​Insurance in a Changing Climate: Implications for the Cat Modelling Community

The London arm of the ISCM gathered on Monday, 23 September 2019 in the Lloyd’s Old Library to discuss the challenges and the opportunities presented to our community by climate change. 

The afternoon was organised in two parts:  first we heard the Chief Risk Officer’s perspective with a presentation by Vinay Mistry from Channel Managing Agency, followed by a panel of distinguished market scientists and experts moderated by Richard Dixon.

Part I - The Chief Risk Officer’s Perspective
Vinay Mistry (CRO Channel Managing Agency)

The concurrence of the ISCM event with the UN forum on Climate Change (the one famously attended by Greta Thunberg) wasn’t lost on the minds of attendees and speakers, and Vinay made an ice breaker of it by mentioning that other climate change events were available. That opening line set the tone for an informative and thought-provoking presentation, delivered informally but sharply.

The main argument presented by Vinay is that climate change presents us with a set of risks which we are called to manage but also a set of opportunities which, when identified, can be transformational for our industry and for us as practitioners. Vinay explained that the direct impact on top and bottom line is not the most immediate concern, in his view transition risk has the potential to be most impactful, especially when it comes to step changes. The challenge here is to correctly identify not the magnitude but the direction of change, as in the short-term global warming can produce extreme and unexpected localised effects.

Climate change is however already opening new opportunities for our industry: the emergence of flood as a major catastrophic peril is one we are most familiar with but looking ahead marine vessels might soon be able to navigate the arctic route and energy business is already moving into renewables. We will need to deal with a new set of regulations, possibly leading to new ways of managing capital. 

Vinay concluded his speech with a forward looking and positive note. He identified three key ingredients to manage the risks and take advantage of the opportunities: communication, improved tools and the ability to reframe our mission to include social and environmental conscience alongside profit.

The Q&A session highlighted the need for collaboration industry wide. Dickie Whitaker from OASIS gave a few examples of the type of forums already active that might facilitate collaboration. 


Part II - An Expert Industry Panel

Moderator: Richard Dixon (CatInsight)
Tom Philp   (Manager, Science in the Science and Natural Perils function at AXA XL) 
Jessica Turner   (Senior Vice President, Catastrophe Advisory at Guy Carpenter)
Paul Wilson   (Head of Non- Life Analytics at Securis)
Ioana Dima-West   (Executive Director, Head of Model Research and Evaluation at Willis Re)

The panel discussion was focused around five key questions which gave each panellist the opportunity to expand on their point of view. The key questions discussed were as follows: 

Q1 - What are the impacts of Climate Change on Catastrophe Risk and does the science help us?

The consensus among the panellists was that climate change impact can particularly affect so-called “secondary perils”. For instance, storm surge and rainfall flooding seem to be becoming more prominent in tropical cyclones. The challenge however is the science is not mature enough, we can in some cases be fairly confident of the direction of change, but we have little evidence to quantify it.

Further considerations were made about the adequacy of the current catastrophe models, with regards to their use to model multi-year deals on an aggregate basis. But even when considering the typical one-year time horizon it is difficult to say whether our models correctly reflect the risk.

We also discussed the need of cat-model vendors to quantify and communicate how much climate change is already included in their models. Vendors need to justify why climate change is or isn’t explicitly accounted for – e.g. a good reason why it isn’t would be that the direction of a change in a specific peril is uncertain but is considered by the scientific community to be within historical inter-annual variability.  Statements like this are already made in some white papers.

The conclusion was that science helps us when it is convergent. If multiple sources point in the same direction we can be more confident of the signal and it is more appropriate for us to implement new adjustments or new features, but care is needed. Interpreting this is a role for applied scientists within the industry.

Q2 - Is it fair to say our response is driven by regulation?

The consensus among panellists was that regulation certainly plays a role. In countries where this is not happening conversations about climate change are more difficult.

However at least another two important factors influenced our agenda on climate change: the role of investors and the role of public entities. Within the ILS market for instance, end investors are increasingly questioning the impact of climate change on catastrophe risk and their continued confidence in the asset class requires a robust response to how climate change is considered and included in our modelling. Beyond the insurance market, government and public entities have been working with Cat Model vendor companies for many years, using and adjusting their models to answer questions on the financial impacts of climate change, relevant to their long term needs for resilience.

It is arguable therefore the work of the PRA came after enough momentum had built in the industry already.

Q3 - What can we realistically achieve when the vast majority of our work is based on a time horizon of one year?

The panel acknowledged the question was addressing an important aspect, as climate change effects will inevitably be negligible over the course of one year. Two important considerations however followed. 

Firstly, the need was identified for the cumulative effects of climate change to be incorporated in our current models. When pricing and transacting business we might still want to quantify the impact of sea level rise on the potential for storm surge and the leading vendor models already do this. 

Secondly, longer time horizons are indeed present in our everyday work even if they might occupy less of our time. In the mid-term horizon, for instance, we want to consider possible changes in asset values and the ever present risk of stranded assets which are factors that influence exposures and vulnerability. In the long-term environmental social and corporate governance takes centre stage.

The conclusion was a call to be proactive. We, as practitioners, should be building a dialogue with the board, in order to be the ones framing the narrative in the long term.

Q4 - What would your ideal research dataset be?

After agreeing data is plentiful and easy to reach, the panel went on to disagree on how to use it and for what. Several suggestions were made, each tailored to a slightly different use case and the goal of each panellist. The most significant can be summarised as follows:

It would be useful to have a set of projections with a slightly shorter term, say 2030 instead of 2050;
Reach a better understanding of changes in probability for extreme events, in the short as well as in the long term;
Greater scrutiny on current models and better documentation to use academic studies more effectively.
Communication to academia (or even to insurers) by vendor modellers as to what they have derived their “baseline” historical period for risk
Work with academia to translate scientific output into cat-modelling ingestible ‘variables’: e.g. instead of “changes in precipitation”, provide information on “changes in flooding events” 

Q5 - Are we biased towards thinking things are getting worse?

The panel agreed there are areas where things will get better and these need to be recognised. The challenge is always around communication, as many of these factors will sound counter-intuitive to our audience. A suggestion was made that uncertainty around climate change is a much bigger issue than we are used to. However, our industry is fundamentally built on uncertainty – thus for some stakeholders in the market, climate change may present commercial opportunities e.g. insuring renewables or development of new products.

Concluding the afternoon was the remark our community has been used to thinking about climate change for decades now. Our experience makes us best placed to tackle the issue, and events like the present one will ensure we will also be best equipped.