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Rain, Wind, Flood and Fire: Climate Change Poses Challenge for Catastrophe Models

The severe hurricanes and record-breaking wildfires that have caused widespread damage in recent years have heightened concerns that a changing global climate may be leading to more frequent and extreme natural catastrophes. Among the possible effects of climate change, stronger and slower-moving hurricanes may bring more devastating winds, higher storm surge and greater inland flooding; hotter temperatures can dry out vegetation and raise the risk of wildfires, particularly as people move into formerly wild areas. Those changes may lead to greater risks for property owners and higher-than-expected claims for insurers.

 

The development of catastrophe models has played a crucial role in better assessing and mitigating risks, but the behavior of three major hurricanes in the past three years raised the question of whether climate change is outpacing the models. Over the near term, however, natural climate variability has a bigger impact on risks than longer-term climate trends. Current catastrophe models, which take that variability into account as well as more recent trends, are designed to project today’s risks as accurately as possible. Still, modeling firms such as RMS are looking to the future to estimate how changing climate may influence natural disasters and what that may mean for property owners and insurers.

SLOWER, STRONGER STORMS, HOTTER WILDFIRES

Concerns over climate change were reinforced by a trio of powerful but slow-moving hurricanes in each of the past three years that brought massive rainfall and flooding. Hurricane Harvey set rainfall records in August 2017, dropping more than four feet of rain on Houston as it crawled across the Gulf Coast. Hurricane Florence plodded through the Carolinas in 2018, inundating the states and causing flooding that persisted for weeks. In 2019, Hurricane Dorian stalled over the Bahamas for two days before creeping north along the East Coast.

There is at least anecdotal evidence for more storms stalling, picking up greater amounts of moisture over the sea and dropping that on land, producing very heavy inland flooding. Researchers have begun to study whether climate change may be inducing changes in how storms track, such as slowing or stalling. Whether there is a connection between climate change and these recent hurricanes remains to be established and requires a more in-depth analysis of the relationship between large-scale steering currents that guide hurricanes and climate change.

On the West Coast, wildfires have intensified. California suffered some of the worst wildfires in its history in 2017 and 2018. The Camp Fire in 2018 burned more than 153,000 acres, destroyed 18,000 structures and caused 85 fatalities in northern California. The Thomas Fire in 2017 burned 282,000 acres and destroyed more than 1,000 buildings in Santa Barbara and Ventura Counties, while the Tubbs fire caused 22 deaths in Napa and Sonoma Counties while burning 36,807 acres. Given the growth in the frequency and intensity of recent wildfires in the western U.S., RMS has put more weight on recent experience in its model.

QUANTIFYING TODAY’S RISKS

Because weather and climate are always changing, catastrophe models are meant to reflect how those changes impact various perils today. As such, the models capture the evolution of climate over time and quantify that risk for the current climate.

While cat models are not meant to project future climate, modelers are looking ahead. RMS, for example, has taken steps to look at projecting climate factors and how those will influence perils into the future. The baseline rate set for the RMS North American Hurricane Model, for instance, is meant to represent today’s climate, while the medium-term rate set provides an alternative view to adjust rates according to the projected risk over the next five years.

RMS has also looked at longer-term climate projections out to 2030, 2050 and 2100 to see how climate may evolve over longer periods and how that will impact the frequency and intensity of hurricanes, wildfires, floods, winter storms and other weather perils around the world. Projections beyond 10 or 15 years, however, are highly uncertain because not only is the climate changing but all of the underlying components of the risk may also change, for example, the exposure itself as property owners and governments take steps to mitigate damage.

NATURAL CLIMATE VARIABILITY

While climate will surely vary over the next five years, massive, abrupt changes are unlikely. That means the bigger impact on risk will come from natural, large-scale oscillations that affect weather globally, such as El Niño Southern Oscillation (ENSO) in sea surface temperatures off Peru. That oscillation, which is fairly predictable over a three- to seven-year time frame, has a direct impact on weather in California, for instance, bringing more rainfall in certain years. Other well-known patterns include the North Atlantic Oscillation in atmospheric pressure, and the quasi-biennial oscillation of tropical winds in the stratosphere. The challenge for modelers is to reconcile natural climate variations with longer term trends, including increased greenhouse gases and increased global temperatures, and to understand how they will evolve over longer periods.

Another complication is that as climate changes, the risk profile may too. For instance, if the Florida coast is subject to intensifying hurricane risks, people may choose to rebuild further inland, for instance away from the coastal areas experiencing greater flooding and stronger winds. In addition, buildings codes may also become stricter to make buildings more resilient.

Looking further out, climate change may play a role in how insurers manage their books of business in relation to changing risk from various perils. For instance, if a company is growing its flood book, they would want to evaluate not only the risk today but what that risk may look like in five, 10 or 15 years from now. Those assessments may also include insurers’ investments, such as real estate portfolios as well as other investments.

BOTTOM LINE

The climate is always changing. Over the near term, natural climate variability plays a bigger role in determining the risk from specific perils. Today’s cat models take that natural variability and the evolution of risk into account. Longer-term, rising temperatures and sea levels may heighten some risks, but forecasting and quantifying risk over longer periods is highly challenging. Still, it’s crucial to manage today’s property risks with an eye to the future.

Contact your CRC Group producer for more information.

Contributor

  • Colin Morris is the Senior Risk Analyst for CRC Group and is located in our Shrewsbury, NJ office.

 

Guest Contributors Peter Dailey, Vice President, Risk Management Solutions Peter is an expert in climate catastrophe model development and analytics with over 15 years of industry experience. DJ Bennett, Client Executive, Risk Management Solutions located in Hoboken, NJ. About Risk Management Solutions (RMS) RMS models and solutions help insurers, financial markets, corporations, and public agencies evaluate and manage global risk throughout the world. RMS has over 1,200 employees across 13 offices in the US, London, Bermuda, Zurich, India, China, Japan, Singapore, and Australia, with products and models covering six continents. Insurers, reinsurers, trading companies, and other financial institutions trust RMS solutions to better understand and manage the risks of natural and human-made catastrophes, including hurricanes, earthquakes, floods, terrorism, and pandemics. Visit RMS.com to learn more and follow RMS on Twitter and LinkedIn.

ENDNOTES

  1. Incidents Overview, California Department of Forestry and Fire Protection, 2019. https://fire.ca.gov/incidents/