This post is part of a series sponsored by CoreLogic.
The New Paradigm of Climate-Conscious Insurance
When climate change changes the atmosphere and increases the frequency and severity of natural disasters, insurance companies must adapt to a change in environmental and industry rules. Scientific understanding, investor goals and variables regarding climate risk modeling are being developed to meet right now. This puts even greater pressure on insurance companies to comply with (and exceed) regulations and customer expectations.
In order to remain competitive in this new paradigm, it is crucial for insurers to stay up to date on the latest climate risk insights that shape insurance space.  Much like a ship's radar as it sails into a deep fog, these insights can help insurance companies identify and avoid risky regions and business lines while identifying safe waters. Below are four insights on climate risk that insurers should keep in mind when serving customers ̵
1. Scientific understanding of climate risk is constantly changing
Insurance companies must keep up to date with the latest science and decide which climate models are the most accurate and applicable to them. The World Climate Research Program & # 39 ;s Coupled Model Inter-comparison Project involves over 30 groups around the world. Each runs complex numerical climate models that connect the physics of the ocean and the atmosphere to produce climate forecasts based on different carbon dioxide emission scenarios.
Climate models are constantly being improved, both in terms of increased room resolution and the physical processes involved in simulations. These improvements result in more reliable estimates of how natural risks will change at the regional level, from the next decades to the end of the century.
As climate change models have a relatively rough resolution, forecasts must be scaled down. to a finer resolution before it becomes useful for a disaster model. CoreLogic aims to help insurers understand this method, how aspects of climate models are incorporated into disaster models and to what extent.
2. Limiting climate change means modifying modern disaster models
There is always some uncertainty in modern disaster models. Additional complexity arises when separating climate change signals from the natural variation in the atmosphere, leading to changes in danger on multiple decadal scales. Older disaster models use historical loss data to give model outputs credibility. But when it comes to climate, historical losses are not enough to fully understand future risks and evaluate the credibility of the results.
To combat this uncertainty, reduction takes effect in the form of hard measures and soft measures. Tough measures include physically constructed structures, such as flood defenses, and usually involve large investments to meet longer time horizons. Soft measures, usually driven by national or municipal policies, such as the removal of combustible waste, are shorter-term measures and much cheaper to implement.
With disaster models that account for both natural climate variation and physical restraint measures, insurance companies are more likely to sign policies correctly and provide customers with the right level of protection.
3. The rules vary depending on location and danger
While science lays the foundation for shaping the future of insurance, regulatory guidelines also play a crucial role. The current legislative environment varies considerably depending on the jurisdiction, which complicates an already complex system. Regulation exists at different levels of complexity and maturity around the world, ranging from no regulatory position to highly prescribed tests. As a global industry, it is therefore a great pain for insurers to keep track of what needs to be reported and to which authority.
As I said, some regulators are leading the process of understanding the impact of climate change. The Intergovernmental Panel on Climate Change (IPCC) is generally considered to be the main authority in this area. Although the IPCC does not conduct scientific research, it assesses the current state of scientific understanding related to climate change.
The IPCC also creates Representative Concentration Pathways (RCP), which describe four different 21 first century greenhouse gas (GHG) emissions and atmospheric concentrations, air pollution and land use. These scenarios range from business as usual (no limit) to strong limit where reductions reduce catastrophic effects. Given their acceptance as standard scenarios in scientific, political and regulatory areas, RCPs will have much to rely on when making catastrophic risk models.
4. Investors anticipate risk and demand change
One last element to consider is the strong influence of investors. Investors build sustainability in their investment strategies and demand significant changes in corporate behavior. This includes the insurance industry and adjacent markets, such as real estate and mortgages, with respect to climate risk. This is currently handled through policy, environmental monitoring and reporting. At least three credit rating agencies (Standard & Poor's, Moody & # 39; s and AM Best) have identified significant ESG factors, including climate risk for insurance companies. Insurers must consider and implement these considerations as part of their holistic view of climate risk guarantee.
Climate risk is constantly evolving
The effects of climate change are already here, and insurance companies that stay or ignore the pressing reality will risk losing business. By understanding the elements involved in climate risk, including the latest information on scientific understanding, regulations, investors and risk modeling variables, insurers can better serve their clients and improve their portfolios.
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