Keying climate change into catastrophe models

Catastrophe Modelling & Climate Change, produced by Lloyd’s Exposure Management & Reinsurance team, explains how the insurance industry increasingly relies on computerised “probabilistic” catastrophe models from different providers to manage their catastrophe risk exposures.

Through a series of case studies contributed by academics and third party vendor experts, the Lloyd’s report looks at how today’s catastrophe models account for climate change.

The re-evaluation is important because scientific consensus around effects of climate change is strengthening. Climate Change 2014: Impacts, Adaptation, and Vulnerability, the fifth assessment from the Intergovernmental Panel on Climate Change (IPCC), stresses that increasing magnitudes of warming is increasing the likelihood of severe and pervasive impacts that may be surprising or irreversible.

Effects everywhere

The effects of climate change are expected to be felt everywhere, as the Lloyd’s report’s authors point out. In its section on European windstorm trends, for example, cat model company EQECAT highlights several significant predicted future climate scenarios including fewer smaller storms but an increase in the frequency of very large storms; it predicts a four-fold increase in the frequency of years with several severe storms. It is also expected that there will be a shift in the latitude of European windstorms towards central Europe (between bands 48N-61N).

The overall impact on European insurance companies’ exposure from these changes implies a 3%-5% decrease in the total number of potentially damaging storms, EQECAT says, but a 10%-20% increase in the number of larger storms. Also, the progressive shift of storm tracks to Europe’s central latitudes could multiply the severe storm losses experienced in big European economies, notably France and Germany.

In the UK, climate change is likely to mean more flooding, according to scientists from the consultants JBA Group writing in the report. Although winter rainfall totals haven’t changed much in the last 50 years and annual totals appear not to have changed significantly since records began in 1766, over the last half century an increasing proportion of the UK’s winter rain has fallen during intense wet spells.

Research based on climate models forecasts increases in peak river flows from 10% to 15% over the period between 2015 and 2039, rising to a range of 20% to 30% by 2080 although, as the authors point out, flood risk is also affected by property development and by investment in flood risk management measures.

Rising sea levels

As well as rivers, sea levels around the UK are projected to carry on rising too. Under a high carbon emissions scenario (in which reliance on fossil fuels continues to increase rapidly) there is a chance that sea levels could rise by around 70cm. There are credible (though unlikely) extreme scenarios that would lead to even greater increases in sea level of up to 1.9m.

Rising sea levels around the world could have significant implications for insurers in the context of storm surge, according to cat model firm RMS, another contributor to the Lloyd’s report. Superstorm Sandy, one of the most expensive insured cat events of all time, broke 16 historical tide records along the US east coast in 2012.

Scientists have estimated a one to two-third decrease in the return period of a Sandy level event recurrence between 1950 and 2012 due to global sea-level rises, RMS points out. Further increases in sea-level in this region would be expected to lead to a non-linear increase in the loss potential from similar storms. Catastrophe models that dynamically model surge based on current mean sea-level already factor this increased risk into their projections, RMS adds.

The fact that most climate change effects are implicitly included through data rather than through explicit adjustment should not imply any delay to climate action, says Trevor Maynard, leader of Lloyd’s Exposure Management & Reinsurance team: “The urgent need to mitigate carbon emissions remains as critical now as before.”

Climate change is expected to continue to happen even if strong action is taken to cut greenhouse gases, however, meaning that policymakers and planners will have to make use of climate model projections, but take account of uncertainty in them, Mr Maynard says.
“Catastrophe models calculate financial impacts from potential events in the next year or so,” he says. “Planners need to consider how the risk will change over the term of their projects.”

Join the debate

On 15 May 2014, Lloyd’s Head of Exposure Management, Trevor Maynard, hosted a Twitter discussion on the effects of climate change.