Report calls for common approach to climate change risk modelling


The Catastrophe Resiliency Council and The Lighthill Risk Network have released a preeminent report on climate change risk modelling.

The report, Best Practices for Modelling the Physical Risks of Climate Change, examines what a warmer world implies for the extreme weather perils that concern insurers.

It also explores how catastrophe models can be used to estimate these impacts and aims to establish best practices in the use of data, methodologies, and tools for the modelling of climate change risk assessment.

According to the report, the regulatory environment is evolving rapidly with new climate-related financial disclosures and reporting obligations being established. The proposed US SEC enhancement and standardisation of climate-related disclosure, for example, is a significant change and related financial disclosure reporting could be onerous.

Another key finding of the report is that extended time horizons chosen by regulators for climate change scenario analysis have little to no value to the non-life insurance industry for pricing, solvency, or risk assumption.

The report also found that small changes in hazards can have big impacts on the footprints of future losses, particularly for rainfall-induced events.

The report concludes that to fully understand and model climate change, a holistic view of all risks must be taken. It’s not just about climate, exposure, or policy planning / mitigation all viewed independently — it’s all three and in equal measure.

Christopher McDaniel, president, Catastrophe Resiliency Council, said, “The risks related to climate change have grown at an accelerated pace in recent years. Establishing best practices in risk modelling methodology related to these risks is imperative. Using a common approach will allow the industry to better price climate risk and create resiliency strategies.”

Jeremy Hindle, director and consultant – Risk, ESG, Climate, Data Standards & Modelling, added, “Predicting how future climate will influence changes in frequency and severity against different pathways, time horizons and temperature changes has created a lack of consensus as to how best to derive decision useful outputs that could provide all stakeholders with what they need.

“As the insurance sector plays such a key role in helping bring financial relief to victims of such disasters, fully understanding and modelling the future impacts of climate change requires a holistic view of all approaches to climate change risk modelling.”

FinTech Global spoke to industry executives at the start of the year to discuss what trends may emerge for 2023. It was predicted that there will be a lot of focus on how insurers can respond to disasters influenced by climate change-related extreme weather events.

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