Quantifying Financial Impact of Climate Risk with Moody’s Climate on Demand

Climate change is widely accepted as the next great integrated risk challenge. To ensure long-term economic resilience, a wholly robust and comprehensive approach for estimating climate impacts will be required, one that captures real asset losses as well as distributive business interruptions. This requires a worldwide transformation in asset management strategies to help reduce climate risk exposure.

The number of billion-dollar natural disasters has continued an upward trajectory in both frequency and severity since the 1980s. As shown below in the chart from the U.S. National Centers for Environmental Information, the number of billion-dollar climate-related natural disaster events in the U.S. averaged around three per year during the 1980s. This had grown to an average of 18 per year between 2017–2021.

Following increases in climate-driven losses, asset managers and owners urgently need to answer this question: How can I accurately assess the impact of climate and climate change on my asset portfolio to inform strategies that can help reduce my climate risk exposure?

While there are a growing number of applications on the market that attempt to provide climate risk scoring, having a reliance on predictions that lack transparency, validation, and reputational leadership in the risk industry (i.e. insurers and reinsurers) has real financial consequences – now more than ever.

RMS, a Moody’s Analytics company, in collaboration with Moody’s foundational Climate on Demand physical risk scoring application, is set to release a groundbreaking solution that meets this challenge, backed by decades of unparalleled experience and billions of dollars invested in physical climate risk assessment research and model development.

Moody’s Climate on Demand version 2 will offer financial metrics that robustly measure asset-level climate change impacts, by leveraging RMS’ position as a global leader in the (re)insurance industry.

Climate risk metrics generated in this release will be validated by a global physical climate loss experience totaling hundreds of billions of dollars, to complete a wholly reimagined market-leading application with physical climate metrics validated in the real world.

Businesses are already benefiting from Moody’s foundational Climate on Demand physical risk scoring application. This application provides a forward-looking view of an asset’s exposure to a range of physical climate risks including floods, heat stress, hurricanes and typhoons, sea level rise, water stress, and wildfires.

The current Climate on Demand application can evaluate the forward-looking climate hazard exposure for a portfolio of assets located anywhere in the world and in real time, allowing users to examine specific risk drivers and explore underlying indicators that capture various dimensions of hazard risk.

With this new version 2 release, Climate on Demand will include exciting updates that enable more accurate calculation of impact in financial terms.

Latest Generation of Moody’s Climate on Demand

Moody’s next version of Climate on Demand will enable users to gain deeper insights into the financial impact of physical climate risk, benefiting from the integration of RMS’ models, data, and technology.

Expected in early 2023, Climate on Demand version 2 will provide financial impact metrics and risk impact and hazard scores tailored to assets globally, and for multiple climate change scenarios through to the year 2100.

RMS is in a unique position to provide these unparalleled advancements in how forward-looking risk is estimated, owing to the following:

• Trusted in the Global Insurance Market: For three decades, Moody’s RMS has led the provision of climate-related models to inform risk pricing and portfolio management for the global property and casualty (P&C) insurance industry. RMS models support risk decisions for a US$2.5 trillion global market through modeling real asset risks with a focus on physical climate.  

• Investment in Deep Scientific Expertise: RMS has developed detailed climate risk models which go beyond today's climate risk and incorporate the widest spectrum of climate change research. In addition, RMS benefits from extensive in-house scientific expertise with over 100 team members together with decades of structural engineering experience in assessing exposures and damage — with this expertise soon to be featured in Climate on Demand.
• Validated Financial Loss Metrics: RMS leverages its partnerships with global insurers and reinsurers to analyze and model decades and hundreds of billions of dollars of global climate event loss experience. When an event strikes, RMS Event Response teams are deployed to generate on-the-ground damage surveys, research event impacts, and corroborate model outputs.

Breaking Down Our Approach to Assessing Physical Climate Change Risk

The RMS modeling approach seeks to robustly capture the full range of impacts that climate has on real assets, with an approach rooted in encapsulating the exposure to global hazards for each specific geolocation, and the individual financial risks associated with each asset’s unique exposure and vulnerability, as defined below: 

• Hazard refers to perils like wind, precipitation (rain and snow), fire intensity, earthquake shake intensity, and so on. RMS physical climate modeling capabilities capture real-world hazard complexities, including many compounding climate impacts and indirect drivers of hazard risks. For example, RMS wildfire models incorporate damage not just from fires but also from smoke. Flood risk scores incorporate factors such as sudden snowmelt, and earthquake risk incorporates fire damage following an earthquake, which in many cases may become the largest loss driver.
• Exposure refers to the characteristics and corresponding value of assets at risk, for instance, the age of a building, the number of stories, construction materials used, and other site-specific characteristics, as well as the type and value of any contents or equipment.

• For businesses, the losses from business interruption also needs to be modeled. Losses due to business downtime can easily overshadow any losses from physical damage in financial terms. RMS modeling accommodates these business interruption factors attuned to business type, e.g. a factory, retail store, or industrial complex.

• Vulnerability relates to the susceptibility of an asset to damage from a given hazard, such as how a building interacts with a hurricane, as an individual building’s response varies depending on factors such as the site location or industry type. All of this is captured within the models using hundreds of detailed vulnerability and impact curves that relate hazard to financial loss.

Ultimately, RMS has continued to refine and validate its approach to estimating the complete physical risk of real assets and will now integrate its improved hazard scoring, exposure, and vulnerability methodologies into version 2 of Moody’s Climate on Demand.

In addition, Climate on Demand version 2 will also have advanced portfolio aggregation and correlation analytics to allow users to look at accumulated risks across diverse asset classes and geographies. The analytics capability of Climate on Demand will enable accurate modeling of a portfolio of assets, taking into account the correlation and interdependencies between different climate hazards and locations to give meaningful overall risk scores.

Look out for the new version of Moody’s Climate on Demand in 2023, with decision-ready financial metrics, tailorable asset features, and smart portfolio management.

Our vision for Climate on Demand will also enable users to customize their solution package to increasingly granular levels of risk identification and quantification to meet their individual use case requirements. As we continue to work hard on delivering the next Climate of Demand version, please watch for deep dives into each of our upcoming feature sets.

If you’d like to dig deeper today and find out more details on the capabilities of the Climate on Demand application, click here to email us.