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Climate Change – what the Insurance Industry thinks

For his own part, Muir-Wood puts his money where his mouth is. “I personally wouldn’t invest in beachfront property anymore,” he says, noting the steady increase in sea level we’re expecting to see worldwide in the coming century, on top of more extreme storms. “And if you’re thinking about it, I’d calculate quite carefully how far back you’d have to be in the event of a hurricane.”

How the Insurance Industry Is Dealing With Climate Change Smithsonian 25 Sept 13 When it comes to the calculating the likelihood of catastrophic weather, one group has an obvious and immediate financial stake in the game: the insurance industry. And in recent years, the industry researchers who attempt to determine the annual odds of catastrophic weather-related disasters—including floods and wind storms—say they’re seeing something new.

“Our business depends on us being neutral. We simply try to make the best possible assessment of risk today, with no vested interest,” says Robert Muir-Wood, the chief scientist of Risk Management Solutions (RMS), a company that creates software models to allow insurance companies to calculate risk. “In the past, when making these assessments, we looked to history.

But in fact, we’ve now realized that that’s no longer a safe assumption—we can see, with certain phenomena in certain parts of the world, that the activity today is not simply the average of history.”This pronounced shift can be seen in extreme rainfall events, heat waves and wind storms. The underlying reason, he says, is climate change, driven by rising greenhouse gas emissions. Muir-Wood’s company is responsible for figuring out just how much more risk the world’s insurance companies face as a result of climate change when homeowners buy policies to protect their property………

The fact that the frequency of some catastrophic weather events may be changing due to climate change makes the problem even more complex.

The best strategy for solving it is the use of computer models, which simulate thousands of the most extreme weather disasters—say, a record-setting hurricane slamming into the East Coast just when the power grid is overloaded due to a heat wave—to tell insurance companies the worst-case scenario, so they know just how much risk they’re taking on, and how likely it is they’ll have to pay out.

“Catastrophes are complex, and the kinds of things that happen during them are complex, so we are constantly trying to improve our modeling to capture the full range of extreme events,” Muir-Wood says, noting that RMS employs more than 100 scientists and mathematicians towards this goal. “When Hurricane Sandy happened, for instance, we already had events like Sandy in our models—we had anticipated the complexity of having a really big storm driving an enormous storm surge, even with wind speeds that were relatively modest.”These models are not unlike those used by scientists to estimate the long-term changes our climate will undergo as it warms over the next century, but there’s one important difference: Insurance companies care mainly about the next year, not the next 100 years, because they mostly sell policies one year at a time.

But even in the short term, Muir-Wood’s team has determined, the risk of a variety of disasters seems to have already shifted. “The first model in which we changed our perspective is on U.S. Atlantic hurricanes. Basically, after the 2004 and 2005 seasons, we determined that it was unsafe to simply assume that historical averages still applied,” he says. “We’ve since seen that today’s activity has changed in other particular areas as well—with extreme rainfall events, such as the recent flooding in Boulder, Colorado, and with heat waves in certain parts of the world.”……..

RMS isn’t alone. In June, the Geneva Association, an insurance industry research group, released a report (PDF) outlining evidence of climate change and describing the new challenges insurance companies will face as it progresses. “In the non-stationary environment caused by ocean warming, traditional approaches, which are solely based on analyzing historical data, increasingly fail to estimate today’s hazard probabilities,” it stated. “A paradigm shift from historic to predictive risk assessment methods is necessary.”

……..For his own part, Muir-Wood puts his money where his mouth is. “I personally wouldn’t invest in beachfront property anymore,” he says, noting the steady increase in sea level we’re expecting to see worldwide in the coming century, on top of more extreme storms. “And if you’re thinking about it, I’d calculate quite carefully how far back you’d have to be in the event of a hurricane.”
http://blogs.smithsonianmag.com/science/2013/09/how-the-insurance-industry-is-dealing-with-climate-change/#ixzz2g2NapC6H

September 26, 2013 - Posted by Christina Macpherson | 2 WORLD, climate change