The findings of the Fifth Assessment Report (AR5) from the Intergovernmental Panel on Climate Change (IPCC), finalized in 2014, were clear: Human behavior is affecting climate change. The occurrence of extreme climate-related catastrophic events, such as the recent record-breaking wildfire seasons in California (2020) and Australia (2019–20), are reminders of the present-day threat to society from climate volatility. So how can we quantify the many projected climate scenarios and adapt to the significant uncertainty surrounding this evolving climate emergency? Can we evaluate the financial impacts to a useful degree of certainty given the extensive range of outcomes reflected in these future scenarios?
RMS® is helping clients navigate these sources of uncertainty. We distill them into useful analytics to quantify the impact of various plausible climate change scenarios on clients’ existing portfolios. This can help inform longer-term business strategies in the face of significant uncertainty. For example, RMS has worked with a leading international reinsurer to examine potential future changes across two of its country portfolios.
Climate Change Analytics
For the insurance market, climate change analytics could be viewed as an extension of the risk analytics long practiced by the industry. For example, analyzing the variability from a baseline and the likelihood of extreme events happening – this is what drives current risk-based pricing decisions. And it's not just insurers that are examining these issues. New to this space is a much broader group of stakeholders, from governments to financial institutions, also looking to adopt climate change analytics and make future planning decisions, while the importance of quantifying climate change rapidly grows.
How does RMS help clients get the climate change analytics they need? The first questions to address when analyzing climate change relate to the baseline: What is climate risk today, how variable can weather extremes be, and what are the potential impacts of current climate trends?
Selecting a Climate Change Scenario
Once you have a baseline – an assessment of risk in today’s climate – you then need to project how greenhouse gas concentrations are going to evolve in the future. The Representative Concentration Pathway (RCP) scenarios published by the IPCC are widely used for this purpose. RCP scenarios characterize how atmospheric greenhouse gas concentrations can be expected to evolve across the remainder of the century, assuming different intervention levels. The scenarios range from RCP8.5, which represents a business-as-usual scenario where there is no mitigating intervention at all, through to RCP2.6, which requires immediate, effective intervention that leads to a marked decline in emissions from 2020 onward.
For our client, we focused on modeling the effects of climate change on tropical cyclone risk for two countries, projected to 2030, 2050, and 2100, and based on an intermediate RCP scenario of RCP4.5. In our climate change study, we focused on three components of the risk:
Changes in tropical cyclone frequency
Effects of sea level rise on storm surge (coastal flood) risk
Changes to exposure
Even after settling on a single emissions scenario (in this example, RCP4.5), significant uncertainty stems from ongoing discussion in the scientific community about how concentration pathways will impact global climate variables such as sea surface temperatures, sea level rise, and changes in atmospheric circulation. Furthermore, more research is required about how global changes (climate scale) will be distributed at a local level (weather scale), and what the resulting changes in natural catastrophe risk within a region or at a location might look like.
Accounting for Climate Change in Risk Models
We adjusted two RMS tropical cyclone models to account for projected changes in each of the three analysis areas. There are several contributing factors to be considered just to analyze the first aspect: changes in tropical cyclone frequency.
These factors include the spatial distribution of tropical cyclone development, seasonal cycles and interannual variability of basin-wide activity, modulation of tropical cyclone occurrence by El Niño-Southern Oscillation (ENSO) cycles, storm size, storm intensity, model resolution, and the influence of coupling between the atmosphere and ocean. Therefore, developing an approach to the problem, as recognized in the IPCC’s AR5 and its analysis of changes in extreme weather and climate events, requires expert judgment of model skill (or lack thereof) in simulating the relevant physical processes for the study region.
To form the basis of our analysis, we carefully selected several peer-reviewed papers from leading authors published in respected scientific literature. Using multiple views rather than a single reference view can add complexities to the analysis and interpretation of results. However, it also reduces the risk of relying on a single reference. Given the wide range of scientific opinion, this is prudent and necessary to assign confidence to the results.
Informing a Climate Change Strategy
The RMS climate change study provided our client with a detailed understanding of potential future loss magnitudes and distributions to their global portfolio, allowing for more informed decisions about long-term business planning and strategy.
What insights can clients get from this kind of study? It can deliver indications on climate-change-impacted perils, such as whether U.S. wind-only hurricane losses will likely increase (see Figure 1) or which U.S. states display the strongest loss escalation signal.
For other countries, the picture on climate change could be less clear. Looking at Australia, for example, cyclones are expected to become more frequent along the western coast but less frequent along the eastern coast, based on the latest scientific literature. While overall cyclone frequency is dominated by storms impacting Australia’s western coast, the vast majority of exposure is concentrated in key cities along its eastern coast. This means that changes in overall cyclone frequency across the country may not align with changes in areas of high exposure, and therefore may be unsuitable to capture future changes in loss.
Starting Your Climate Change Analytics Journey
Uncertainty around the future implications of climate change is significant. But focusing our efforts on explaining and reducing the key sources of uncertainty will provide the greatest tangible value to RMS clients aiming to adjust their position and avoid falling behind the curve of the changing risk landscape. We continually update the RMS view on climate change risk to keep pace with the evolution of the global climate crisis. In addition, we reflect this view in RMS risk models where appropriate, facilitating discernible value to the industry.
To lead and grow in the dynamic insurance market and the wider financial services industry, adaptation to change is critical for every business. Adaptation requires good decision-making across a range of stakeholders. Your organization’s knowledge about how risk will change in the future and the corresponding sources of uncertainty around those changes will help avert impediments to business continuity. Increased foresight early on will help plan for and potentially avoid impending shocks, which is the foundational goal of effective risk management.
RMS has considerable expertise and experience working with clients – from insurers, financial institutions, governments, and regulators – to analyze the potential impacts of climate change on an organization, using the latest science combined with innovative software platforms. Our consulting teams can help assess your current position and implement sound practices to increase your understanding of the risks projected into the future. To learn more, visit the climate change page on RMS.com.
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Senior Director, Product Management and Strategy, RMS
Joss Matthewman recently rejoined RMS as Senior Director of Product Management and Strategy, leading on RMS’s climate change activities. Prior to this, Joss was Head of Catastrophe Exposure Management at Hiscox, responsible for natural catastrophe, war, terror, and political violence exposure management and reporting across the group.
Before joining Hiscox, Joss spent seven years in model development at RMS, where he worked on the RMS North Atlantic Hurricane and Asia Typhoon models, before being appointed Head of Storm Surge Modeling. During this period Joss joined the PRA working group on climate change which he continues to engage with today.
Prior to entering the insurance industry Joss obtained a PhD in Applied Mathematics from UCL and worked as a postdoctoral researcher in climate science at the University of California, Irvine. His published areas of research during this time include stratospheric sudden warmings and the impact of sea-ice on global atmospheric teleconnections.