Insurance and Climate Change column

Climate Change Modeling is Closer than You Think

By | July 28, 2016

For the last few years you got a common response from catastrophe modelers who advise the property/casualty industry when asked about including the effects of climate change in modeling.

It went something like: “The industry isn’t interested in what the weather will look like in 30, 50 or 100 years, it’s focused on what extreme weather will look like next year.”

But lately it seems that more cat modelers are being asked if they can include the effects of climate change in their models, and at least one modeling firm is now gearing up to offer just that.

Boston-based AIR Worldwide is developing better tools to help its clients understand the risks of climate change.

The firm announced this on its website:

“Insurers, reinsurers, financial institutions, and policymakers are being asked increasingly tough questions about their resilience to the possible effects of a changing climate. AIR takes an active role in climate research and is committed to helping clients understand, measure, and manage the associated uncertainties.”

The firm says its scientists are collaborating with organizations like The Met Office, Geosciences Australia and the Association of British Insurers to quantify the financial impacts of climate change.

“Findings have indicated correlations between environmental factors such as sea levels and sea surface temperatures, and the intensity and frequency of natural disasters, including windstorms, floods, and coastal storm surge,” the site states.

No, the P/C industry hasn’t suddenly switched its focus to what’s going to happen 30-plus years from now, said Peter Sousounis, assistant vice president and director of meteorology in AIR’s research and modeling division.

Climate change continues to occur on a relatively slow time scale – slow relative to one-year renewal periods on property – but this doesn’t mean a warming world isn’t having affects in the here-and-now. Though that is still up for debate.

Sousounis and other modelers say the industry, and particularly the public sector, is coming to them for more information on impacts from climate change – Are rising sea levels putting more properties at risk? Are droughts being made worse? Can we expect more tornadoes?

“An aspect of climate change that we don’t understand is how it’s impacting the year-to year variability,” he said.

In other words, variability over the last five to 10 years may be much different than 50 to 60 years ago, and this is among the important questions firms like AIR and their clients want answered.

One of the questions Sousounis believes should be tackled sooner than later is how climate change will affect the variability of hurricanes and their forward wind speed.

If a hurricane’s forward speed slows, it could increase its time spent over, say, a city on the Eastern Seaboard, thereby increasing precipitation and exposure to high winds for the city’s inhabitants and all of its structures.

Just what does climate change have to do with the forward wind speed of hurricanes?

“The poles are warming at a rate that is faster than equatorial regions,” Sousounis explained.

This means the pole-to-equatorial temperature gradient is changing, and that in turn can alter the world’s atmospheric circulation.

That’s the brief version of his much longer tutorial he gave, which held that the frequency of the wave-shaped currents that circle the globe could change, slowing hurricanes down as well as creating other issues.

More severe damages from hurricanes could result, and particular regions may be more consistently exposed to the same weather – more heavy precipitation day after day in some areas, while other areas are plagued by prolonged heatwaves.

Including climate change in modeling may be easier said than done.

Multiple conditions are already factored into modeling, and the potential impacts of climate change add yet another dimension to the mix, according to Tom Larsen, a product architect for Irvine, Calif.-based CoreLogic.

Larsen kicked it into mathematical mode, as modelers are often do, explaining this in terms of X and Y dimensions, plus the depth of the atmosphere, and the time element. He thankfully didn’t assign lettering to the last two dimensions, effectively dumbing things down for me.

“You’ve got four dimensions that your dealing with,” he said.

Attempting to factor in the impacts of climate change effectively doubles all of that.

“It’s a 16-fold increase in analytics,” he added – or rather multiplied.

This isn’t to say the task is impossible.

The academic world is increasingly developing their own models and adding to a growing set of research on climate, which AIR and other modelers can seize upon in their efforts to make better products.

If nothing else, the availability of more data is always attractive to P/C insurers, Larsen said.

“The market is becoming more accepting of these models,” he said. “We are getting more requests at different levels. It’s certainly not on the top five list for many of our clients, but it is on the important list.”

Most in this field say the biggest interest in modeling for the impacts of climate change is coming from the public sector, which much must think about planning on a far longer scale.

Planning for buildings often requires at least a decade of forethought, and planning for infrastructure even longer.

A report out in July from Rand Corp. shows climate change has the potential to severely impact U.S. infrastructure, and it finds that natural hazard exposure that may be caused by climate change is concentrated in regions like the Atlantic and Pacific coasts and the Mississippi River valley.

“The public sector definitely has a long time-horizon,” Sousounis said. “That’s a whole other group of stakeholders that we’re targeting in terms of our research interests.”

Silicon Valley-based Risk Management Solutions has already begun offering its services to the public sector. RMS recently performed a future climate modeling scenario for San Francisco, which found in May that $77 billion worth of property could be at risk of storm surge/flooding as a result of sea level rise.

The analysis was used to inform the city’s recently released Sea Level Rise Action Plan. Following that the city’s mayor announced an $8 million investment over the next two years to begin strengthening the city’s seawall, which provides flood protection to the downtown district.

RMS last year partnered on the Risky Business initiative, a year-long effort co-chaired by former New York Mayor Michael Bloomberg, former Treasury Secretary Henry Paulson, and Farallon Capital founder Tom Steyer, to quantify and publicize the economic risks the U.S. faces from the impacts of a changing climate.

RMS provided an analysis of the impacts that climate change will likely have on coastal infrastructure and related assets for the initiative.

Robert Muir-Wood, chief research officer for RMS, said the recent projects, which look as far out as 2100, weren’t without challenges.

“It’s greater uncertainty as you look further and further out,” Muir-Wood said. “As we’re looking at climate change, you’ve got to model more and more of the uncertainty.”

Muir-Wood sees this sort of municipal modeling and consultation is a whole new part of their business with great potential for growth.

“I think it’s a new kind of client,” he said, adding, “It’s very early days I would say. I think there is going to be increasing interest in the public sector to explore risk into the future.” ”

Most of the climate change-related questions Steve Bowen hears from his clients relates to just how this is going to be done.

“I will say that I think in general there’s been a lot of feedback from clients and the industry as a whole in trying to figure out how the cat modeler is going to take the whole topic of climate change and model it into their climate solutions,” said Bowen, who is a director and meteorologist at Londonbased Aon Benfield analytics and impact forecasting.

This may be more than mere curiosity about the future. It could be that some people in the industry think the climate change is already affecting the weather. That includes Bowen.

“The fact of the matter is we’re already seeing this impact today,” he said.

Bowen, like the others interviewed, cautioned that modeling is not an exact science. But he is confident that warmer seas are yielding more intense storms.

“They tend to be causing more damage when they occur,” he said. “You’re tending to see higher losses. There are some of these climate change discussions taking place currently and that is being put into these contracts, and I would expect you’re going to see more and more of that as we move forward.”

He wasn’t short on examples of higher losses when asked.

China is experiencing its worst flooding in decades from an intense monsoon season, Bowen said.

“They’re looking at a $25 billion economic loss from floods on the Yangtze river basin,” he added.

He also pointed to drought in other parts of Asia, Australia and Brazil, as well as several consecutive drought-fueled wildfire seasons that have started early for California.

“The U.S. loses have been way up in terms of hail loss, especially in Texas this year,” Bowen said.

CoreLogic earlier this month estimated losses from hail events this year in Fort Worth, Plano, Wylie and San Antonio totaled $689.6 million.

Then you have 2014 being the hottest year on record, then 2015, and 2016 doesn’t look too cool either, he said.

“Something’s certainly happening,” Bowen said.

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