is the main enemy of civilization has caused more civilization to collapse than any other thing.

 

 

 

 

Jeff Malec  50:33

So, right. So you’d get the New Orleans people would vote for a complex system of under ground underwater pumps. But the Midwest might say no, thanks. We need our we need our grain, we need no droughts.

 

Dr. Jeff Masters  50:46

Yeah, the day may be coming where we got a result to resort to the Hail Mary. And that’s geoengineering, which we’re talking about now, to deliberately modify the climate to reduce the impacts, we can cool down the climate, we can cool down the ocean and reduce hurricane strength. Should we do that? Oh, boy, we don’t know what we’re doing. Now. It’s really risky to be deliberately messing with things on that scale. Maybe we’ll have to do it to save ourselves. But I sure hope not, I am not an advocate of geoengineering. But I think it’s okay to be studying it for now. There’s a lot of research being done on it. And in maybe one of these schemes will work out, spraying salt into the air over the oceans to reflect sunlight, cool the planet, spreading sulfur in the stratosphere to reflect sunlight and cool the planet. These are some of the geoengineering ideas out there, and they can work and they would work. But why we better know what we’re doing and read or not have any other choice.

 

Jeff Malec  51:47

Okay, that was Dr. Jeff, masters of Yale Climate Connections, Google that and check out his Ion Storm blog for more from Jeff. Next, we got some excerpts from our pod with Chris McCown, on the rarely talked about in super interesting world of reinsurance and how betting against hurricanes like this is actually packaged into a yield paying alternative investment. Send it. And that would it be fair to say like in parts of Florida, or Louisiana or Texas, like you either couldn’t get it, Hurricane insurance would be prohibitively expensive for individuals, if there weren’t reinsurance if the insurance companies couldn’t offset that risk?

 

Chris Mckeown  52:24

Yeah, there’s, over the years, the reinsurance pricing has become part of how insurance companies manage that risk and manage their own pricing. There’s, there are, as you know, in the United States, every state has their has an insurance commissioner that protects consumers and thinks about the regulatory framework for those insurance companies. But with so having having having taken care of that aspect of the business insurance companies then think about how, you know, the pricing of the risk, and including the reinsurance price gets passed on to consumers. In some, in some places, it’s too burdensome, honestly and state step in, you have states with state mechanisms like Florida, and other other states have have wind pools that are, are endorsed and support sponsored by the states, too. But but also, in most cases to encourage private capital deployment to the extent that we can find that balance. Sometimes there’s not enough price to pass on it, they are not insurable. But in those cases, the state steps in but generally speaking, again, insurance business strives to rationalize the pricing for the risk and, and find products that consumers can buy.

 

Jeff Malec  53:45

And then who are the investors? So family offices, pensions, endowments, like big institutional investors? We’re talking?

 

Chris Mckeown  53:52

Yeah, I mean, you think about so if you wanted to invest in insurance companies, you’d have a few choices, right? You could be a large private equity firm with with a long runway of watching valuation grow, or you could buy a lot of reinsurance companies are publicly traded, you could buy the public equity to that that gives you that’s, that’s another equity REIT that you’re purchasing or that so it’s a long term private equity play, to access the actual risk. The investors, as you mentioned, have have have created and the business has created what we call ILS insurance linked securities, which is a broad term and securities you need to put in quotes because while some of it is securitized, that is Cat bonds, which are 144 a securities, a lot of it is not they’re just private transactions that are that are crafted as securities but they’re but they’re not necessarily liquid securities, but the idea is that you as an investor, whether you’re a pension fund a sovereign wealth fund, a family office, large asset aggregator can invest specifically in the insurance risk, bypass them market risk bypass the execution risk the management risk and really sort of laser in focus to say I want I want to be exposed to Florida windstorm or Louisiana windstorm. And I will take the premium that you collect as a reinsurer I’ll take a share of that premium and provide you capital to, you know, to participate in that risk specifically.

 

Jeff Malec  55:21

Right? Yeah. Like nobody wakes up and say I want to be exposed to Texas wind, right? So they’re they’re having, they’re saying, Oh, I love this constant flow of income. And I know that there’s this risk on the other side of it, right?

 

Chris Mckeown  55:35

The benefit? I’m sorry, go ahead. Yeah. Go ahead. The benefits investors is really on the portfolio. It’s directionally non correlating risk. It when you think about them, the classic case we bring up as 2008 2008, with everything going on. And there were losses, by the way in the i