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Managing the Impact of Climate Change

Apocalyptic wild fires burn grasslands Superior homes in Marshall fire outside Boulder Colorado
High winds 80 to 100 miles per hour fueled apocalyptic wild fires which tore across open grasslands and through homes in Superior, Colorado. An estimated 500 to 1,000 homes were destroyed by the Marshall fire outside Boulder, Colorado which was sparked by downed power lines in high winds on December 30, 2021.
milehightraveler/Getty Images

How can re/insurers manage growing catastrophe risks if lessons from the past no longer apply?

The COP26 conference in Glasgow ended amid dismay that world leaders had failed to agree to tougher carbon emissions limits. Time is running out to avert a climate disaster, scientists and activists argue. The effects of climate change are already being felt, say some experts, and re/insurers agree, blaming global warming for their record weather-related claims.

Having been caught out by mounting losses from natural catastrophes, re/insurers are increasingly critical of cat modellers for what they see as their inability to factor in the effects of climate change. Peter Zaffino, AIG’s President and CEO recently told investors: “over the last five years, on average, models have been 20% to 30% below the expected value at the lower return periods. If you add in wildfire, those numbers dramatically increase.” He concluded: “industry losses, compared to model losses at the low end of the curve have been deficient and need rate adjustments to reflect a significant increase in frequency in cats.”

Rising sea levels mean that for any given event, the storm surge seen today would be different to that seen 100 years ago.
Joss Matthewman, Senior Director, RMS
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Modeling firms have defended their products against the criticism. Joss Matthewman, senior director at risk modelling firm RMS, says: “For each of our models we have undertaken an assessment of all the climate data used to build the model and have also undertaken a thorough investigation of the scientific consensus surrounding the impact of climate change to date.”

But he argues: “Significant challenges exist for most perils for extracting climate change signals from other effects, for example natural variability. But where there is consensus, such as rising sea levels since the pre-industrial era, we aim to incorporate these effects in our models when we build them.”

Cat models are based on weather patterns going back over centuries to predict when and where catastrophes may strike. But scientists agree that climate change means the past is no longer a reliable guide to our weather in the future.

Climate scientists are working hard to predict what the weather will be in 20-,30-, or 50-years’ time. But that’s also little help for a re/insurer wanting to know what price to charge next year for the risk of a hurricane hitting Florida or a wildfire in California.

So, reinsurers are coming up with their own answers. Helped by extreme event attribution, a new school of climate science linking global warming with what’s happening to our everyday weather, they’re using cutting-edge scientific research and detailed comparisons of the catastrophe models’ predictions against how much they’ve paid out on recent natural disasters to understand what’s going on with the weather.

Swiss Re, for example, has a team of more than 50 climate experts working on its proprietary catastrophe models. It regularly updates these with the latest scientific research, some of which it commissions: it recently worked with Columbia University to understand the impact of climate change on North American hurricanes.

Uncovering The Everyday Signs of Climate Change

Re/insurers say their research reveals that climate change is already here.

Temperature-related climate extremes, such as more frequent and/or severe heat waves, can be attributed more robustly to anthropogenic climate change.
Yordanka Velichkova, Catastrophe Perils Portfolio Lead, Swiss Re
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Ernst Rauch, Munich Re’s chief climate and geo scientist, says convective storms are worsening as a direct result of climate change. “These events are on the rise, as are the losses from them. An example is low pressure system Bernd. The total loss for our industry stands today at €9 billion, of which between €7 billion and €8 billion is from Germany alone. It’s a record, but it’s part of a trend that we have been noticing for decades.”

Although extreme event attribution is a relatively new discipline, Yordanka Velichkova, catastrophe perils portfolio lead at Swiss Re, says: “Temperature-related climate extremes, such as more frequent and/or severe heat waves, can be attributed more robustly to anthropogenic climate change compared to more dynamic atmospheric hazards such as tropical cyclones. Furthermore, researchers have been able to link, for example, the increase in wildfires in California with drought conditions that were most likely amplified by a warming climate.” The risk of more, and more devastating, wildfires in California has increased by 70-110%, Swiss Re says.

Increasingly powerful Japanese typhoons are also being blamed on global warming. Three powerful typhoons that hit Japan between 2018 and 2020 seemed to surprise the industry, which had to pay claims of more than $5 billion for each — much higher than the models predicted. Hiscox Re’s research team found that, among other factors, not only had the number of severe typhoons near to Japan increased in recent decades, but that the latitude at which storms reach their maximum intensity had shifted, putting Japan at greater risk. It responded by changing its rating model, as did Swiss Re, to take account of what the Zurich-based firm estimates to be a 50-80% increase in risk.

Climate change is also changing the track of other storms, some re/insurers argue. US hurricanes are increasingly moving further north and becoming stronger, according to a recent study by Chaucer. The proportion of storms hitting the most vulnerable states, like Florida and Georgia, has fallen over the past 20 years, while central and northern states, from the Carolinas to New England, are getting hit more, it found. Storms are also becoming more intense and slower moving. “We can expect to see the trend of more severe hurricanes continue as long as the climate continues to warm. This will mean higher windspeeds and greater precipitation, which could ultimately lead to more property damage,” says Dana Foley, Chaucer’s head of catastrophe research.

The damage wrought by hurricanes is also increasing because of rising sea levels. “Rising sea levels mean that for any given event, the storm surge seen today would be different to that seen 100 years ago,” says Matthewman. A storm surge created by 2012’s Hurricane Sandy, measured at nearly 14 feet at Battery Park in lower Manhattan (exacerbated by an unusually high full moon tide) flooded large sections of lower Manhattan, causing $2 billion of the damage to New York City.

Picking up The Climate Signals

But are re/insurers right to blame their rising natural catastrophe losses on climate change? Just how clear are the climate signals they’re picking up?

Munich Re’s Rauch says it’s possible to tune out the other factors also driving increased insurance losses to hear clear climate warning signs. “We have been collecting information on losses from weather-related events for the past 50 years and can identify those weather-related peril in regions where we see [climate-change-related] trends occurring, after ‘normalizing’ them, so taking out inflation, changing wealth and populations.”

But some are unconvinced. “Teasing out the climate change signal amid the myriad other factors contributing to loss is statistically impossible,” says Robert Hartwig, the former president of the Insurance Information Institute and now Clinical Associate Professor at the University of South Carolina’s Center for Risk and Uncertainty Management.

Teasing out the climate change signal amid the myriad other factors contributing to loss is statistically impossible.
Robert Hartwig, Clinical Associate Professor at the University of South Carolina’s Center for Risk and Uncertainty Management
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Hartwig is convinced that “climate change is real,” but states: “The noise around the economic, demographic and geopolitical factors is so large as to swamp the relatively faint signal emitted by climate change specifically.” As a result, “incorporating location and peril-specific climate change rating factors is beyond the realm of actuarial science today.”

Swiss Re’s Velichkova acknowledges that “the attribution of extreme events to climate change is always challenging, ” but stopped short of blaming global warming for storm Bernd. She said climate change is just a part of the story. “The contributing factors to this summer's flood need to be judged in a wider socio-economic context beyond the role of climate change. Land-use changes, especially the continuous increase of built-up land and surface sealing, and the economic development in flood-prone areas have significantly amplified the risk in several affected areas.”

Hartwig says: “I have long held that increases in economic damage associated with climate-related risks over the past 100-150 years are driven primarily by factors apart from climate.”

The destructive power of hurricanes was already well known in Florida in 1920, but that didn’t prevent its population from increasing 22-fold over the following century. Many of those chose to live along the coast, creating pockets of stratospheric property value in the most vulnerable areas. It was a similar story in Texas. The growing wealth and population put these states on a “collision course” with the climate risk, Hartwig argues. “The story of Florida and Texas has been replayed in many areas around the world. The economic, demographic, and geopolitical forces at play absolutely dominate any signal from climate.”

Where Do We Go From Here?

Aside from the debate around extreme event attribution, the real issue, on which everyone can agree, is that there’s been intense and rapid development in places around the world that were known to be vulnerable to catastrophe. Re/insurers’ warnings of the effects of climate change on at-risk regions amplify the dire scientific predictions about an imminent climate disaster if global warning goes unchecked and could help finally spark a proper debate about not only how but where we live in a world with a more hostile climate.

Rauch says re/insurers should play an active role in that debate, because their accumulated wealth of data on natural hazards could prove invaluable in helping communities adapt to climate change.

Regardless of how clear the current climate signals are in today’s natural disasters, the message that increasingly valuable property being built in at-risk areas is leading to bigger losses is obvious — providing people listen. Hartwig concludes: “The price of re/insurance is among the most direct signals of risk associated with climate events. It is up to private interests, populations and governments as to whether they will heed that signal.”

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