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Work of the scientific community and re/insurers needed to assess climate change: Lloyd’s

15th September 2021 - Author: Luke Gallin

To better assess the impacts of climate change over time, there’s a real need to integrate the work of the scientific community with the actuarial work undertaken by the re/insurance industry, according to Dr. Kirsten Mitchell-Wallace, Head of Portfolio Risk Management, Lloyd’s.

Executives from the specialist Lloyd’s insurance and reinsurance market held a virtual climate change discussion yesterday, as part of the 2021 rendez-vous de septembre conference.

Hosted by the Lloyd’s market’s Chief Executive Officer (CEO), John Neal, the event highlighted the challenges and opportunities for the re/insurance industry presented by the changing climate, the role of Lloyd’s within this, and the importance of private and public sector collaboration to foster creative and realistic targets.

Across the industry, the climate debate has intensified amid a rise in the frequency and severity of certain perils, which, as asset values rise and people continue to build on and live in hazard-prone areas, has the potential to drive greater economic and potentially insured losses.

For insurers and reinsurers, the climate change conversation often includes catastrophe risk models, and specifically whether these models can adequately understand and assess the impacts of climate change.

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This point was raised by Neal during yesterday’s event, when he asked fellow panellist, Dr. Mitchell-Wallace, if on the one hand, the models are fit for purpose around understanding natural catastrophes, and on the other hand, if modeling today can help in terms of assessing climate change impacts over time.

“I suppose it depends what we mean by modeling,” said Dr. Mitchell-Wallace. “So, if we think of our typical catastrophe modeling that we have in the industry, we’ve been doing that for a long time. We know the limitations of the models; we’ve done a lot of work on that.

“But what we need to do to answer this question is quite different. We need to integrate the work of the scientific community, work on numerical weather prediction and climate science, together with the more actuarial and risk assessment work that we do typically in the insurance industry.”

Both vendor models and in-house modelling capabilities are used widely across the industry and are valuable tools which assist in the pricing of risks.

Of course, the cat risk modelling companies out there are constantly updating their models with the latest science and events, and it’s this constant evolution which Dr. Mitchell-Wallace feels stands the sector in good stead as it looks to better address the climate issue.

“We’re starting from a really good base, though, because we have spent since the 90s, a lot of effort on ever better catastrophe models, and ever better understanding of extreme events. So that’s starting us in a really good place,” said Dr. Mitchell-Wallace.

She continued to explain that thanks to open-source catastrophe modelling, which has really opened up the discipline so that more scientists and peril specialists can participate, we now have climate conditioned catastrophe models, which Dr. Mitchell-Wallace believes “are going to really help us in understanding these problems.”

But while the industry is well placed to address the modelling of climate risks, she continued to warn of some fundamental issues around the suitability of different climate models for different kinds of events, notably those which are important in driving insured losses.

“Climate models are, in general, pretty bad at resolving extreme events. So, the resolution of the models is always improving, and has improved massively over the last 20 years. But essentially, the models are solving atmospheric equations in horizontal and vertical boxes, and the size of the boxes relative to the peril is really important. And many climate models still don’t simulate strong tropical cyclones.

“So, we don’t really have enough granularity in the model output that we’re getting to make really solid deductions about the things which are of most interest to us as an industry,” said Dr. Mitchell-Wallace.

On top of that, she continued, it’s important to understand what’s natural variability.

“We know the climate cycle changes over time, so what’s natural and what’s anthropogenic climate change, that’s always really quite difficult. And then, we have also the difference between what drives losses for us, and what’s done in terms of the studies. So, from an industry perspective we’re really interested in landfalling hurricanes and the frequency and severity of landfalling hurricanes, whereas the studies are more on a basin-wide basis,” she said.

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