Researcher Colloquium on Extreme Weather Phenomena under Climate Change EXTREME EVENTS AND (RE)INSURANCE Richard J. Murnane RPI/BIOS, 16 Jjune 2011 Researcher

Researcher Colloquium onExtreme Weather Phenomena under Climate Change

EXTREME EVENTSAND

(RE)INSURANCE

Richard J. MurnaneRPI/BIOS, 16 Jjune 2011


(Hurricane Fabian over Bermuda. Sept. 5, 2003)

Washington Post, June 15, 2011


Overview

• Introductory comments• (Re)insurer’s view of science• Climate change relative to business 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


What Is Risk?• Risk = f(climate, exposure, vulnerability)


Top 40 For Victims (1970-2010)

Swiss Re Sigma, 1/2011


Top 40 For Victims (1970-2010)



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


2008 Non-life Premium Volume

Swiss Re, Sigma 3/2009

US and Europe premium: ~$1.4 trillionGlobal ~$1.8 trillion


Top 40 Property Cat Losses 1970-2010


In 2010 dollars:Total ~$350 billion2010 losses ~$43 billion


How Do (Re)Insurers:

• Assess their risk?– Using catastrophe risk models that provide

the “technical” price


Generic Risk Model


Existing Risk Models

• Public models (not open source!)– HAZUS-MH– Florida Public Hurricane Model

• Proprietary models– AIR, ARA, EQECAT, RMS– “In-house” models


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, …


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


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?


Overview



“… 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.


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.


“… 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.


Upward Trend In Strongest Storms?

“We find significant upward trends for wind speed quantiles above the 70th percentile…”

Elsner et al., Nature, 2008


State Of KnowledgeIPCC, 2007 CCSP, 2008


Overview



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?


“Real World” Impacts

• Regulatory and ratings agencies• New cat models


AMO And Hurricane Landfalls

Goldenberg et al., 2001


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


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


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


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

Documents

Researcher Colloquium on Extreme Weather Phenomena under Climate Change EXTREME EVENTS AND (RE)INSURANCE Richard J. Murnane RPI/BIOS, 16 Jjune 2011 Researcher