Catastrophe risk modelling specialist RMS has said that average annual insurance industry losses from North Atlantic hurricanes could increase by 24% by 2050, while European floods could drive 59% more in insured losses by the same year.
This is according to new risk models launched by RMS yesterday, as a suite of Climate Change Models were announced by the risk modelling company at its annual Exceedance event.
The figures are based on today’s exposures, so actual losses could be higher as clearly the value exposed to these perils is likely to have increased by 2050.
RMS’ new models provide climate change insights for North Atlantic Hurricane, Europe Inland Flood, and Europe Windstorm.
The models quantify and differentiate the impacts of acute physical risk due to variable potential climate change scenarios (known as Representative Concentration Pathways or RCPs), different time horizons, and within specific regions of the world, the company explained.
The goal is to empower organisations, insurance, reinsurance, insurance-linked security (ILS) focused, or corporations and other entities, to make more informed decisions regarding the potential impacts of climate change to their portfolios and assets, including to residential and commercial properties, warehouses, and retail chains.
The climate change models should help insurance, reinsurance and ILS market interests improve their risk selection, manage portfolio-wide exposure and embed the output into their view of risk.
A 24% increase in average annual insured losses from North Atlantic hurricanes by 2050 is actually not a particularly surprising figure, but given this is based on today’s exposure levels that perhaps gives some cause for concern and drives home the fact risk transfer and reinsurance capital is going to be critical for the US insurance industry if climate change scenarios RMS has used play out.
RMS explained, “For North Atlantic Hurricane the figures are for wind only and do not include storm surge or tropical cyclone-induced flooding. Exposure is based on the 2019 RMS Industry Exposure Database for all lines of business; further changes in losses would be expected from changes in exposure. The figures are based on an RCP 8.5 scenario.”
The EU flood increase in average annual insured losses of 59% is perhaps a little more concerning, as again at current exposure levels this is a really significant increase and drives home both the need for risk transfer and reinsurance to support European insurers, but also the very urgent need for resilience against flood risk to be increased across the region.
RMS said, “For European Flood, exposure is based on the 2020 RMS Industry Exposure Database for all lines of business; further changes in losses would be expected from changes in exposure. The figures are based on an RCP 8.5 scenario. 59 percent is based on the very latest version of the EU FL climate change model.”
RMS hopes that its new Climate Change Models help in the pricing and understanding of future risks organisations and the re/insurance industry faces, while enabling risks from climate change to be better communicated as well.
Tom Fink, senior vice president and managing director at Trepp, a provider of data, analytics, and technology solutions to the global securities and investment management industries, said, “Our clients in the banking and commercial real estate markets are working to quantify their exposure to environmental risks. By incorporating the RMS climate risks analytics, Trepp can better help the investment and financial services industry understand the physical risks posed by a changing climate.”
RMS chief research officer, Robert Muir-Wood, commented, “Unpacking the risks from climate change includes many individual perils, components, and situations, some of which are profoundly non-linear. Also, when mediated through tropical cyclone size, intensity and track, winter storms or major river floods, the relationship between climate parameters and their impacts becomes highly complex and can only be captured in a full catastrophe modeling capability that we are now delivering.
“Clear metrics on current and future climate perils, such as those available with the RMS Climate Change Models and Solutions, are becoming vital for the insurance industry, businesses, and investors globally. Increases in frequency and intensity of hurricanes, floods, and wildfires have already driven businesses, investors, and regulators to try to assess what this means for their current and future operations.”
The climate change components of these new model additions look set to increase the risk metric output even more, if scenarios of potential climate change are adhered to, which has ramifications for ILS portfolio management, pricing and more importantly insurability of properties in regions that face significant climate change related impacts.