Seasonal hurricane forecast skill and relevance to the (re)insurance industry

Accumulated Cyclone Energy (ACE): The ACE of a season is calculated by summing the squares of the estimated maximum sustained velocity of every active tropical storm (wind speed 35 knots (65 km/h) or higher), at six-hour intervals. The result is then multiplied by 10-4 to make the numbers more manageable. The unit of ACE is 104kn2. Seasonal hurricane forecasts are eagerly anticipated each year by coastal residents and businesses, emergency management agencies, and of course insurers, reinsurers and holders of US wind exposed Cat Bonds. In view of the potential societal impact of hurricanes, forecasting techniques are discussed widely in the scientific literature, where several different forecasting approaches have been put forward (Gray 1984; Elsner and Jagger 2006; Vitart 2006; Wang et al. 2009; Saunders and Lea 2005; LaRow et al. 2010; Vecchi et al. 2011). Many of these approaches are implemented by forecasting groups that provide regular and publicly available seasonal forecasts. The performance of forecasts in the 2013 season was unsatisfactory where hurricane activity was significantly overestimated by all. This raises the central question: “How skillful are seasonal forecasts?” that this paper addresses by comparing past forecasts with observed hurricane activity and introducing the reader to statistical measures of “skill”. We also consider the application of these forecasts to the (re)insurance industry. Seasonal hurricane forecast skill and relevance to the (re)insurance industry