Cat modellers need to balance consistency and adapting to climate change
September 26 2024 by Mithun Varkey
Insurance companies must be prepared to embrace change and invest in building their own technical understanding to manage their portfolios effectively, says Guy Carpenter’s Mark Weatherhead.
Catastrophe models are at the heart of the (re)insurance industry’s ability to effectively manage risk and reduce loss events, significant climate shifts, however, pose challenges to model calibration and validation.
Model vendors should balance the need for consistency to ensure there are no dramatic shifts in modelling results, with the requirement to incorporate climate change and improved scientific data for reliable risk assessment,” said Mark Weatherhead, managing director, head of analytics & advisory, South-East Asia and Korea for reinsurance broker Guy Carpenter.
“Regular model updates are necessary due to evolving scientific views, exposure changes and regulatory factors,” he added.
In response to changing net retentions in the market, there is a growing emphasis on risk management, specifically regarding natural perils in Asia.
Insurance companies must be prepared to embrace change and invest in building their own technical understanding to manage their portfolios effectively, according to Weatherhead. It is crucial for companies to have an independent view of risk and its influence on portfolio decisions.
“We see a positive trend as insurers enhance their data and underwriting practices to effectively manage risk, giving them a competitive advantage and reducing losses during events,” he said, adding that this trend also leads to more favourable reinsurance conditions.
Guy Carpenter, for example, provides peer benchmarking tools in present and future climates and climate-related financial loss estimates and assists clients in optimising catastrophe responses, assessing impacts and providing them a view of risk to transform data into actionable insights.
‘Unmodelled’ perils
El Niño and La Niña are major influences on weather patterns and natural catastrophe events. From 2020 through early 2024, the APAC region experienced La Niña conditions, which set up the series of flood events in Australia, China, Japan, and Korea. These conditions also influence regions around the world, with insured losses in Asia remaining relatively stable compared to global losses.
“In the last few years, there have been a number of losses in Asia caused by ‘unmodelled perils’, most recently the flood events in Australia and New Zealand. However, the key drivers of loss in the region are still tropical cyclones and earthquakes,” Weatherhead noted.
While it is true that some of these secondary perils are currently not modelled in the larger commercial catastrophe models, this does not mean we cannot form a view of the risk, he said.
“We see a positive trend as insurers enhance their data and underwriting practices to effectively manage risk, giving them a competitive advantage and reducing losses during events.” Mark Weatherhead, Guy Carpenter
Some of these perils are modelled by smaller specialist providers and brokers. Even when not directly modelled, there is ample scientific data available to assess the risk, whether it be satellite imagery of active wildfires, live data on volcanic activity or scientific publications on peril risk.
“As such, the concept of perils being ‘unmodelled’ is a misnomer,” according to Weatherhead.
The insurance industry should incorporate this data into their risk management process by investing in technology, computing capabilities and data analysis for informed decision-making.
Risk mitigation
Insurers have an important but often underappreciated role to play in building societal climate resilience.
“It has been well established that countries with a higher degree of insurance penetration recover much more quickly when catastrophes occur,” said Weatherhead.
Beyond claim payments, the insurance industry can advocate for improved mitigation measures and collaborate with governments and academic institutions for research funding, shape market dynamics through risk-based pricing and deliver innovative solutions to make insurance affordable for lower socioeconomic classes.
“These efforts not only help provide financial relief in the aftermath of an event, but also educate citizens about the benefits of insurance,” he said.
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