1. Researcher Colloquium on Extreme Weather Phenomena under Climate Change EXTREME EVENTS AND (RE)INSURANCE Richard J. Murnane RPI/BIOS, 16 Jjune 2011 Researcher Colloquium on Extreme Weather Phenomena under Climate Change Richard J. Murnane RPI/BIOS, 16 Jjune 2011 Researcher Colloquium on Extreme Weather Phenomena under Climate Change (Hurricane Fabian over Bermuda. Sept. 5, 2003)

2. Washington Post, June 15, 2011

3. Researcher Colloquium on Extreme Weather Phenomena under Climate Change Overview Introductory comments (Re)insurer’s view of science Climate change relative to business change

4. Researcher Colloquium on Extreme Weather Phenomena under Climate Change Why Am I Here? Senior research scientist at BIOS and program manager for the Risk Prediction Initiative, a science- business partnership at BIOS Chief scientist with OpenRisk LLC, a catastrophe risk business platform

5. Researcher Colloquium on Extreme Weather Phenomena under Climate Change What Is Risk? Risk = f(climate, exposure, vulnerability)

6. Researcher Colloquium on Extreme Weather Phenomena under Climate Change Top 40 For Victims (1970-2010) Swiss Re Sigma, 1/2011

7. Researcher Colloquium on Extreme Weather Phenomena under Climate Change Top 40 For Victims (1970-2010) Swiss Re Sigma, 1/2011

8. Researcher Colloquium on Extreme Weather Phenomena under Climate Change What Is Risk? Risk = f(climate, exposure, vulnerability) Focus on risk of losing $$$ Probability of loss: –Annual Average Loss (AAL) –Return period loss, e.g., 100 year event Variance around the probability of loss –Correlation of occurrence and intensity –Clustering

9. Researcher Colloquium on Extreme Weather Phenomena under Climate Change 2008 Non-life Premium Volume Swiss Re, Sigma 3/2009 US and Europe premium: ~$1.4 trillion Global ~$1.8 trillion

10. Researcher Colloquium on Extreme Weather Phenomena under Climate Change Top 40 Property Cat Losses 1970-2010 Swiss Re Sigma, 1/2011 In 2010 dollars: Total ~$350 billion 2010 losses ~$43 billion

11. Researcher Colloquium on Extreme Weather Phenomena under Climate Change How Do (Re)Insurers: Assess their risk? –Using catastrophe risk models that provide the “technical” price

12. Researcher Colloquium on Extreme Weather Phenomena under Climate Change Generic Risk Model

13. Researcher Colloquium on Extreme Weather Phenomena under Climate Change Existing Risk Models Public models (not open source!) –HAZUS-MH –Florida Public Hurricane Model Proprietary models –AIR, ARA, EQECAT, RMS –“In-house” models

14. Researcher Colloquium on Extreme Weather Phenomena under Climate Change How Do (Re)Insurers: Assess their risk? –Using catastrophe risk models that provide the “technical” price Price their (re)insurance? –Model results, in part, but also market price, investment expectations, business considerations, …

15. Researcher Colloquium on Extreme Weather Phenomena under Climate Change Underwriting Vs. Investment Returns Swiss Re, Sigma 2/2005 15 10 5 0 -5 -10 -15 Percent Change 1998199920002001200220032004* Aggregate of US, Canada, France, Germany, UK, and Japan Underwriting result Capital gain/loss Current investment income Other income/charges Operating result

16. Researcher Colloquium on Extreme Weather Phenomena under Climate Change 19901995200020052010 Year 400 300 200 100 0 Guy Carpenter’s Global Property Rate On Line Index Guy Carpenter, 2011 Andrew 9/11Katrina Great recession?

17. Researcher Colloquium on Extreme Weather Phenomena under Climate Change Overview Introductory comments (Re)insurer’s view of science Climate change relative to business change

18. Researcher Colloquium on Extreme Weather Phenomena under Climate Change “… future warming may lead to an upward trend in tropical cyclone destructive potential, and – taking into account an increasing coastal population – a substantial increase in hurricane-related losses in the twenty-first century.” Changes In Hurricane Power? Year Sea Surface Temperature Power Dissipation Index K. Emanuel, Nature, 2005.

19. Researcher Colloquium on Extreme Weather Phenomena under Climate Change Or, No Change? “Subjective measurements and variable procedures make existing tropical cyclone databases insufficiently reliable to detect trends in the frequency of extreme cyclones.” Landsea et al., Science, 2006.

20. Researcher Colloquium on Extreme Weather Phenomena under Climate Change “… the increase of [vertical wind shear] has been historically associated with diminished hurricane activity and intensity. A suite of state-of-the-art global climate model[s] project… [s]ubstantial increases in tropical Atlantic and East Pacific shear …” Future Unfavorable Conditions? Vecchi and Soden, GRL, 2007.

21. Researcher Colloquium on Extreme Weather Phenomena under Climate Change Upward Trend In Strongest Storms? “We find significant upward trends for wind speed quantiles above the 70th percentile…” Elsner et al., Nature, 2008

22. Researcher Colloquium on Extreme Weather Phenomena under Climate Change State Of Knowledge IPCC, 2007CCSP, 2008

23. Researcher Colloquium on Extreme Weather Phenomena under Climate Change Overview Introductory comments (Re)insurer’s view of science Climate change relative to business change

24. Researcher Colloquium on Extreme Weather Phenomena under Climate Change Potential Impacts All other things being equal, losses will increase with: –Sea level rise –More frequent events –More intense events –Wetter events (i.e., more floods) –Etc….. But, to what extent, and over what time scale, can we say with certainty that these changes will occur?

25. Researcher Colloquium on Extreme Weather Phenomena under Climate Change “Real World” Impacts Regulatory and ratings agencies New cat models

26. Researcher Colloquium on Extreme Weather Phenomena under Climate Change AMO And Hurricane Landfalls Goldenberg et al., 2001

27. Researcher Colloquium on Extreme Weather Phenomena under Climate Change Florida Hurricane Commission On Loss Projection Methodology FHCLPM created during the 1995 Legislative Session Models used for rate filing in the state must be certified by FHCLPM To date only models based on climatology approved Models not approved by commission used for reinsurance transactions

28. Researcher Colloquium on Extreme Weather Phenomena under Climate Change New Models New RMS hurricane model –Updated construction and roof types –Higher inland wind speeds –Heightened building vulnerability –Increased losses due to storm surge Change in losses –Increased insured loss results range from 20 to 100 percent –Some loss estimates in Texas have doubled, losses for Middle Atlantic states also increased significantly –Smaller increases in Florida

29. Researcher Colloquium on Extreme Weather Phenomena under Climate Change Market Response Ratings: –S&P issued a negative watch on 17 cat bonds due to the revised model –A.M. Best expects companies to incorporate model revisions as soon as practical. –Those companies that have started to use the new version apparently are quick to move as they see little or no impact on their rating or capital requirements

30. Researcher Colloquium on Extreme Weather Phenomena under Climate Change Closing Comments (Re)insurers time horizon is very short: quarters and years, not decades and centuries To my knowledge: –Clustering not incorporated in models –Correlation in frequency and intensity not incorporated in models Under-appreciated problem is how to combine, in an optimal manner, results from multiple model