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Researcher Colloquium onExtreme Weather Phenomena under Climate Change
EXTREME EVENTSAND
(RE)INSURANCE
Richard J. MurnaneRPI/BIOS, 16 Jjune 2011
Researcher Colloquium onExtreme Weather Phenomena under Climate Change
(Hurricane Fabian over Bermuda. Sept. 5, 2003)
Washington Post, June 15, 2011
Researcher Colloquium onExtreme Weather Phenomena under Climate Change
Overview
• Introductory comments• (Re)insurer’s view of science• Climate change relative to business change
Researcher Colloquium onExtreme Weather Phenomena under Climate Change
Why Am I Here?
• Senior research scientist at BIOS and program manager for the Risk Prediction Initiative, a science-business partnership at BIOS
• Chief scientist with OpenRisk LLC, a catastrophe risk business platform
Researcher Colloquium onExtreme Weather Phenomena under Climate Change
What Is Risk?• Risk = f(climate, exposure, vulnerability)
Researcher Colloquium onExtreme Weather Phenomena under Climate Change
Top 40 For Victims (1970-2010)
Swiss Re Sigma, 1/2011
Researcher Colloquium onExtreme Weather Phenomena under Climate Change
Top 40 For Victims (1970-2010)
Swiss Re Sigma, 1/2011
Researcher Colloquium onExtreme Weather Phenomena under Climate Change
What Is Risk?• Risk = f(climate, exposure, vulnerability)
• Focus on risk of losing $$$• Probability of loss:
– Annual Average Loss (AAL)– Return period loss, e.g., 100 year event
• Variance around the probability of loss– Correlation of occurrence and intensity– Clustering
Researcher Colloquium onExtreme Weather Phenomena under Climate Change
2008 Non-life Premium Volume
Swiss Re, Sigma 3/2009
US and Europe premium: ~$1.4 trillionGlobal ~$1.8 trillion
Researcher Colloquium onExtreme Weather Phenomena under Climate Change
Top 40 Property Cat Losses 1970-2010
Swiss Re Sigma, 1/2011
In 2010 dollars:Total ~$350 billion2010 losses ~$43 billion
Researcher Colloquium onExtreme Weather Phenomena under Climate Change
How Do (Re)Insurers:
• Assess their risk?– Using catastrophe risk models that provide
the “technical” price
Researcher Colloquium onExtreme Weather Phenomena under Climate Change
Generic Risk Model
Researcher Colloquium onExtreme Weather Phenomena under Climate Change
Existing Risk Models
• Public models (not open source!)– HAZUS-MH– Florida Public Hurricane Model
• Proprietary models– AIR, ARA, EQECAT, RMS– “In-house” models
Researcher Colloquium onExtreme Weather Phenomena under Climate Change
How Do (Re)Insurers:
• Assess their risk?– Using catastrophe risk models that provide
the “technical” price
• Price their (re)insurance?– Model results, in part, but also market
price, investment expectations, business considerations, …
Researcher Colloquium onExtreme Weather Phenomena under Climate Change
Underwriting Vs. Investment Returns
Swiss Re, Sigma 2/2005
15
10
5
0
-5
-10
-15
Pe
rce
nt C
ha
nge
1998 1999 2000 2001 2002 2003 2004*
Aggregate of US, Canada, France, Germany, UK, and Japan
Underwriting result
Capital gain/loss
Current investment income
Other income/charges
Operating result
Researcher Colloquium onExtreme Weather Phenomena under Climate Change
1990 1995 2000 2005 2010Year
400
300
200
100
0
Guy Carpenter’s Global Property Rate On Line Index
Guy Carpenter, 2011
An
dre
w
9/1
1
Ka
trin
a
Gre
at r
ece
ssio
n?
Researcher Colloquium onExtreme Weather Phenomena under Climate Change
Overview
• Introductory comments• (Re)insurer’s view of science• Climate change relative to business change
Researcher Colloquium onExtreme Weather Phenomena under Climate Change
“… future warming may lead to an upward trend in tropical cyclone destructive potential, and – taking into account an increasing coastal population – a substantial increase in hurricane-related losses in the twenty-first century.”
Changes In Hurricane Power?
Year
Se
a S
urf
ace
Te
mp
era
ture
Po
we
r D
issi
pat
ion
Ind
ex
K. Emanuel, Nature, 2005.
Researcher Colloquium onExtreme Weather Phenomena under Climate Change
Or, No Change?
“Subjective measurements and variable procedures make existing tropical cyclone databases insufficiently reliable to detect trends in the frequency of extreme cyclones.”
Landsea et al., Science, 2006.
Researcher Colloquium onExtreme Weather Phenomena under Climate Change
“… the increase of [vertical wind shear] has been historically associated with diminished hurricane activity and intensity. A suite of state-of-the-art global climate model[s] project… [s]ubstantial increases in tropical Atlantic and East Pacific shear …”
Future Unfavorable Conditions?
Vecchi and Soden, GRL, 2007.
Researcher Colloquium onExtreme Weather Phenomena under Climate Change
Upward Trend In Strongest Storms?
“We find significant upward trends for wind speed quantiles above the 70th percentile…”
Elsner et al., Nature, 2008
Researcher Colloquium onExtreme Weather Phenomena under Climate Change
State Of KnowledgeIPCC, 2007 CCSP, 2008
Researcher Colloquium onExtreme Weather Phenomena under Climate Change
Overview
• Introductory comments• (Re)insurer’s view of science• Climate change relative to business change
Researcher Colloquium onExtreme Weather Phenomena under Climate Change
Potential Impacts• All other things being equal, losses will
increase with:– Sea level rise– More frequent events– More intense events– Wetter events (i.e., more floods)– Etc…..
• But, to what extent, and over what time scale, can we say with certainty that these changes will occur?
Researcher Colloquium onExtreme Weather Phenomena under Climate Change
“Real World” Impacts
• Regulatory and ratings agencies• New cat models
Researcher Colloquium onExtreme Weather Phenomena under Climate Change
AMO And Hurricane Landfalls
Goldenberg et al., 2001
Researcher Colloquium onExtreme Weather Phenomena under Climate Change
Florida Hurricane Commission On Loss Projection Methodology
• FHCLPM created during the 1995 Legislative Session
• Models used for rate filing in the state must be certified by FHCLPM
• To date only models based on climatology approved
• Models not approved by commission used for reinsurance transactions
Researcher Colloquium onExtreme Weather Phenomena under Climate Change
New Models• New RMS hurricane model
– Updated construction and roof types– Higher inland wind speeds– Heightened building vulnerability– Increased losses due to storm surge
• Change in losses– Increased insured loss results range from 20 to 100
percent– Some loss estimates in Texas have doubled, losses for
Middle Atlantic states also increased significantly– Smaller increases in Florida
Researcher Colloquium onExtreme Weather Phenomena under Climate Change
Market Response• Ratings:
– S&P issued a negative watch on 17 cat bonds due to the revised model
– A.M. Best expects companies to incorporate model revisions as soon as practical.
– Those companies that have started to use the new version apparently are quick to move as they see little or no impact on their rating or capital requirements
Researcher Colloquium onExtreme Weather Phenomena under Climate Change
Closing Comments
• (Re)insurers time horizon is very short: quarters and years, not decades and centuries
• To my knowledge:– Clustering not incorporated in models– Correlation in frequency and intensity not incorporated
in models
• Under-appreciated problem is how to combine, in an optimal manner, results from multiple model