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Catastrophe Modelling and Climate Change


Scientific research points conclusively to the existence of climate change driven by human activity. Nevertheless, significant uncertainty remains on the nature and extent of the changes to our climate and the specific impacts this will generate. Many of the effects will become apparent over the coming decades and anticipating them will require forward projections, not solely historical data.

Changes in the climate and weather patterns have the potential to affect extreme weather events. Insurers have a key interest in understanding the impact of climate change on the frequency of extreme weather events. The frequency of heat waves has increased in Europe, Asia and Australia and more regions show an increase in the number of heavy precipitation events than a decrease. It is virtually certain that since the 1970s there has been an increase in the frequency and intensity of the strongest tropical cyclones in the North Atlantic basin.

Catastrophe modelling technology is now used extensively by insurers, reinsurers, governments, capital markets and other financial entities. They are an integral part of any organisation that deals with natural catastrophe risk and are used most commonly to perform activities such as risk selection and underwriting, reserving and ratemaking, development of mitigation strategies, design of risk transfer mechanisms, exposure and aggregate management, portfolio optimisation, pricing, reinsurance decision-making and capital setting. The models help to quantify our understanding of the natural world.

Climate change trends may be implicitly built into catastrophe models, given the heavy use of historical data in constructing them; however these TRENDS are not necessarily explicitly incorporated into the modelling output. Uncertainties associated with the estimation of the extent and frequency of the most extreme events means that the climate change impact can be difficult to account for in risk models.

The sensitivity of hurricane losses is influenced by a number of factors related to climate change, such as sea-level rise and sea surface temperature. There is a relationship between sea surface temperatures and hurricane strength which suggests a gradual increasing trend. It is thus imperative that changes in these are modelled accurately.

The approximately 20 centimetres of sea-level rise at the southern tip of Manhattan Island increased SUPERSTORM Sandy’s surge losses by 30% in New York alone. Further increases in sea-level in this region may non-linearly increase 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.

Climate models continue to project impacts on extreme weather in the coming decades. EQECAT show how future climate scenarios could see increases in the frequency of intense storms in Europe, with a possible shift in storm track towards northern latitudes. JBA notes that climate change has already increased the probability of flood events in the UK such as those which occurred in 2000, and a 1 in 5 rainfall event could be 40% larger in future.

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