To help the (re)insurance market understand the possible impacts of climate change on U.S. hurricane activity, AIR has extended its suite of climate change solutions by developing a Miami Hurricane Climate Change Event Set. This particular offering consists of 81 deterministic scenarios that encompass a range of possible ways climate change could impact a storm like 1992’s Hurricane Andrew for the year 2050 and provide analytics and detailed information about the impacts of future climate on the severity of different hurricane sub-perils.
The 81 scenarios represent different ways that climate change could alter the characteristics of a single event. The tool helps AIR clients understand and quantify the potential impacts of these changes on the insurance risk at the industry level as well as on individual books of business, providing a full range of potential scenarios to demonstrate the sensitivity of sub-peril loss contributions for the event. Understanding this sensitivity can provide guidance for how climate change may impact a number of future risk management decisions in areas that include:
- Peril-specific exposure
- Reinsurance restructuring
- Policy selection
- Business expansion and retraction
- Risk profile development
- Enterprise risk management
- Pricing
- Risk mitigation analysis and strategies
The range of scenarios provides a sensitivity testing mechanism to see how different magnitudes and types of perturbations impact portfolio losses. It enables clients to understand their potential liability due to changes in severity if an Andrew-like event were to recur under future climate scenarios, and also the uncertainty in the losses that might result, which can be helpful in understanding how today’s risk management decisions and frameworks may need to evolve over time. While quantifying impacts to a single event, the event set provides an example of the size and extent of claims that could potentially occur, which can help with potential portfolio reorientation, e.g., indicating new areas that may be at risk from this type of event, as well as decisions around future insurance coverage for sub-perils, like storm surge and flood.
Hurricane Andrew inflicted unprecedented losses in 1992 when it slammed into Florida—before catastrophe models had been accepted by the industry—causing 11 insurance companies to become insolvent and requiring others to be bailed out by their parent companies. Today, relying solely on historical data to estimate the current and future risk from a changing climate could still put insurance firms out of business. AIR’s Climate Change Practice can extend its science-based methodology and modeling tools to create event sets for additional perils, including inland flooding, wildfires, and convective and extratropical storms as well as for other regions. Because there is considerable uncertainty in how extreme event risk may evolve in a warmer climate (e.g., from changes in frequency), Climate Change Event Sets provide a practical approach to assessing the potential impact.
For more information about the event set contact an expert from the AIR Climate Change Practice
