Catastrophe risk modelling could be improved by integrating the latest climate science and a variety of technologies into the modelling framework, according to the Geneva Association.
A report by the insurance industry think-tank ‘Managing Physical Climate Risk: Leveraging Innovations in Catastrophe Risk Modelling’, says integrating the latest climate science, earth climate system simulations and nested models within global climate models (GCMs) into cat models could be “a game changer”.
It is argued this would address catastrophe risk modelling’s reliance on historical data and support new climate insurance products.
According to the Geneva Association, further use of big data, cloud sourcing, satellites and remote sensing, as well as computational advancement and artificial intelligence, are among tools that will be co-opted into the new generation of advanced risk models over the next few years.
Overall, the report calls for agreement on a uniform international exposure data standard, and a need to extend the model time horizon.
The think-tank says the need for a uniform international exposure data standard is important to enable transparency, comparability and acceptance of results, and allow for the efficient use of cat models.
In terms of extending the model horizon, the report says current cat model frameworks are designed to support risk assessment for 12 months contracts, typically calibrated using historical data.
However, it says forward-looking models are needed to support the short, medium and long-term horizons necessary for strategic planning for all stakeholder groups including re/insurers.
The report also urges physical climate risks to be incorporated into financial modelling and investment risk analysis to allow for analysing explicit dependencies between asset and liability risk for capital modelling /management by re/insurers, other segments of the financial sector.
Finally, it recommends considering models of models and embracing systems-based thinking for the next generation of cat models.
Bridging the gap between natural catastrophe modelling and climate modelling will be one of the topics discussed at the second annual Insurance & Climate Risk EMEA conference, which will take place on 3 December 2018 in London.
Other topics to be discussed at the conference will include:
- Incorporating ESG into underwriting practices
- Quantifying the financial impacts of climate change risks and progress to date
Click here for more information about the conference and to confirm your attendance.