Meeting climate change head on

Reinsurance Association of America releases "climate change policy"

By Phil Zinkewicz

“The world’s climate is changing. An increase in the severity and frequency of extreme weather is impacting daily life for the global community. Mounting evidence from the scientific community makes it increasingly clear that climate change is having a significant effect on the world’s social and economic risks.”

That observation introduces a recently released “climate change policy” issued by the Reinsurance Association of America (RAA). Last September, the RAA adopted an official climate change policy and, in doing so, became the first insurance industry organization to have such a policy, according to the RAA.

“It is incumbent on our industry to acknowledge the changing climate and the risks it poses to the business community, and to ensure that policymakers consider measures for adapting to, and mitigating the potentially adverse impacts of climate change,” says Frank Nutter, president of the RAA.

In its policy, the RAA commits to:

• Promoting awareness and understanding of the risks associated with climate change

• Working to identify ways the insurance sector can meaningfully utilize its risk management expertise to help society tackle the impacts of climate change

• Encouraging efforts to mitigate human-induced greenhouse gases and implementing risk reduction initiatives to adapt to climate change

• Encouraging its members to assess the impact of their business operations, to analyze their contribu-tion to climate change, and to evaluate emissions reduction measures.

The RAA maintains that, so far, current scientific evidence does not permit the insurance industry to determine the specific impacts of climate change in terms of the location, frequency or severity of insured perils. However one organization believes that, within limits, it can do those very things.

AIR Worldwide, based in Boston, Massachusetts, touts itself as being “the world’s premier risk modeling and technology firm specializing in risks associated with natural and man-made catastrophes, weather and climate.” According to Dr. Peter S. Dailey, director of research in atmospheric science, AIR Worldwide pioneered the problematic catastrophe modeling technology that “revolutionized” the way insurers, reinsurers and financial institutions manage their catastrophe risk.

“Our leading edge models of global natural hazards, which form the basis of our software systems, enable companies to identify, quantify and plan for financial consequences of catastrophic events,” Dailey says.

“We have developed models covering all major natural hazards, including hurricanes, earthquakes, winter storms, tornadoes, hailstorms and flood for more than 40 countries throughout North America, the Caribbean, South America, Europe and the Asia-Pacific region.”

Recently, AIR Worldwide issued a white paper to provide an update on its original research on climatological influences on hurricane landfall risk. The white paper discusses two “catalogs” of hurricane activity in the United States. A “standard” catalog reflects hurricane risk under average climate conditions, while a “warm sea surface temperature (SST)” catalog reflects hurricane risk under warmer-than-average sea surface temperature conditions.

“Each of these catalogs incorporates the latest scientific research and has undergone extensive peer review by leading scientists to provide a credible estimate of U.S. hurricane risk,” says Dailey. “Together, they provide the most scientifically advanced and sound approach to assessing U.S. hurricane risk available today.”

Findings from the research undertaken by AIR scientists indicate that, during years in which SSTs are warmer than the long-term average, the U.S. Gulf and East Coasts experience more frequent tropical cyclone landfalls. The findings further indicate that tropical cyclone intensity at landfall is also affected by warm ocean conditions, and the effect varies by region.

Says Dailey: “In particular, the Gulf Coast is likely to experience more frequent landfalls of tropical storms, but little increase in the number of hurricane landfalls. The pattern is different for the Southeast, which is likely to experience more frequent storms of hurricane strength. In the Northeast, the relationship between warm SSTs and hurricane landfalls is too weak to draw a clear conclusion. Overall, the difference or increase in the mean frequency between the warm SST catalog and AIR’s standard catalog for U.S. hurricane landfall is between 5% and 10%, but it varies, depending on the geographical region and measure of intensity considered in the analysis.”

Dailey points out that, while sea surface temperatures are a significant indicator of hurricane risk over a five-year period, secondary factors can still play an import role in determining hurricane activity from season to season, and they also play a role in the heightened uncertainty in any climate conditioned catalog. “For example, despite the warmer-than-average SSTs in the Atlantic in 2006 and 2007, the El Nino Southern Oscillation (ENSO) cycle and the Saharan Air Layer (SAL) mitigated what had been forecast to be highly active seasons,” says Dailey.

AIR offers its Warm SST catalog as a supplement to, rather than a replacement for, its Standard catalog of Atlantic hurricane activity, according to Dailey. “In providing two catalogs instead of one, AIR is promoting the idea of using multiple views of risk,” he says.

“It is well known in the scientific community that several credible, albeit different opinions of what the future may hold is always preferable to a single opinion,” he continues. “Weather and climate forecasts across the world are based on multiple runs of numerical models, or multiple opinions, that provide a measure of where the opinions agree and where they differ. By providing two catalogs with our U.S. Hurricane Model, we encourage clients to assess variability and uncertainty, which are fundamental to managing risk.”