In light of its uncertain but apparent influence on both the frequency and severity of natural catastrophe events, it’s no surprise that climate change is at the forefront of the minds of catastrophe risk underwriters, investors and of course model vendors, but it’s important to remember that this is not the only uncertainty.
To close the inaugural day of the new annual re/insurance and insurance-linked securities (ILS) conference – Prospectus 2021, attendees were treated to an in-depth and insightful exploration of peak catastrophe perils and the climate factor, with a focus on hurricane risks.
Delivered by Dr. Jamie Rodney, Executive Director of ILS Analytics at ILS investment manager Twelve Capital, the keynote delved deep into the work Twelve Capital has been doing to better understand hurricane risk and the potential influence of climate change, as well as the workings of catastrophe risk models with a view to the incorporation of climate factors.
A Q&A session followed Dr. Rodney’s speech, during which a member of the audience highlighted the need for risk managers to do more to understand the uncertainty around cat model output and the importance of playing a central role in developing their own view of risks.
“I would actually argue that there needs to be more collaboration across the industry,” said Dr. Rodney. “From a cat model perspective, working and collaborating with cat model vendors and having worked at a cat model vendor myself, there’s a lot of cutting edge science, there’s a lot of leading scientists working on this field.”
According to Dr. Rodney, more collaboration, understanding and openness will increase the ability of the marketplace to actually start to change things.
“If you don’t open up the model, or work closely with cat model vendors, you don’t actually really know what you’re adjusting.
“So, you could be introducing more bias to something that already could be biased. I think as a risk taker, again, it’s all about understanding, what am I looking at? What is the uncertainty or the possible changes? And then, again, it’s around risk margin. If you understand the risk then you can start talking about risk-adjusted, how much risk you want to take,” he continued.
Climate change is clearly a great uncertainty for cat risk vendors, but as Dr. Rodney emphasised during his keynote, this is not the only uncertainty.
“Climate change is one, past climate, future climate, but also we see other uncertainties or possibly larger deltas in things like supply / demand, underwriting discipline,” he explained.
Adding, “Another question might be, even during the 20 years of high-end activity and I know people talk about the hurricane drought between 2012 and 2017, but actually, that is a period where from a pricing perspective, rates declined dramatically. So, even within a changing or potentially warming climate, you had a window of five years of no losses.
“Whether that’s statistically significant or just luck of the draw. Is that a larger issue in the market than actually the variation of climate change year-on-year? And, I don’t know the answer, but also it relates to other uncertainties and other areas of potential volatility, there’s not just climate change.
“On top of that, which we haven’t touched on in this talk on purpose, it’s risk mitigation. Is the worst case scenario a reasonable scenario moving into the next 40 years? How’s urbanisation going to change? There’s huge deltas everywhere, and you have to understand those to make sure that you’ve got credible risk margins above that risk level.”
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