According to a recent commentary from Man Group, the global alternative and active investment manager, the rising frequency of rapid intensification is posing new challenges for catastrophe bond investors.In its latest commentary, written by Andre Rzym, Partner, Head of Systematic Opportunities at Man AHL and Tarek Abou Zeid, Partner, Head of Client Portfolio Management at Man AHL, the company highlighted Hurricane Erin, the fifth named storm of this year’s Atlantic season, which intensified from Category 1 on August 15 to a Category 5 major hurricane just a day later.“Rapid Intensification (RI) is the term used to describe a windspeed increase of at least 30 knots (kt) over a 24-hour period.In the case of Erin, the increase was 75kt, the fifth highest on record, and the informal term ‘explosive intensification’ captures what happened rather better,” Man Group explained.

Data shared by Man Group shows that the nine most extreme examples of rapid intensification have all occurred within the last 20 years, underscoring the growing challenges for cat bond investors.“While hurricane path forecasts are improving, forecasting intensity changes is even more challenging.The path of a hurricane is largely determined by the large-scale environment, whereas intensification seems to be also affected by much smaller-scale details in the hurricane’s core,” Man Group said.

“The presence of wind shear can either enable or inhibit RI, but it is not even known whether hot towers in the core are causally related.” However, the investment management firm stresses that this is particularly problematic when RI occurs unexpectedly near land, since preparedness planning is a function of both landfall location and intensity and may then need to change rapidly.“To put this in context, were a Category 1 to make landfall one might expect some roof damage and a few days’ power outage, whereas a Category 5 making landfall will destroy most homes, with total roof failure, wall collapse and the area being uninhabitable for weeks or months,” Man Group added.The firm also pointed to last year’s Hurricane Milton, the strongest hurricane on record in the Gulf of Mexico, which illustrated how small track deviations can lead to dramatically different insured losses.

Ultimately, Man Group concludes that rapid intensification introduces a new layer of uncertainty to insured loss forecasting, complicating risk assessment for cat bond investors.“How should an investor think about rapid intensification? The rising frequency of RI adds complexity to risk assessment, but the reality is that it sits alongside other non-stationary drivers of loss including sea temperatures, sea levels, and atmospheric conditions.“Collectively, these impact the frequency and severity of storms making landfall.

As a result, market pricing is not just a function of expected risk, but uncertainty in that estimate itself.We believe that diversification is the most powerful mitigant available, most notably by peril, geography, seniority and coverage type,” Man Group concluded.Man Group’s commentary on rapid intensification of hurricanes and what that means for insurance-linked securities (ILS) and catastrophe bond investors is particularly timely in 2025.

The Atlantic hurricane season this year, while not yet causing any impacts or losses to the ILS and cat bond market, has thrown up plenty of examples of what the market needs to be aware of when investing.First, the 2025 hurricane season is the first in 90 years where the first three Atlantic hurricanes to occur have all reached major status, at category 3 wind speeds or higher.We’ve also seen three hurricanes that might be seen as having undergone rapid intensification, hurricane Erin whose maximum sustained wind speeds rose by 85 mph in just over 24 hours, Humberto whose maximum wind speed increased 85 mph in 24 hours, and Gabrielle whose maximum wind speed increased 65 mph in just 24 hours.

In addition, hurricane Erin saw its wind speeds rise by 65 mph in just a 12 hour period, while its minimum central pressure dropped by 55mb, putting it in the top-three cases for these metrics in rapid intensification scenarios.This year the ILS and cat bond market has been fortunate so far to see these storms recurving out at sea, but it will not be so lucky ever year and so considering how hurricane dynamics such as rapid intensification can occur is critical for investors into the asset class, as Man Group rightly highlights..All of our Artemis Live insurance-linked securities (ILS), catastrophe bonds and reinsurance can be accessed online.

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