November 17, 2021
This year saw businesses and governments from around the world come together in Glasgow, Scotland, at the United Nations conference COP26 to discuss how to make better decisions around climate change.
As extreme weather events become more frequent and more severe, climate change has become an issue that virtually every organization must consider. Of the $268 billion in economic losses caused by natural disasters in 2020, $258 million resulted from weather-only disasters — a figure 26 percent higher than the 21st century average, according to Aon’s Weather, Climate & Catastrophe Insight: 2020 Annual Report.
However, while the vast majority of scientists and businesses agree on the importance of addressing climate change, there is often a crucial gap between the future-focused analysis of academia and how banks, insurers and others evaluate climate-related exposures.
The way extreme weather risks are modelled and assessed today is somewhat fragmented. The work of top climate scientists and the latest data on climate change into weather risk models needs to be brought together.
With assessments like the recent Intergovernmental Panel on Climate Change (IPCC) report suggesting that climate change is widespread, rapid and intensifying, it’s become critical for businesses to move away from modeling weather risk exposures based on historic data and instead incorporate the likely future impacts of climate change. That’s where the research being done in academic circles can play a valuable part.
“The goal is to bring academia closer to — and even embedded within — the tools that are used across many different industries,” says Liz Henderson, senior managing director at Aon. “This will create a common language around the quantification of climate-related risks, which then creates a market upon which you can trade that risk.”.
Businesses are under increasing pressure to disclose the potential impact of climate change on their organizations.
“One of the biggest challenges that organizations have at the moment around changing requirements is the disclosure piece,” says Henderson. “The ability to quantify that climate risk with a level of comfort in the tool and the data that you’re using is critical.”
To provide that information accurately, businesses need the analytical tools that take into account the possible future impacts of climate change on weather events.
Developing New Tools
Today’s landscape of catastrophe modeling tools and the data used to assess extreme weather risks is somewhat fragmented. What’s needed is a new set of tools that incorporates the work of top climate scientists and the latest data on climate change into weather risk models.
Simply shifting frequency or severity assumptions isn’t enough. It’s necessary to create models that are actually built around an understanding of how climate change might affect all the characteristics of severe weather events, says Henderson.
“What’s needed is to break down events to their components and understand how climate change impacts the characteristics of an event,” she says. “How the event behaves differently, where the events make landfall, the speed and velocity of the events as they make landfall, how long they maintain strength after landfall. Things that you can’t really understand without building up from the ground. You have to consider those component impacts that climate change has on an event.”
“What we’re trying to do is change the narrative in which people are just obsessed around frequency,” says Steve Bowen, managing director and head of catastrophe insight at Aon. “They think that frequency should be the sole focus, but perhaps an even bigger driver seen from climate change is how events are behaviorally changing on an individual basis. The data to this point do not necessarily show that we’re seeing this dramatic increase in the number of event occurrences, but the events that are occurring are more intense. They’re acting more unusually. They’re not scenarios that we’ve necessarily seen before, or we’ve previously considered in modeling.”
That analysis of how climate change is altering the characteristics of weather events can then be connected to better understand the exposures of vulnerable populations and areas which are at high risk, Bowen says.
Partnering with Academia
Aon has partnered with Columbia University to incorporate cutting-edge academic climate research into weather risk modeling.
The collaboration aims to create a climate change solution for Aon’s Impact Forecasting tropical cyclone catastrophe model suite. The enhanced modeling will enable insurers to quantify the climate risk in their portfolios and make adjustments that will inform better decisions on pricing, investments and exposure management both today and over the long term.
The collaboration involves three phases:
• The first phase saw Columbia applying its research-driven frequency adjustment based on CMIP5 data, which was the underlying data from the IPCC’s Fifth Assessment Report, to Aon’s Impact Forecasting U.S. hurricane event data set to highlight differences and provide a current view of tropical cyclone frequency and intensity.
• Phase 2 has begun to expand the collaboration, with Aon’s Impact Forecasting team working with Columbia to develop a climate-conditioned set of event scenarios and analyze different storm parameter behavior based on various emission pathways at various time horizons. This data comes via output from the Columbia Hazard (CHAZ) model and implements brand new CMIP6 data that was used in the recently released IPCC Sixth Assessment Report.
• Phase 3 will incorporate these same methodologies into additional global ocean basins — including the Northwest Pacific, South Pacific and Indian. These new climate change-calibrated event sets will be implemented into new Impact Forecasting tropical cyclone models for Japan (part of the current Asia typhoon model) and Australia to provide an updated view of risk.
“We’re looking to expand into and repeat this partnership with Columbia into other perils and other regions,” says Henderson. “Because fundamentally what we want to bring to our clients is the best of the science and research and what the experts who are studying this phenomenon are looking at and understanding right now.”
“We’re trying to take a very nuanced and honest view by working with academics who can guide us and show us the latest science and where the literature is headed. This is where we can begin to identify where there may be some emerging consistency on what future scenarios may look like,” says Bowen. “That makes it easier for us to then look our clients in the eye and say, ‘Yes, this is what we feel is most realistic because this is what the consensus shows.’”
Making Better Weather Risk Decisions
The added insights into severe weather risks gained by partnering with leading academic researchers will lead to better decisions.
“I think one of the challenges when you’re looking at new development or rebuilding after an event is people making those decisions are not looking at tools like this,” says Henderson. “By making data more accessible and usable, we can help those decision makers really understand the future risk as they’re making plans.
“Catastrophe models historically have not been used for this type of modeling,” says Bowen. “So this is sort of new terrain. The Columbia relationship is exciting because we’re actually getting climate-conditioned event sets directly from leading researchers in the academic space and then being able to simulate those climate change effects through the lens of the Impact Forecasting tropical cyclone model suite.”
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