A Brief Overview of Climate Change Impacts & Insurance Hadi Dowlatabadi IRES & LIU, University of British Columbia Vancouver, BC. May 8th 2006 Canada Research Chair in Applied Mathematics & Global Change University Fellow, Resources for the Future, Washington DC. Engineering & Public Policy, Carnegie Mellon University Pittsburgh, PA. Contact:

2 of 17 May 8-9 Summary Impact magnitudes and uncertainties are growing. Impacts are a function of many factors: –Context defines sensitivity –One or more dimensions of climate are changing –Vulnerability is a product of context & climate change –Recovery is determined by the capacity to adapt The Insurance industry is integral: –Assets & underwritings are at risk. –It can shape the pattern of adaptation. –It can shape the evolution of the risk itself. –Contexts can be shaped to reduce vulnerability

3 of 17 May 8-9 Source: IPCC SYR Climate Change & Risk I.Loss of unique ecosystems… II.Health property impacted by more frequent and intense extreme events III.Changes in crop yields, health impacts in low income countries IV.Global aggregate impacts V.Large scale impacts

4 of 17 May 8-9 The Many Aspects of Climate change While projected global temperature change is the most quoted figure, impacts are driven by local changes in many different aspects of climate: –Temperature: hot spells, cold spells, diurnal variation… –Precipitation: draughts, floods, snow or rain, what season… –Storms: how often, how strong, where

5 of 17 May Climate Change & Impacts Climatic VariableProbabilityImpacts Higher maximum temps and more hot days over most land areas Health, agriculture, … Higher minimum temperatures and fewer cold days over most land areas Health, forestry, … Reduced diurnal temperature difference over most land areas Health, … More intense precipitation eventsFloods, … Increased summer continental dryingDraughts, … Increased peak wind speed in tropical cyclones Surge, wind damage, … Increased precipitation intensity in tropical cyclones Flood, … Probability

6 of 17 May 8-9 Fewer Frost Days: context Matters In Texas: –Less damage to citrus crop. –Less ice, fewer auto accidents. –Fewer deaths among the homeless. In Alberta: –Pests survive winter and damage trees. –More ice, more auto accidents. –No homeless now, because too cold.

7 of 17 May 8-9 Changing Distributions The challenge is not limited to: a)larger means, b)or higher variance, c)but that the whole distribution is changing. Source: IPCC SYR

8 of 17 May 8-9 But Impacts Are Assured Our systems are built to withstand extreme events based on historic conditions. –We have already been stung by the error of assuming a biased baseline ( precipitation) –Climate change will mean that historic extremes will not be a good guide for establishing safe operating margins. Bridges will need to be built with greater clearance. Buildings to withstand higher wind speeds. Power plants will have to do without cooling water. Opportunistic species will fill vacant niches… Disease prevalence and propagation will be impacted…

9 of 17 May 8-9 Changes in Annual Runoff Two projections for a) HDCAM2 b) HDCAM3 – baseline. Source: IPCC SMP

10 of 17 May 8-9 Precipitation & Flooding We know more water will be evaporated and moved around by the atmosphere and That is likely be dumped someplace pole-ward of where the water was evaporated. We know that more extreme precipitation events will be more likely. –But we do not know, and the models do not address, how frequent successive storms visit the same location (Florida 2004), –or how long a system may stay in place and keep dumping water on saturated soil (mid-West flood of 1993).

11 of 17 May 8-9 Climate, Impact & Insurance Events: differ in definition A climate event can be defined in terms of physical thresholds, e.g. wind speed in a hurricane. An impacts event can be defined in terms of a threshold in the magnitude of assets at risk. An insurance event can be defined in terms of a threshold in the damaged incurred to insured assets.

12 of 17 May 8-9 Events, Economic & Insured Losses ( ) Source: IPCC SYR

13 of 17 May 8-9 Event Frequency & Damage: Damage ($) Expected Frequency Once a century Once a year Once a decade Single event cost curve

14 of 17 May 8-9 Event Frequency & Damage: After A century Damage ($) Single event cost curve (discounted) Sum of a century of event cost curve (discounted) Expected Frequency Once a century Once a year Once a decade

15 of 17 May 8-9 Rewriting the Rules Damage ($) Single event cost curve (discounted) Sum of a century of event cost curve (discounted) Expected Frequency Once a century Once a year Once a decade Cat bondsRe insuranceRevised risk pools Development regs & Insurable risks Mitigation to limit Impact liability

16 of 17 May 8-9 Impacts & Insurance Only a fraction of the impacted can afford insurance. A smaller faction of the impacted have chosen to carry insurance coverage. But the totality of impacted people and systems can directly and indirectly impact the assets and viability of the insurance industry.

17 of 17 May 8-9 Summary Impact magnitudes and uncertainties are growing. Impacts are a function of many factors: –Context defines sensitivity –One or more dimensions of climate are changing –Vulnerability is a product of context & climate change –Recovery is determined by the capacity to adapt The Insurance industry is integral: –Assets & underwritings are at risk. –It can shape the pattern of adaptation. –It can shape the evolution of the risk itself. –Contexts can be shaped to reduce vulnerability