Changing Weather Patterns Mean an Uncertain Future and Increased Risks

By Charles E. Boyle | May 30, 2014

In his discussion of the effects of climate change at the European insurance Forum in Dublin,  Prof. Richard Tol of the Economics Dept. of the University of Sussex, pointed out that even “after 40 years all climate models still aren’t very good,” as the “the weather is no longer stationary.” Although what that will produce is mostly unknowable, he said “there’s little doubt, however, that future extreme weather will be very different than today’s.”

The increasing uncertainty of what the weather might bring has been accompanied by increased losses, both economic and insured, which, Tol said, are “mostly due to more people, more vulnerability;” in short “more stuff” that needs to be insured, and in return makes managing the risks more uncertain.

Last winter saw near record cold in the U.S. and Canada, the Philippines was hit with the most powerful typhoon ever to make landfall, and large parts of the UK experienced the the worst floods  since 1948. December and January were the wettest for those months since detailed data was first published, in 1910. By contrast in Northern France last winter it did rain, but for the first time since I moved to the region in 1976, the temperature never got below freezing, and it never snowed.

Unlike catastrophe models, which are increasingly sophisticated and incorporate more and more relevant data, climate models are a more of a leap in the dark. The data available may, or may not, be relevant to the present, let alone the future. Even the best models can’t predict exactly what future weather patterns will be, only that they will be different, and in all likelihood hotter and wetter.

"You need to improve risk management,” create “awareness, incentivize and lobby authorities, unless you want to shift the risk back to the client.” Prof. Richard Tol of the Economics Dept. of the University of Sussex

This situation creates more risks, as it produces greater uncertainty, and it calls for solutions that can address what is known about those risks in ways that may lessen their effects. The re/insurance industry is perhaps the first line of defense in those efforts. It provides the capital to underwrite property policies, and is in a position to induce governmental authorities on both local and national levels to impose regulations that will mitigate rising sea levels, stronger windstorms, increased flooding, droughts and wildfires.

“Your uncertainty has increased,” Tol said; “so you need more risk capital, higher premiums, more cat bonds, integration with banks, and backup by governments.” Or, put another way, “you need to improve risk management,” create “awareness, incentivize and lobby authorities, unless you want to shift the risk back to the client.”

 

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