Modelling the future

Ellissa Cavaciuti-Wishart, head of cat modelling, International at Axis Re, tells The ReInsurer how catastrophe modelling is evolving to better capture the impacts of climate change.

How has the ability of modelling tools to capture climate change risks improved? Climate risk is one of the most pressing, complex, and multifaceted issues facing the (re)insurance industry.

Over my nearly 15 years in the industry, the sophistication and scope of catastrophe models has increased, both geographically and in terms of secondary perils and coverages.

Model components are now being updated in line with the latest available research in terms of hazard and vulnerability with significant catastrophe events used to re-evaluate and adjust our view.

An example of this kind of benchmarking is the 2011 Tohoku earthquake, the magnitude of which was not previously assumed possible on that fault line.

The resolution, coding and even formatting of data has also improved, enhancing our understanding of the risk. Until relatively recently however, most models were largely calibrated against historical events but these events are no longer an accurate predictor of future risk.

We’re now entering a phase where we can reasonably attribute certain cat events to anthropogenic climate change, and we can be more confident about the outlook for the next few decades.

There is currently a drive within the industry to incorporate the latest climate research into models or adjust them based on our view of climate risk.

Exciting prospects that leverage remote sensing data, increasing computational abilities and AI will hopefully support this development of more progressive, forward-looking models.

Do you foresee climate risks becoming uninsurable and public-private partnerships a necessity?

The role of the (re)insurer is to support both our clients’ and society’s growth and development by sharing the burden of catastrophe losses.

There is a part to play in influencing behaviour by setting the tone and pricing risks adequately. We should steer clients away from unsustainable development or investment options.

We may see a brief interlude where insurance for climate-change induced loss activity, such as the California wildfires or flooding within low lying coastal areas, becomes increasingly untenable.

Increasing the protection gap is simply not an option and this is where public-private partnerships (PPPs) become important.

PPPs are an essential mechanism in the effort to narrow the protection gap. Partnerships on all levels are essential.

One example is the Insurance Development Forum, an initiative in which AXIS is involved.

IDF, launched by leaders of the UN, World Bank and the insurance industry, is working to close this gap by making the value proposition for insurance clear, showcasing and applying our industry’s deep expertise and supporting the growth of insurance where it is needed most.

Where are the biggest gaps in our understanding when it comes to climate change?

Scientific research and developments are progressing our industry’s understanding of the mechanisms of climate change and its attribution to cat events’ frequency and severity.

The biggest challenge within cat modeling is translating this understanding into something meaningful in terms of risk assessment and pricing.

To do this, we must bridge the gap between ‘macro’ signals coming from climate models, for example on a large geographical scale, with a timeframe towards the end of the century, with what we expect to see on a local level on a much shorter time scale.

At AXIS, we are currently building a Climate Change Matrix where we aim to quantify regions and perils into different climate risk categories by time horizon whilst assigning a confidence level.

This will help us to identify gaps and prioritize further evaluation work. If we can capture the inherent uncertainty when it comes to perils’ frequency, severity and timescale, and pick out signals we are seeing against a backdrop of natural climate variability, we will be in a better position when assessing the risk and providing clients with the right coverage.

How has AXIS adapted its business planning and operations to factor in climate change risks?

One initiative which is important and which I am involved in at AXIS is our Climate Change Working Group, an umbrella group that brings together perspectives from across our company.

We are assessing climate-related risks and opportunities identified in other AXIS working groups focused on product development; evaluating and recommending changes to modeling, pricing and underwriting based on climate change; and considering emerging risks associated with climate change.

From the work we are carrying out in this space, we seek to enhance both our shorter-term operational outlook and also support a longer-term strategic view as we consider climate risk not only in the context of physical damage, but also in terms of transition and liability risk affecting other lines of business.