When exploring the potential influence of changing climatic conditions on hurricanes, it’s important to recognise that trends in exposure may be even more important than trends in climate change, according to Dr. Pete Dailey, Head of Research at Aeolus Capital Management.
Earlier this month, our sister site Artemis.bm spoke with Dailey and Frank Fischer, Chief Analytics Officer at Aeolus, the insurance-linked securities (ILS) and reinsurance investment manager, about their ongoing program of climate risk research.
During the Artemis Live video interview, available to view on-demand, Aeolus provided an update on its research with a view to how this impacts its decision making in the ILS space and beyond.
The company’s latest paper centres on hurricanes and climate change. As our readers will be aware, hurricanes were a key driver of some of the recent heavy loss years experienced by insurers and reinsurers.
At a time when industry losses from hurricanes has been elevated, the climate debate has intensified around the world, and notably in the re/insurance industry as companies attempt to accurately price for evolving risks in an uncertain and changing climate.
“First, from an observational point of view, it’s clear that actual observed hurricanes are confirming that these events are becoming more costly over time, and that’s likely the result of compounding factors,” said Dr. Dailey. “Two of the most important ones being, first, increased exposure. In other words, more insured property value in harm’s way of hurricanes. And, secondly, that hurricanes have higher damage potential resulting from warmer ocean temperatures.”
While the new paper from Aeolus does focus on climate change, it also mentions exposure value, which Dr. Dailey feels is an important factor.
“It’s important to acknowledge that trends in exposure may be as important or perhaps even more important than trends in climate change, because they’re both factors that play into the overall risk profile,” he said.
“So, when we talk about the exposure itself, it’s important to separate trends in exposure over time with trends in climate over time. While they are intrinsically tied together when we assess a major loss event, because we basically tally up the damage, we tally up how much of that damage is insured, and how much will be paid out in the way of claims. That’s the total insured loss. That is a combination of changes in exposure and changes in the hazard,” he continued.
Of course, other economic factors come into play such as inflation and escalating labour and material costs as a result of strained supply chains and shortages, which often follow a major catastrophe event like a hurricane.
“So, on the exposure, the economic loss side, it’s important to acknowledge that those trends can be extracted from the data and understood alongside the hazard changes,” said Dr. Dailey.
On the hazard side of the equation, Dr. Dailey explained that Aeolus sees “that advances in climate models and fine scale weather models are allowing us to better understand the relationship of warming oceans, which is the main energy source for hurricanes to tropical cyclone development.”
“And, in turn, the contribution of climate change to overall hurricane risk may be important to consider year-over-year. Whereas we think about climate change changes as taking place over very long periods of time, we can still kind of consider those changes annually.
“So, in separating the trends and the hazard, and the trends and the exposure, we can start to sort of dissect the relative contribution of these factors to the overall risk,” he said.
Watch the full video interview on-demand here.
