Risk management and modelling vital to secure nat cat insurability

Risk management, catastrophe modelling and government support will be key to keeping natural catastrophe perils insurable in a changing climate, insurance industry experts have told Commercial Risk Europe.

This year has seen record-breaking floods in Europe, as well as wildfires, heatwaves and the costliest US winter storm on record. Increasingly, scientists are linking the increase in extreme weather events to climate change. The latest United Nations IPCC report concluded that human activity has led to “unprecedented” climate changes and associated extreme events. In September, the World Meteorological Organization also said weather-related disasters have increase by a factor of five during the past 50 years, while economic losses had increased sevenfold.

“These events should serve as a warning that we are in crisis mode. Corporations should take concrete actions to reduce their impact on the environment and protect their operations from these changes. Corporations need to think for the long term,” said Amar Rahman, global natural hazards practice leader at Zurich Insurance.

Rising catastrophe losses are already helping to fuel growing demand for catastrophe insurance and reinsurance, according to Yordanka Velichkova, Swiss Re’s catastrophe perils portfolio lead. “Increased (re)insurance demand for effective nat cat protection is already here today and expected to rise – the global natural catastrophe protection gap is far from closed,” she said.

If the (re)insurance industry is going to be able to continue to provide risk transfer solutions for nat cat risk, it need to better understand exposures, particularly secondary perils, added Ms Velichkova.

“Natural catastrophe modelling capabilities for the peak perils such as hurricanes, earthquakes and typhoons are an undisputed fact, both as a costing as well as a risk management tool. For secondary perils such as hailstorms or wildfire, modelling capabilities, however, are far less developed. In view of the growing prominence of secondary peril events and associated losses, more attention to this risk set is needed. This is a prerequisite for sustainable coverage in the long run,” she said.

As insurers develop confidence in climate-change projections, they can develop innovative products based on future scenarios, according to atmospheric scientist Daniel Bishop from catastrophe modelling firm Karen Clarke & Company (KCC). “The KCC models also provide valuable information to insurers on the impacts of various mitigation strategies that have the potential to reduce the rising costs of catastrophes. Property owners that invest in mitigating potential damage will also gain from lower premiums that reflect the benefits of mitigation,” he said.

KCC scientists are integrating observed climate trends into catastrophe models, according to Mr Bishop. KCC is also developing nine future climate scenarios, as well as three emission pathways – for 2025, 2030 and 2050 – that represent the low-emission best-case, middle-of-the-road best-estimate and high-emission worst-case scenarios for each of its peril models, he added.

“The KCC future scenarios will provide a baseline to assess future risk and will be paramount to guide the insurance industry through a changing catastrophe risk landscape in the coming decades,” said Mr Bishop. “The KCC future scenarios, currently being developed for the US Hurricane Reference Model, the Flood Model and the Wildfire Model, will capture the full impacts of short- and long-term climate change on future exposures,” he said.

According to Mr Rahman, risk managers and insurers need to make use of these emerging tools and not wait for future developments. “All aspects of climate change are evolving and developing, from climate data and analysis tools to mitigation technologies and regulations. We can’t afford to wait until these have matured and need to take immediate action,” he said.

“We need to use the available data and tools, even if they are still in development and don’t provide all the answers, to assess and quantify the risks to our organisations and develop solutions that serve not only the financial objectives of an organisation but society as a whole. This requires close collaboration between academia, regulatory bodies, all levels of government, industry and society,” Mr Rahman said.

And the corporate risk manager role requires a “paradigm shift”, he continued. “The risk manager should play a pivotal role in defining the mitigation and adaptation strategies, and defining and implementing the associated measures. There are huge opportunities for companies taking the lead in changing the way they operate but if these changes are not carefully managed, there are also risks associated with implementation,” he said.

A full version of this story will be available in Commercial Risk Europe’s September issue.