Tag Archives: climate risk

The Age of a Roof and The Price You Pay: New Analysis of Hurricane Risk in the U.S.

RMS has completed research on hurricane risk to single-family dwellings using an improved understanding of roof age, which can lead to more accurate loss projections using our models

Residential gable end roof failure in the Bahamas, observed following Hurricane Matthew

Residential gable end roof failure in the Bahamas, observed following Hurricane Matthew

Weak roofs mean losses during hurricanes. During reconnaissance trips to the southeast U.S. and the Bahamas following Hurricane Matthew last fall, RMS experts saw ample evidence of this simple fact.  Their on-the-ground survey highlighted everything from shingle and tile damage to complete roof failures.

Roof weakness significantly influences RMS’ view of structural vulnerability in our North Atlantic Hurricane models, which can factor in a roof’s age, covering, and shape into calculations of potential loss. However, this valuable property data is not captured by many insurers, and this could represent a missed business opportunity to improve underwriting – whether it be pricing or risk selection.

Extending the Data, Refining the Insights

RMS already has a dataset of hurricane claims from over one million single-family dwelling (SFD) homes in Florida and the northeast U.S., representing $240 billion in total insured value. However, this dataset lacks roof characteristics for a majority of the homes, so we augmented it with roof age information obtained from BuildFax, which holds detailed building characteristics for over 90 million properties in over 10,000 U.S. cities and counties. From this enhanced dataset we found:

  • About 70 percent of Florida homes (SFDs) had roofs aged 10 years or older at the time of the 2004-05 hurricanes
  • Roughly half of the Northeast homes (SFDs) had roofs aged 20 years or older at the time of Superstorm Sandy (2012)
  • Only 20% of all homes (SFDs) still had their original roofs, although this proportion was lower for coastal properties than for inland properties

So what was the relationship between roof age and losses? In the second stage of our research, our vulnerability modelers paired the exposure data with 182,000 hurricane claims, totaling $2.25 billion in paid losses, to look for patterns related to roof age.

graph claim severity 1

Normalized severity of Florida claims from the 2004-05 hurricanes, by roof age and selected wind speed bands, for all risk classes

Normalized severity of Northeast claims from Sandy, by roof age and selected wind speed bands, for all risk classes.

Normalized severity of Northeast claims from Sandy, by roof age and selected wind speed bands, for all risk classes

 

 

 

 

 

 

 

 

 

As expected, we found that homes with older roofs generally corresponded with more claims, and claims of greater severity. This was most evident at the low wind speeds experienced in the Northeast U.S. during Superstorm Sandy, as well as at higher wind speeds experienced in the Florida hurricanes. These graphs show that buildings in Florida with a roof older than 20 years are associated with claims that are between 50-100% more severe, compared with buildings having a roof less than five years old. A similar trend appears in the Northeast, but is muted because of the smaller dataset.

That’s the picture from historical data. But what about modeling potential future events? To answer that question we analyzed the enlarged Florida dataset, focusing on how roof age at a particular location compares to the industry average for that region.

patchwork map

Change in modeled AAL by Florida county when including roof age information from BuildFax

The change in modeled average annual loss (AAL) by county shows a patchwork of increased and decreased risk that corresponds to the average roof age of properties in each county.

So we can see that using roof age data leads to significant differences in modeled loss within regions.

That’s a valuable insight in itself. But we decided to drill down a little deeper.

 

 

 

From counties to ZIP codes to individual locations

Although the maximum change in AAL was less than 10% at the county level, changes of up to 20% were observed at the level of ZIP codes. These results show that improved understanding of predominant roof age could influence a company to change its regional underwriting strategy or refine its rating territories.

Going more granular still, within each county and ZIP code there is variation in the roof age of individual homes and this is critical to consider when writing new business. The scatter plot below shows the change in AAL at individual locations. Those homes with older roofs produce higher than average AAL and vice versa.

red blob map

Change in modeled AAL by location when including roof age information. “Location AAL” (x-axis) represents AAL without roof age

So when we go down to the level of individual locations the impact of roof age data leads to loss changes of up to 50%, demonstrating higher significance than at the regional level. For high hurricane risk locations in Florida with large baseline AALs, this change translates into substantial dollar amounts. That’s crucial to know, revealing key opportunities to improve underwriting practices. For instance, companies might choose to quote more competitively on price for properties with newer roofs.

Unsurprisingly, over time strengthened building codes and practices have led to stronger roofs that are more resilient to hurricane damage. But this research tells us much more – the sheer magnitude of modeled loss changes observed was significant, with clear implications for profitability, as explained by BuildFax CEO Holly Tachovsky:

“These results reveal key opportunities to improve underwriting practices, including pricing and risk selection. A focus on roof age can be the difference-maker for loss ratios in certain geographies. As a result, we see a growing level of sophistication among carriers that want to rate and select with a higher degree of accuracy.”

RMS remains committed to partnerships with industry experts like BuildFax to communicate the business benefits of emerging trends in the (re)insurance space.

Shrugging Off a Hurricane: A Three Hundred Year Old Culture of Disaster Resilience

If a global prize was to be awarded to the city or country that achieves the peak of disaster resilience, Bermuda might be a fitting first winner.

This October’s Hurricane Nicole made direct landfall on the island. The eyewall tracked over Bermuda with maximum measured windspeeds close to 120 mph. Nonetheless there were there were no casualties. The damage tally was principally to fallen trees, roadway debris, some smashed boats and many downed utility poles. The airport opened in 24 hours, with the island’s ferries operating the following day.

Bermuda’s performance through Nicole was exemplary. What’s behind that?

Since its foundation in 1609 when 150 colonists and crew were shipwrecked on the island, Bermuda has got used to its situation at the heart of hurricane alley. Comprising 21 square miles of reef and lithified dunes, sitting out in the Atlantic 650 miles west of Cape Hatteras, a hurricane hits the island on average once every six or seven years. Mostly these are glancing blows, but once or twice a century Bermuda sustains direct hits at Category 3 or 4 intensity. Hurricane Fabian in 2003 was the worst of the recent storms, causing $300 million of damage (estimated to be worth $650 million, accounting for today’s higher prices and greater property exposure). The cost of the damage from Hurricane Gonzalo in 2014 was about half this amount.

How did Bermuda’s indigenous building style come to adopt such a high standard of wind resistance? It seems to go back to a run of four hurricanes at the beginning of the 18th Century. First, in September 1712 a hurricane persisted for eight hours destroying the majority of wooden buildings. Then twice in 1713 and again more strongly in 1715 the hurricane winds ruined the newly rebuilt churches. One hurricane can seem like an exception, four becomes a trend. In response, houses were constructed with walls of massive reef limestone blocks, covered by roofs tiled with thick slabs of coral stone: traditional house styles that have been sustained ever since.

The frequency of hurricanes has helped stress test the building stock, and ensure the traditional construction styles have been sustained. More recently there has been a robust and well-policed building code to ensure adequate wind resistance for all new construction on the island.

Yet resilience is more than strong buildings. It also requires hardened infrastructure, and that is where Bermuda has some room for improvement. Still dependent on overhead power lines, 90 percent of the island’s 27,000 houses lost power in Hurricane Nicole – although half of these had been reconnected by the following morning and the remainder through that day. Mobile phone and cable networks were also back in operation over a similar timescale. Experience of recent hurricanes has ensured an adequate stockpile of cable and poles.

Expert Eyes on the Island

It helps that there is an international reinsurance industry on the island, with many specialists in the science of hurricanes and the physics and engineering of building performance on hand to scrutinize the application of improved resilience. Almost every building is insured, giving underwriters oversight of building standards. Most importantly, the very functioning of global reinsurance depends on uninterrupted connection with the rest of the world, as well as ensuring that on-island staff are not distracted by having to attend to their family’s welfare.

Bermuda’s experience during Nicole would merit the platinum standard of resilience adopted by the best businesses: that all functions can be restored within 72 hours of a disaster. The Bermuda Business Development Agency and the Association of Bermuda Insurers and Reinsurers were fulsome in their praise for how the island had withstood the hurricane. The strong and widely-owned culture of preparedness, reflects the experience of recent storms like Gonzalo and Fabian.

Stephen Weinstein, general counsel at RenaissanceRe, commented “It’s remarkable that one day after a major hurricane strike, Bermuda is open for business, helping finance disaster risk worldwide, and poised to welcome back business visitors and vacationers alike.”

In early 2017, RMS will issue an update to Bermuda wind vulnerability in the version 17 software release as part of a broader update to the 33 islands and territories covered by the North Atlantic Hurricane Models. Updates to Bermuda vulnerability will consider past hurricane observations and the latest building code research.

Calculating the cost of “Loss and Damage”

The idea that rich, industrialized countries should be liable for paying compensation to poorer, developing ones damaged by climate change is one that has been disputed endlessly at recent international climate conferences.

The fear among rich countries is that they would be signing a future blank check. And the legal headaches in working out the amount of compensation don’t bear thinking about when there are likely to be arguments about whether vulnerable states have done enough to protect themselves.

The question of who pays the compensation bill may prove intractable for some years to come. But the scientific models already exist to make the working out of that bill more transparent.

Some context: in the early years of climate negotiations there was a single focus—on mitigating or (limiting) greenhouse gas emissions. Through the 1990s it became clear atmospheric carbon dioxide was growing just as quickly, so a second mission was added: “adaptation” to the effects of climate change.

Now we have a third concept: “Loss and Damage” which recognizes that no amount of mitigation or adaptation will fully protect us from damages that can’t be stopped and losses that can’t be recovered.

Sufficient self-protection?

The Loss and Damage concept was originally developed by the Association of Small Island States, which saw themselves in the frontline of potential impacts from climate change, in particular around sea-level rise. By some projections at least four of the small island countries (Kiribati, Tuvalu, the Marshall Islands, and the Maldives) will be submerged by the end of this century.

Countries in such a predicament seeking compensation for their loss and damage will have to answer a difficult question: did they do enough to adapt to rising temperatures before asking other countries to help cover the costs? Rich countries will not look kindly on countries they deem to have done too little.

If money were no object, then adaptation strategies might seem limitless and nothing in the loss and damage world need be inevitable. Take sea level rise, for example. Even now in the South China Sea we see the Chinese government, armed with strategic will and giant dredgers, pumping millions of tons of sand so that submerged reefs can be turned into garrison town islands. New Orleans—a city that is 90% below sea level—is protected by a $14 billion flood wall.

But, clearly, adaptation is expensive and so the most effective strategies may be beyond the reach of poorer countries.

Calculating the cost with models

Through successive international conferences on climate change the legal and financial implications of loss and damage have seen diplomatic wrangling as richer and poorer nations argue about who’s going to foot the bill.

But we can conceptualize a scientific mechanism for tallying what that bill should be. It would need a combination of models to discriminate between costs that would have happened anyway and those that are the responsibility of climate change.

Firstly, we could use “attribution climate models” which run two versions of future climate change: one model is based on the atmosphere as it actually is in 2016 while the other “re-writes history” and supposes there’s been no increase in greenhouse gases since 1950.

By running these two models for thousands of simulation years we can see the difference in the number of times a particular climate extreme might happen. And the difference between them suggests how much that extreme is down to greenhouse gas emissions. After this we will need to model how much adaptation could have reduced loss and damage. An illustration:

  • A future extreme weather event might cause $100 billion damage.
  • Attribution studies show that the event has become twice as likely because of climate change.
  • Catastrophe models show the cost of the damage could have been halved with proper adaptation.
  • So the official loss and damage could be declared as $25 billion.

While hardly a straightforward accounting device it’s clear that this is a mechanism—albeit an impressively sophisticated one—that could be developed to calculate the bill for loss and damage due to climate change.

Leaving only the rather thorny question of who pays for it.

Insurers Need a “Dual Horizon” View of Risk To Manage Climate Change

Last week, as a participant on the Joint OECD/Geneva Association Roundtable on Climate Change and the Insurance Sector, I had the opportunity to outline the (re)insurance industry’s critical role in the financial management of climate catastrophe events.

Source: COP21 Make It Work/Sciences Po

The meeting, held in Paris during The 21st Conference of the Parties (COP21) to the United Nations Framework Convention on Climate Change, gave rise to a thought-provoking discussion of the many ways in which the insurance industry will need to engage with the challenges of climate change and in particular extend its “risk horizon.”

A next generation perspective of risk

For centuries we have considered that sea level or climate stays the same. But now we must prepare for a world of constant change. A good way to start is by developing dual horizons—today and a generation away—for how we think about risk.

Today the focus of the insurance industry is short-term. Most contracts are for a single year, securitizations might run for three years, but no-one is looking beyond five years–what at RMS we call the “Medium Term.”

But as our world continues to warm and the catastrophe risk landscape evolves, we need a “next generation perspective” of risk: an additional forward-looking perspective focused 15 -35 years in the future.

Today’s (re)insurers should expect to develop plans for how they would function in a world where there is an explicit cost of carbon and more intense catastrophes from droughts to floods. Everything we build today, from city center high rises to coastal infrastructure, will still exist but in a more extreme catastrophe event environment. Already the U.K. and French insurance regulators are starting to ask questions of their supervised firms as to how their businesses would function in such a future.

In this next-generation perspective insurers will have to play an increased societal role.  Today, property owners assume that insurance will always be available. In our future world, that may become an unreasonable expectation. When determining where, and at what elevation, people can build in the flood plain, we should consider the risk over the whole future lifetime of the property, not simply the risk when the property is built.

This will require us to develop two defined datums: one for the current location of the 100-year flood zone, and a second “Next Generation” datum, showing where the 100 year flood hazard is expected to be 30+ years in the future. As highlighted by the December 2015 floods in Carlisle, northern England, flood protection already needs to consider how climate change is shifting the probabilities. When a building is constructed above the Next Generation flood datum a lifetime’s insurability may be guaranteed. These dual horizon datums will need to be objectively and independently defined, and insurers will want to be involved in determining what gets built and where.

The role of the catastrophe modelers

Since 2006, RMS has acknowledged it is no longer safe to assume that the activity of any catastrophe peril is best defined as the average of the past fifty or hundred years of history.  What then becomes the basis for determining activities and severities? We have committed more than ten person years of research to exploring what gives us the best perspective on current activity, with a focus on Atlantic hurricane. However we will need to apply the same thinking to all the climate perils.

All states of the climate contain a wide spectrum of extremes. If the climate changes, we can expect the spectrum of extremes to change. In a climate hazard catastrophe model we want to know what is the best representation of that activity, including what is the uncertainty in that estimation.

Our value to our clients comes from our true independence. This value also extends beyond the insurance industry, to providing a neutral perspective on risk to rating agencies and governments. RMS models are used by both insurers and reinsurers. They are employed for issuing securitizations and for portfolio management by investors in cat bonds. In every risk transaction, the party taking the risk will be more pessimistic than the party giving up the risk. We have a key role to play in providing a neutral science-based perspective.

Why We’re Getting Better at Changing the World

Photo by Blue Origin

Let’s start by celebrating goal achievement.  Last week, Jeff Bezos’ Blue Origin rocket successfully took off—and then returned back to Earth.  Mission accomplished. But, from 100 kilometers above the Earth’s surface, looking back at our planet, what’s the state of our global goal achievement?  Do we even have goals?

I ask this as over 50,000 delegates descend on Paris this week for the 21st Conference of the Parties to the United Nations Framework Convention on Climate Change. Or more simply, COP21.

COP21 offers the unique prospect of 196 countries achieving a (sort of) legally binding agreement on climate change: to keep global warming below 2°C by reducing greenhouse gases. But what would a “good goal” for COP21 look like and would it ever be achieved?

Set your goal. Measure it. Achieve it.

It’s easy to get cynical about achieving BHAGs (Big Hairy Audacious Goals), but maybe a template for success has emerged. In 2000, the United Nations agreed to eight BHAGs through its global Millennium Development Goals. Goal number four was to reduce child mortality by two-thirds within 15 years across 138 developing countries.

A 50% reduction in child mortality in 15 years

In 2010, Hans Rosling’s celebrated TED talk outlined a two million annual reduction in child deaths under the age of five within a decade, down to 8.1 million per year. By the end of 2015, we will be below six million deaths per year, almost halving in 15 years.  That’s still too high, and many countries will miss the two-thirds reduction target, but nonetheless it is a huge improvement.


Source: IHME

As Rosling points out, the Millennium Goals were strong due to measurable targets. Clear targets, at individual country level, have driven the ability to lobby for increases in financial resources for clean water, immunization and antibiotics, motivated by strong partnerships and innovations in service delivery.

A goal for climate change

Rio in 1992 is remembered for establishing climate change as being caused by humans, and more specifically, primarily the responsibility of the industrialized countries.

Source: Wikipedia/EU Edgar Database

France, as host, wants to build on the momentum of Rio, but also learn lessons from past summit failures.  So, much of the COP21 framework has been defined and negotiated in advance. Francois Hollande has already agreed with top-polluter China on a mechanism to monitor cuts every five years.

The squabbling that characterized Copenhagen in 1999 will be minimized, and high expectations set for those attending, such as encouraging heads of state to arrive at the start, rather than jetting in at the end.

Frequent communication with every country participating has been critical. As conference chair, Laurent Fabius, French Foreign Minister told the FT last week “Negotiators sometimes hold firm positions that only ministers can unlock, I know their bosses – I see them all the time. We talk often, it helps”.


Infographic: Who has pledged an INDC so far, and what percentage of the world’s emissions are covered. Credit: Rosamund Pearce, Carbon Brief, based on EU data

Paris will pull out all the stops to get an agreement, but will we be willing to accept the short-term costs and constraints to slow down climate change?  The answer is probably yes.

So what are the lessons for COP21?

As Jeff Bezos’ Blue Origin extreme rocket recycling shows, individual changes in our daily behavior such as recycling and energy conservation can affect climate change, but ultimately, changes need to be government led, especially around energy generation and emission control. Whether world leaders are ready to be held legally accountable for missing their climate goals is an ongoing issue.

Nonetheless, as the Millennium Goals show, clear and well-defined targets, annually measured (“are we there yet?”) create momentum to drive change forward. The success of COP21 will be defined by whether emerging sub-goals are specific, measurable, achievable, realistic, and time bounded. Now that would be smart.

RMS and Risky Business: Modeling Climate Change Risk

Earlier this year, RMS partnered with the Risky Business Initiative, a year-long effort co-chaired by former New York City Mayor Michael Bloomberg, former Treasury Secretary Henry Paulson, and Farallon Capital founder Tom Steyer to quantify and publicize the economic risks the United States faces from the impacts of a changing climate.

The report, which launched today, has been widely covered in publications ranging from Fortune and The Wall Street Journal to The Hill. It builds on the best available scientific evidence, including both the Intergovernmental Panel on Climate Change (IPCC) and National Climate Assessments, to highlight the risks and cost a changing climate will bring to the business and financial communities the report addresses.

The report details the impact of climate change at the county, state, and regional level; it is the highly vulnerable coastal regions exposed to rising sea levels and the potential for changes in storm activity where RMS has been privileged to contribute our expertise and modeling.

RMS North Atlantic hurricane and storm surge models are based on a base climatology defined by the historical record of storms and represents the current state of the climate. Sea-level rise will increase the risks associated with storm surges and a changed climate may lead to changes in the frequency and intensity of hurricanes the impact the U.S. East Coast and Gulf States.

To address the potential impacts of such changes, RMS pulled together a cross-functional team from our model development group and consulting teams to implement the changes in storm frequency and sea-level rise in our model and analyze the impacts against our database of U.S. property exposure. The team worked with leading climate and hurricane experts and the Risky Business team to understand the latest scientific thinking and gather the information needed to adjust our model from the peer review literature.

In the space of just a few months, the team developed nearly 20 versions of our storm surge hazard model to reflect the expected increase in sea-level rise through the coming decades up to the year 2100, as well as the range of uncertainty captured by the latest IPCC assessment. In addition, the team developed several hundred alternative scenarios of hurricane frequency to model how hurricane frequency may evolve with different “Representative Concentration Pathways” used by the IPCC to describe possible climate futures, possible depending on how much greenhouse gas is emitted in the years to come.

The results of RMS’ analysis, quantifying the changes in losses to hurricanes and storm surges through the coming century have been fed into the Risky Business econometric modeling to quantify the cost to the U.S. economy.

Our analysis highlights that the sea-level rise alone – one of the most certain aspects of a warmer climate – has the potential to more than double the economic losses to hurricanes and storm surges by the end of the century if left unchecked.

RMS, along with Risky Business, recognizes that the analysis is not definitive; however, the potential costs can be quantified and the risks of in-action assessed. This collaboration has developed an invaluable database of information on the impacts climate change on hurricane risk, and by extension, the U.S. economy as a whole.

Just as the Risky Business Initiative hopes to promote a non-partisan discussion on the risks of climate change within the business and financial communities as a whole, RMS hopes that this work and our continued collaboration with the scientific community will lead to continued dialogue in the (re)insurance and catastrophe loss modeling community on the impact of climate change to our business.

Visit http://riskybusiness.org/ to view the full report.