...climate change has the potential to reshape the property insurance market. States and regions that have not typically been viewed as natural catastrophe prone are now facing additional perils from the increase in floods in Iowa to wildfires in Colorado. This shift is impacting both acute risks, such as flood, hurricane, and wildfires, and chronic risks like rising sea levels, drought and water stress, and periods of extreme heat and cold. Winners in the insurance industry in the next 5-10 years will be those who are getting better able to harness climate data to better understand these risks. I'm Meg Green with Insurance Insider, and welcome to our webinar, Harnessing Climate Data to Sharpen Risk Selection and Underwriting, offered in partnership with S&P. I'll introduce our panel in a moment, but first, I'd like to invite our audience to share their questions and comments.
We'd like to make our next hour together as interactive as possible. Now to introduce our panel. Up first, joining us is Pradeep Venkatesh. He is Associate Director of ESG Strategy for S&P. Pradeep, thanks for coming in.
Thanks for having me.
Yeah, my pleasure. Next, we have Liz Henderson. She's Head of Aon's Climate Risk Advisory. Hi, Liz.
Hello. Thanks for having me.
Yeah, my pleasure. And we've got Steve Bowen. He is the Chief Science Officer with Gallagher Re. Hi, Steve.
Hello, good morning.
Good morning. Last but not least, we have Tobias Grimm. He is Head of Climate Advisory and Nat Cat Data from Munich Re. Hi, Tobias.
Hi, Meg, and a warm welcome to everyone.
Thank you all. So Steve, I was hoping you could kick us off with an overview of available climate data and how it's used today.
Sure, yeah. I could go for a while on this one, but we'll try to keep it short and concise. So obviously, there are a lot of different types of data that are available. So there's climate data that's looking at historical periods, and there's also the forward-looking component in terms of climate data. So the historical data, you're looking at agencies like NOAA, Copernicus, Japan's Meteorological Agency, NASA. They have this, you know, huge amounts of data. They're looking at environmental conditions, old temperature records, precipitation, all these factors, which really do showcase how the weather and the climate has evolved over time. Now, when we're talking about the future climate data, that's when we get into what we call GCMs, which is short for global circulation models or global climate models.
That's really looking at various time horizons in the future. It's looking at different types of scenarios in terms of how well or how, you know, how bad we do in terms of limiting our carbon emissions and how much we are setting up from a policy standpoint, and how that may influence what the future conditions may look like in the decades to come, in the centuries to come, where we're really able to look at how the oceans and the atmosphere are really going to be acting based on these various conditions.
So that is really, really useful information, as we're continuing to see more and more folks within the insurance sector and also in the broader financial markets to really trying to get a better sense of what the physical risk impact might look like, how it may be may be used in terms of other things. You're seeing regulators are really starting to push a stress test, looking at various you know time frames in the future, various scenarios. How is that going to be affecting your individual portfolio? But really, in terms of how this climate data is being used, it really is broadening out into you know areas even beyond the financial sector.
Even looking at real estate, there's folks that are asset managers trying to decide whether they should be investing in certain parts of the world, whether or not it is going to be a good investment in the future. So, you know, there's a lot of different directions that this can go, and I'm sure my panelists can fill in additional gaps there. But that's in a very quick overview, that's kind of what the data sets exist today and how they are being looked at from a really high level.
That's great, Steve. Thanks. Sorry, Liz, go on.
No, I was gonna say, I think one thing that's really, an interesting development that we're gonna see a lot more research around in the next... well, current research and even in the next few years, is like taking that, two sets of data that Steve talked about, the sort of historical information that's very rich in observational data, that is very, you know, precise, relatively speaking, in terms of understanding how hazards, impact properties and cause damage. And then marrying that with the forward-looking information that is, you know, very, far future based, across longer time horizons, much, more global, in nature.
But you have to be able to bring those two types of data together to really drive insight and things like understanding how, under a certain climate scenario, the amount of carbon in the atmosphere impacts the amount of heat that exists in our oceans and in our atmosphere. And then how does that actually start to affect the behavior of storm formation, storm tracks and strength, and the amount of precipitation that storms carry? That linkage is incredibly important to understand in order to really use this data to make different types of decisions. So I think, you know, that, that research area is developing, and it's important that people really understand where the science is at as they're starting to kind of use that information to make decisions. In the insurance industry, we're really good at understanding uncertainty. We're really good at using this data.
You know, today we're probably better than most other industries in understanding climate and catastrophe information. But then when you look at the real estate investors that Steve mentioned, and mortgage lenders and these other asset owners—there's a long education journey that we're on as people start to get their hands around that and really use it in a way that, you know, is useful and insightful and reasonable based on the information that we have.
Yeah, I'll just add on to that. I fully agree with that. It's how these various financial sectors are using the data is gonna be really important because we are seeing a lot of regulators that are creating these various stress tests, whether it's the Fed, whether it's, you know, internationally, we're seeing more like in Malaysia right now, Bank Negara is putting together these types of requirements. But it's whether or not these institutions actually have climate scientists in-house that are helping guide what these stress actually look like.
Mm-hmm.
Because obviously, sometimes it's very important to see what a worst-case scenario might look like and how that may truly impact a portfolio, how that may impact a future investment. But if you're not looking at the right scenarios, you're not using the data in the right way, that may not actually give you the type of guidance that you're actually trying to seek in the first place.
Mm-hmm.
So there's a bit of caution involved with all of this data that's increasingly available. There's a lot of investment going on into private climate analytics companies-
Mm-hmm
... which may or may not be selling you what you think that you're buying. So having the expertise in-house to sort of validate what's being done is gonna be really critical, in terms of you getting the answers that you're actually seeking.
Mm-hmm.
Yeah. Thank you, Steve. We're gonna get into the worst-case scenarios, but before we get there, Tobias, where has climate change already impacted risks?
Yes, thank you, Meg. I mean, the discussion was now already pretty helpful. That leads us to the question, where we do see already an impact from climate change in our core business, and it's without doubt that the losses out of natural catastrophes are on the rise globally. But to make it clear, we have here a rich database that prove just a steep increase on insured market losses from Nat Cat events. The majority of that increase comes from socioeconomic effects, from the spread of wealth, from the spread of assets and properties in highly exposed regions. Climate change doesn't yet play that dominating role on that increasing losses, but it's increasing, and this is something that we need to focus on.
Weather patterns are kind of changing, events are getting more intense or are becoming more frequent, and that's what we need to investigate in detail. What kind of events are changing? If you take, for instance, the SCS season now, so severe convective storms in the U.S., we have a trend, a clear trend towards more intense SCS outbreaks. In particular, the hailstorm severity is increasing. It's expected to further increase with climate change as it is unfolding. We have the hurricane season now. We have end of May, so the hurricane season is just ahead of us. It does fluctuate from year to year, but this year we have really a very high expectation with respect to the number of hurricanes. However, it's not yet clear as to whether one particular hurricane makes just a costly landfall.
So it's just a question of the likelihood to that extent. And with climate change, we do expect not that the number of events is changing, but the intensity of events is increasing, so they might become more intense or the precipitation amounts will be heavier. Also, on the wildfire question, that's also top of mind for many of us in our markets, pointing to California, to Australia as well, to Southern Europe. Environmental conditions that favor a severe local fire season have just worsened considerably in large parts of the world, and climate change plays a significant role on that. So these are just three examples on severe convective storms and hurricanes and wildfire, that climate change plays an important role, an ever-important role here.
And, to add on that, we do use also the studies from the World Weather Attribution network, that's very helpful, to get on top of it and try to quantify the likelihood of one single extreme weather events that is allocated to climate change.
Yeah, just to follow up on that, the accurate prediction of these physical hazards, the frequency and severity of extreme weather events, is very important. But equally important, though, is the translation of that to financial impact. So of course, as we all know, the same event can have very different effects on a given asset, depending on the type of asset and on financial pathways that we expect a given hazard to take. So for example, a flood can impact a residential building through repair costs, through business interruption, if it's commercial, through increased expenses and just overall asset degradation, and all of those will have very different financial impacts. And so it's important when analyzing climate risk, not just to understand where and how significant these events are going to be, but also how they impact the asset themselves in financial terms.
Maybe to add on that, Pradeep, if you go back to the old risk equation that we're all on top of, it's about the hazard, the vulnerability, and the exposure. Yes, most of the losses are actually driven by exposure, increasingly also by the hazards, so climate change plays an ever important role there. But the vulnerability is key to us and to our proprietary knowledge that we do have as an industry, so loss functions are changing. And we do have here all the skills to really ramp up efforts on prevention measures. That's ever important, adaptation measures, so we need to just kind of reduce the technical underlying risk.
... from weather-related, Nat Cat events, and that's where we all need to join forces.
Yeah, I fully agree with that. I mean, the adaptation piece is truly critical. You know, I think that we tend to be focused or obsessed within our industry on frequency as opposed to severity. And frankly, when it comes to climate risk, that, you know, when you're looking at various perils, there isn't necessarily a huge statistically significant trend, an increasing trend in terms of, you know, overall number of events, but really is starting to change. And what's being picked up in the signal is the intensity of the events that are actually occurring. And so you combine more intense events with, you know, more vulnerable exposure in harm's way, you know, that's a recipe for higher losses. So you have to be thinking about the investment in terms of how we are preparing for these types of events.
Now, in terms of climate risk in general, I just wanna make note for the audience that in terms of climate research and the impact of climate change on individual perils, I mean, this is not a linear thing. The impact of climate is going to be different for each peril, and it is very likely gonna be different in various parts of the world. So, you know, I know everyone tries to look at this at the global view, which is important, but there are some pretty regional differences that may arise from these various perils.
And again, to Tobias' and Pradeep's points, you know, the built environment is gonna be a critical piece in terms of what, you know, the loss risk or how that translates into actual loss is actually going to look like. So all these factors need to be considered at once.
Thanks, Steve. We have an audience question coming in. Thanks very much for that. But we are gonna try to get to as many audience questions as we can. This one is: how does an investor make sense of the various third-party climate data sources that Steve was referencing earlier? What's reliable? Is there, or will there be a consistent standard for climate risk data akin to the financial reporting standards like a GAAP? Liz, you wanna kick us off there?
Yeah. That's a great question, and I think it's something that we've been engaging with our clients on quite a bit, is that education journey that I was talking about. As more companies are required to disclose, required to use this information, they're incredibly dependent on third-party vendors who are coming in and, and telling them, you know, their model is the best view of this risk. Their data methodology is the best methodology out there. When we're working with our clients, we encourage them to think about how much uncertainty is baked into these various models to have a multi-model view of the world, so that they can understand how different assumptions and different inputs will impact the, the decision that they're making.
I think that, one thing that we're really finding is that when you're talking to somebody who is used to using kind of credit data, in order to understand the investment, opportunity and the worthiness of a loan they might be making, that they're used to models that are actually quite precise, that have trillions and trillions of records associated with them. You know, they're able to track everyone's credit purchase on their credit card. They know what you're buying, what magazines you buy. They know, you know, everything about you as a borrower, whether it's a personal borrower or a business borrower.
But understanding the weather is a much different question than understanding credit, and I think that that tension that exists between bringing in layers of information that are, have more uncertainty baked into them, is creating a need for transparency of this data, a need for more consistency around the data, and really, I think we'll see investment from the banking community and other financial institutions into this field. So there'll be more hires, from the insurance industry, from the modeling community into these, companies. There'll be more in-house research, and I think that'll, you know, take us a long way to, create those standards and that transparency. Government institutions are also playing a role in this.
NOAA is engaging directly with the insurance industry to create transparent, consistent data sets on the impact of climate change for at least the U.S., and I think we're gonna see a lot more of that. Is there gonna be a standard? I mean, I believe there already are standards that are being developed, at least on the emission reporting side, how you're reporting your impact from Scope 1, Scope 2, Scope 3, and we'll start to see some more standards from the physical risk side as well.
Thank you, Liz. Pradeep, would you wanna weigh in on this?
Of course. Just in terms of evolving global standards, I think this is an area that we feel Europe is going to take much of the lead on.
Mm-hmm.
As much as many of us here in the U.S. would have preferred seeing more U.S. focus on regulation, I think that the European regulations are much further advanced, require much greater reporting, than do counterparts here or other places in the world. So I think that's an area where we're going to see a lot more investment by both companies and financials. In terms of the aggregate trend, I think this is, akin to the way in which we viewed know your customer regulation several... a few decades ago, especially after, September eleventh. We see quite significant trends, investment by companies, both be driven by aggregate events and by upcoming regulation. And so it's integrating those, not those pieces of information into your decision workflow and ultimately making them part of your day-to-day, that we're going to see larger trends towards.
...Thanks, Pradeep, and thanks for getting a flood of audience questions. Thanks so much for that. We've got one, it talks about in the U.S., insurance regulators are reporting a very high rate of requested rate increases all over the country. Our viewer says they've seen numbers like 48% or even 98%. I'm not sure if they're talking about personal lines or commercial lines, but regardless, why the sudden enormous rate increases? Is the insurance industry playing catch up or getting to actually sound rates, or has the level of risk accelerated so quickly in just the last few years? And this kind of ties into one of our prepared questions, well, which is, are there areas that are uninsurable?
Yeah.
Liz, you wanna take this?
Yeah. No, I think this is a really important question, and it's... you know, I certainly don't wanna add to the growing number of headlines that we're seeing almost every day about, you know, US homeowners insurance becoming unaffordable, unavailable, and growing in expense. You know, I do think that we're seeing pockets of the country where rates have increased significantly. But the question of insurability is quite complex, and there are many factors that go into why an insurance company might be raising rates right now, and certainly, the increasing losses that they've experienced, changes in the reinsurance market in terms of pricing and retention levels, and then changes in the exposures that exist in high-risk areas that are seeing losses now, and the vulnerability of those exposures all drive into those increased losses.
We did a study last year looking at severe convective storm losses over the last 20 years, and, you know, there's clearly an increase in the loss, insured losses from that peril. But based on our analysis, we found that 80% of those loss increases were driven by, population increase, exposure increase, inflation, and just the value of the goods that need to be replaced. So the remaining 20% might be attributable to increased severity of these events, but there's clearly a need for us to understand where we're building, how we're building, and how resilient we are against these events as they occur, or we're going to continue to see these rates start to increase in parts of the country where, you know, they haven't been baked into the actuarially sound price.
In California, you know, the wildland urban interface, where most of the wildfire hazard exists for that state, you know, over 20 years, we've seen the rate of housing growth in that area increase at a rate that's more than double the state as a whole. So more people are growing in areas where this hazard has already existed for a number of years, and we're only now kind of taking that into account in our pricing. There will definitely be parts of the country where you have, you know, lower socioeconomic ability to be able to invest in resiliency, where hazard is increasing, and parts of the environment just will not sustain in a traditional insurance product. We already see state pools and government pools coming in to pick up that high risk.
I think that will continue to grow. But there's a real question around the role of government and the role of, the public-private partnerships to really address the issue, which is that we have people who live in harm's way without the ability to move or to invest in their home and business to be more resilient, and that is gonna have to be something that everyone has a seat at the table to solution around.
Yeah, I mean, that's stuff I completely agree with. I mean, we really are in a bit of a difficult cycle right now because, you know, we're in a hard reinsurance market. Obviously, we're seeing the increased losses that are really affecting primary carriers. You're seeing it primarily within the earnings. I mean, if you go back to the SCS losses, I mean, we had $63 billion of insured thunderstorm losses last year in the U.S. We're already, you know, $25 billion for this year alone. But the percentage of that that was actually covered by reinsurers was effectively zero, right? So because this is going into, you know, the primary carriers are eating all of this, this turns into this vicious cycle where they're paying more for reinsurance protection.
They're getting less if they're paying the same amount, and then primary carriers are then having to turn around and increase their premium prices to make up for the additional costs that they're having, they're having to incur. So, you know, that is definitely driving, you know, a lot of this, and folks that are with, say, national carriers, they are saying, "Well, I didn't file a claim. Why is my premium going up by 20%?" It's like, well, you know, we're all in this together, right? I mean, unfortunately, the reality is that to have a healthy insurance market for a large carrier, they're trying to figure out a way to minimize their risk by, you know, making sure that they have their own financial protection going on in-house.
So, you know, as carriers are having to make some difficult decisions, they're doing a much more, you know, adjustments to their techniques in terms of underwriting. They're also really having to engage much more from a portfolio management perspective. You know, this is leading to some carriers that are deciding that some areas are too risky to maintain doing business. So, you know, as Liz was referencing, that at the state level, we're seeing much more pressure going on to these state-run, you know, insurers of last resort. And it's not just Florida. Florida gets most of the attention, right? Because, you know, they are still, you know, Citizens is the largest residential writer in the state.
... but you look at Texas, you look at California, look at California or Colorado, excuse me, Texas. I mean, you are seeing these state insurers of last resort, their policy rolls are increasing, right? Because people are just seeking protection. So, there's so many downstream implications to all of this in terms of, you know, where people are gonna retire. It's starting to affect housing prices. It's starting to affect, you know, other, other bigger picture decisions that folks may not directly correlate to, to climate risk. But this is a really big, really big challenge that is, you know, to Liz's point, I...
You know, we're saying the same thing from our side is the government is gonna have to have some, you know, skin in the game here at the federal level to act as a financial backstop to make sure that people are gonna in fact have their claims paid out, or they're gonna have that level of protection if they're trying to do the right thing to be better prepared for this increasingly risky world.
Thanks, Steve. I think we need to bring a reinsurer in. Tobias, jump in.
Yes, I'm excited to listen to the talks about reinsurance, so I'm from reinsurance. No, we have a very clear stance on that. And we are, of course, discussing these challenges in the U.S. markets extensively, internally as well, as well as we do so with our clients. We believe that the supply of insurance itself is not the challenge, it's the affordability. So we need to... if you do wanna run a business in a commercial, reliable way, you need to call for risk-adequate prices. And that's just imperative to our business model. And reflecting the really steep increase with respect to the rates, in many of the examples that we know as well.
This is not purely driven by the technical price; this is also other factors that play into that, including also interventions from the insurance commissioners and from others. The key factor for us is to really bring down the underlying technical risk, and that's what we will not manage on our own. So we need to-
Mm-hmm.
-join forces, as said by Steve and with Liz, with the public side as well. We need to do that jointly, not as a private sector on our own, but we need also kind of an incentive for the private customer that really prevention measures do play out and that it's worth to do something on that. So it's a complex topic, and we do have a role here to play, but we believe that we can keep supporting the industry. We have appetite to grow here, and not that business remains an important pillar for us.
Great. Pradeep, can I get you back in, into the conversation on how climate data can help companies manage aggregate exposures?
Of course. Thank you for the question. Importantly for framing, companies have a much longer planning horizon than the one-year look ahead that's really common to insurance and to the insurance industry.
Mm-hmm.
Once you make an investment in a manufacturing facility or a supplier, you can be stuck with that for 5, 10, 15 years. And so the exposure that these companies have to climate risks can be much higher. And of course, you need to be much more careful when analyzing both climate physical data and financial impact data. Of course, if an asset's value is fully insured against climate hazards, against wildfires and other risks, your downtime and productivity can affect the company's value and the contractual relationship. And so companies need to develop these longer term strategies to mitigate risk. Of course, the immediate answer is diversifying an investment portfolio to include assets in other regions, assets that are less susceptible to climate risks.
Building mitigations, as we've discussed here, is a significant area that companies will need to invest in in the future. Of course, layering insurance policies will naturally help companies mitigate some of these issues.
Thank you, Pradeep. Liz, did you wanna jump in on that?
No, I mean, I think Pradeep covered it really well, but I think one thing he said that I think is absolutely right and is a very fair criticism of the insurance industry, is how short-term focused we tend to be on risk, especially physical climate risk. And there's a very real disconnect between the insurance annual policy, how insurers typically look at, you know, they're trying to make a profit next year in their rates and in their methods versus, you know, on the investment side and on the lending side, which is a much longer view of profitability.
I think that from a planning perspective, there's so much opportunity for the industry to use these longer term views and really get quite specific in how climate change will affect profitability, will affect their growth plans, will affect their portfolio distribution over time, and expose some of that information more transparently to the asset owners and to the lending community. On the... I was gonna bring this up in a later question, but it's appropriate now. When the Fed did their climate stress scenario for the six largest banks last year, just last week or two weeks, they released their kind of findings and their summary findings from that. And one of the-
... consistent key issues raised by every bank that went through that exercise was the question of insurability, insurance affordability, over the duration of their investment was a key factor in how material climate change it really is to their, their underwriting portfolio, their loan portfolio. So we have to help to answer that question. We have to help make data more transparent over a longer time horizon in order to, you know, make sure that all of the stakeholders that are deciding where to build, how to build, where to invest, that they have the same kind of view of what the risk will be.
Yeah, I mean, at the end of the day, this is, you know, it's definitely an affordability issue. I think all of us, even here that are based in the U.S., I mean, all of our premiums are going up, whether or not we're filing a claim. But what's really gonna be the growing problem is the availability issue, right? And it goes back to, you know, how much pressure do we wanna put on the public insurance entities versus the private market, right? 'Cause the private market's trying to figure it out, you know, it is putting more strain on the states. And we've already seen, you know, legislation passed in Florida. We've seen it in Louisiana. The states are trying to get a handle on some states are calling it a crisis, right?
In some respects. So, you know, how they're handling all this is gonna be really important, and it really does require, you know, more of that private public partnership to figure out what's gonna be the most realistic way forward, because it's very close to spiraling out of control if we have, you know, particularly a hurricane season that may be quite challenging to the market. So, you know, stay tuned.
Thanks, Steve. Can we talk about those, the long-term exposures and how can insurers better incorporate climate data into managing their long-term portfolio planning? And Steve, would you start us on that?
Yeah, I mean, I think this is a really interesting question. I'm actually gonna be curious to hear what other panelists say, because, you know, the way that insurers are thinking about it, it's still really the next 365 days, right? I mean, that's the traditional business model, that we're only looking at the next year.
But, you know, as more and more financial segments are starting to look longer term, and as you're seeing regulators start to ask questions about how you might be affected based on your current portfolio exposure, based on future, you know, environmental or climate hazard scenario conditions in the next 20 years, 30 years, 50 years from now, I mean, that is really starting to philosophically change how insurers or other financial markets are starting to think about their own portfolio risk, right? So I think this goes back again to the quality of data. I think that a lot of times folks are just happy to get their hands on any data, but not all data has the same quality, right? I mean, it depends where it's coming from.
What is the type of data? Is it actually gonna answer the questions that you need to solve the internal, you know, questions that you're asking yourselves? So, you know, I would say that I think we're definitely getting better, but, you know, because there are so many of these third-party data providers that are increasingly coming onto the market, and I do wanna say that, you know, not all third-party data providers are nefarious, that they're not actually providing a good service, because there are some really good providers that are out there.
But this goes back again to the education piece, because a lot of the data that's being used by these companies that are being used for these longer term portfolio planning are effectively based off on all the freely available data that's coming out of NOAA, right? Or the JMA or Copernicus. So, you know, having that in-house expertise is gonna be really critical in terms of identifying specifically what it is that you're trying to—what you're trying to answer.
Pradeep, could you weigh in? I know you have some interesting information looking at wildfire risk in California and flooding in New York, and, and how are you measuring the long-term implications of climate?
Yeah, of course. So as mentioned, the longer term implications are quite substantial, especially for companies that have and investors that have a rather longer time horizon to look at. Of course, most models that I have seen to date are probabilistic, are decadal in nature, and so you're looking at expected estimates over a much longer time horizon. That can be very important, but it's also important to not overly rely on to overly expect certainty from external models. Any third party provider that can tell you or that claims to tell you they can accurately predict a hurricane or a wildfire 10 years from now is ambitious, to say the least. And so it's important to understand that similar to many credit and other loss estimates, these are all probabilistic.
So you need to be able to analyze the data with that view in mind. This is something that we're doing in-house with larger big data techniques and other simulation estimates to try and really drill down into getting the loss estimates, the distributional impacts of these longer term climate events.
...Yeah, maybe to add on that, so for us, as you mentioned, Pradeep, we need to run all the probabilistic models, and that these determine our risk appetite as of now. I think for every insurer, it's paramount to determine that risk appetite that everyone has in high-risk areas. So accumulation risk management is key for everyone. And I've had a lot of interactions over the last couple of months, also with lots of banks and asset managers, and they do not have kind of the privilege to price on an annual basis only. They have to take into account way longer periods of time. So they need to look into 20 years ahead or 30 years ahead.
In P&Cs or in property casualty business, in non-life, we do renew our contracts on an annual basis. Yes, we do drive all our models with a climate signal already, so that's what we constantly improve our model landscape and our environments, that climate change is already part of that. On a different note, maybe on a related note, just last week, I've had interactions with lots of life and health insurers, and from their perspective, it's already a pretty topical topic as of now. They need to think about how does their longevity and mortality rates will change over decades. This is something that's on top of mind for them. It's not that material in business risk as of now, but they are preparing already.
It has to do with an increase of heat waves. It has to do with the spread of infectious diseases, even mental health issues which may arise out of climate change is becoming a topic for them, though. That's something that is becoming also increasingly relevant.
Mm-hmm. Yeah, I mean, just to jump back in, I mean, the whole concept of compound risk or connected extremes, I mean, is really becoming a much more important, you know, factor in terms of any type of risk assessment, right? I mean, a few of us have already talked about the downstream implications, where I think we tend to focus more on just the physical risk component of all this, but we don't necessarily think about health. We don't think about supply chain. We don't think about, you know, all these other bigger factors that may not necessarily be called a direct loss or direct impact, but they are really leading to, again, philosophical changes in terms of how companies are identifying risk and how they're being affected.
But making those connections are gonna be increasingly critical, as, you know, we continue to see a more globalized economy. All of these things are interconnected. I mean, even the geopolitical perspective of all this, I mean, you look at the Pentagon, I mean, they reference climate risk all the time in terms of how they're planning. But you talk to the layman on the street, and I don't think most people are connecting the Pentagon with climate change. But I think it just, you know, speaks. That's just one example that speaks to how, you know, far down the road the implications of all this actually mean.
So how we communicate that, how we recognize where the connected, you know, links are, and try to help solve that and help, you know, develop some type of strategy from an advisory standpoint, I think is all gonna be pretty critical in terms of how you're actually looking at your portfolio and seeing, you know, where the risk actually exists.
Steve, could I draw you out a little bit on that? How could you just connect the dots for me? How is, you know, political or civil unrest related to, or potentially related to climate change?
Sure. Well, I mean, a lot of it can be driven by, say, food insecurity, right? You get certain areas of the world where they're seeing extreme drought, and, you know, there's this, this massive, you know, need for food. So there's entire segments of people, they're referred to as climate refugees, that move into other parts of the world, especially in, say, the Middle East, where you get various religious sects that, you know, are now integrating because people are just trying to seek food for survival, and that can lead to, you know, to more unrest. So, you know, that's just one example in terms of how this is all tied and how the geopolitical component of all this is a very real thing and consideration that, you know, governments are increasingly paying attention to.
Liz, I see you nodding. Did you want to weigh in on this too?
Oh, yeah. I mean, I obviously, that the impact of climate goes beyond the acute perils that we're sort of familiar with in the insurance industry. And, you know, climate-induced related migration is something that can lead to quite a lot of civil unrest, political instability, changing dynamics, just to broader economic issues and to, you know, country security issues that we're already seeing the impacts of. I think that, you know, one question that came through the chat was around, you know, what are some of the things that you would think about today if you were starting an insurance company from scratch? And, to my mind, I think something that the industry doesn't really think about too often is the impact on...
of these kind of chronic perils, on their business, on their customers, and on the environment in which they operate. If you just think about, heat stress as an example, heat-related events are going to continue to increase, are already increasing, and have really, diverse impacts on people, on properties, and on, on our businesses. The heat waves from last year in the Southwest U.S., you know, Phoenix, had 31 days above 110 degrees Fahrenheit. You know, in prior climate models, that was like a 1 in 250 event. Taking into account climate change, that type of event is expected to occur once every, you know, 1 out of every 15 years or 1 in 15 events.
... That increase in frequency is something that, you know, isn't going to slow down. Every climate signal shows that heat is expected to increase, and it's the most easily understood, you know, peril change, from a, you know, data and analytics perspective. It's hard to say how climate change will affect hurricane behavior, but we know how it's gonna affect heat and heat waves. Heat will affect people's cardiovascular health, their mental health, their ability to work. For every day above 40 degrees Fahrenheit or 40 degrees Celsius, you know, we lose, like 72% of a worker's productivity. Some estimates say that the US is already experiencing about a $100 billion impact to GDP because of heat today, and that can increase up to $500 billion, dollars by, you know, 2030.
Heat is gonna affect health, it's gonna affect life insurance policies. It's gonna affect our company's ability to stay open and operate. It's gonna affect your company's employee wellbeing, and it'll also affect P&C. You know, when heat waves occur, in parts of the country where, the infrastructure is not able to, stay, open, to stay running, to keep the, the cooling, HVAC systems working, you know, those are going to become complex insured losses. You know, a company that we partner with, who, who models these scenarios, looked at one heat wave event that could cause above $120 billion of loss to the insurance industry through workers' comp claims, general liability claims, and, you know, worker safety claims.
So you know, this is something that's gonna be far more tangible, and companies are going to already feeling the pinch from heat, and it's going to increase in the near term. And that's something I would pay attention to right now as an emerging risk that we don't quite have the tools to think about at the moment.
Thanks for that, Liz. Yeah, it's very, very interesting. Tobias, could we come back to you, and how do you see insurers' use of climate data evolving going forward?
Yes. I mean, we touched upon that already a bit. So we at Munich Re, we are constantly monitoring, of course, our model landscape, and every new model that is going to be revised or compiled from scratch is considered with a climate impact, or it is monitored to what extent climate change plays a role already today. So climate change is becoming an increasing topic, but the big challenge is, as we and also all of our peers are a bit of struggling in quantifying the real impact. So what is the amount, to what we can attribute climate change to play a role with respect to frequency and intensity? The devil is a lot in the detail. So we have the flexibility, as mentioned, in the annual adjustments of the models, but it is taking into account, absolutely.
We just need to map out the difference between what has happened in the past, what our loss experience says us, and what today's risk is and what future risk is. So the view into the back view mirror is often not, not representative anymore for what's lying ahead. So we need to understand the different mechanisms and the drivers of these changes that keep pricing accurately and adequately. So higher and better resolution of the data is highly appreciated. That helps us a lot. At the end, it's all about also these compound risks, as Steve already alluded to. That's an increasing issue, so multiple events occurring simultaneously, that gives lots of more challenges to our industry. Yeah. So it is a, it is a topic that is increasing, and everyone needs to comply with it.
Yeah, I would say that, you know, in terms of future climate data, you know, if you're doing any type of modeling, the one thing that we are very much communicating to our clients is don't fall in love with a single model, that you need to have a multi-model approach. You should be looking at various ensemble models. It's really important to make sure that you're appropriately balancing, because any type of future climate model, GCMs that are being used, there are varying levels of sensitivity, different parameters that are being used to adjust, you know, what and how that's gonna actually simulate what future environmental conditions are going to look like.
So, fall in love with one mean model is not going to probably be the best, you know, use of your skill sets, I would say. So, you know, implementing a multi-model view is gonna be really helpful in terms of getting a more accurate view, because, again, there is so much uncertainty, and the farther in the future that you go, the more uncertainty that exists. I forget, someone on the panel referenced this earlier, but, you know, if any data provider or any type of advisor is coming to you and talking about future climate risk in absolute terms, I mean, for me, I immediately just shut down.
I basically walk out the door because, you know, I'm not necessarily gonna take you seriously, because nothing in the weather and climate realm deals in absolutes. There's always some inherent uncertainty that exists, and if you're trying to communicate what future risk is gonna look like at a specific asset location, you know, May 29, 2074, you know, they're not talking to you in good faith. They're not giving you a good estimate. So you have to be talking about the uncertainty. You have to be using a wide range of different types of data and different types of future modeling solutions to make sure that you have a fully fledged view of risk.
Yeah. Pradeep, I saw you nodding along to that. Did you wanna jump in?
Yeah, of course. Certainly one of the things that has been... that Tobias mentioned, that a way in which we see climate data evolving is looking at correlated and coincident hazards. So the idea that a drought-
... will affect your wildfire risk is intuitively pretty obvious, but not one that we as yet see directly integrated into many climate models. Similarly, a hurricane impacting coastal flooding or resulting in coastal flooding or pluvial flooding, again, intuitively, they will go together, but these are areas that significantly more model development and analytical research are needed before we come to a place where we can confidently predict even a distributional impact from multiple events. And so I think that's an evolving frontier of climate use of climate data.
Liz, would you wanna weigh in?
I mean, I wouldn't wanna continue to repeat what everyone says, but I think that, you know, the panelists are right about the uncertainty and the challenge around making sure you've got a multi-model view of the risk, and understanding, too, how the science is continuously evolving. So you know, one thing that we talk to our clients about is how to develop really a framework for assessing the models that you're looking at. So before you even get to the point where you're running a model and you're looking at the output, actually develop a framework for how you're gonna assess those models. Understand what assumptions that they're making, without, you know, judgment that one is better than the other, but just understanding how their underlying assumptions impact the output you're getting.
And then continuously evaluate that framework over time as the science evolves. You know, we've talked about SCS events in the U.S. and the impact of climate on those. You know, I'd say that's an area of, sort of less scientific consensus around exactly how climate will affect the frequency of tornadoes, the strength of tornadoes, where they might occur. So you might take a more nuanced approach to making any adjustments to your models for that type of peril versus, flood or heat, where there's a stronger linkage and there's stronger scientific consensus. So that framework is important to establish initially, and then you continuously evaluate against it. It also can help you when it comes to disclosures.
I know we've got a disclosure question coming up, but, you know, the governance on how you're evaluating the models, how you're using them, what is your framework for reviewing those assumptions and adapting as research evolves, is a critical part to protecting your organization as you're making disclosures and you're doing those in good faith.
Thanks, Liz. And let's get to that question, and we touched on it earlier. But what are the impacts of the proposed SEC regulations on product innovation, modeling, and data?
Yeah, I think, you know, the SEC rules that came out earlier this year were far less meaty, I think, than what many on the, you know, climate activist side were hoping to see. They're certainly less restrictive than the regulations in Europe. And as an individual state, the requirements that California is putting on businesses for disclosure are stricter than the SEC regulation. The regulation is also seeing a ton of litigation, so we don't really know where it will fall, what will ultimately be in those rules. And of course, the future is very uncertain given in the election cycle this year.
So it's hard to say exactly what the impact will be, but what I think is not going to change is that disclosures in some form will start to come for the U.S. publicly traded companies. They will be expected to create that governance framework in-house. It's going to require organizations' skill to understand, you know, how to use climate models and also how to understand the impact their business has on carbon emissions, and the impact that their business can have on increasing or reducing those carbon emissions over time. Data quality is going to be critically important as these disclosures continue.
And one thing that we see as a real concern from the clients that we talk to, especially at the board level, is what risk they're exposing themselves to as they make these disclosures, and as they make commitments to various net zero ambitions and their ability to actually achieve or deliver on those commitments. In terms of product innovation, you know, there'll be... I think the insurance industry has an opportunity to really lean in and support organizations who are making those net zero commitments. Organizations that are making bets on carbon capture, on nature-based solutions, on things that help to actually offset and reduce the amount of carbon in our atmosphere, you know, those organizations are looking for protection to do those investments and to make those bets.
From just like a bit of an opportunity for the industry and a pitch for the industry is to kinda find what those solutions are so that we can enable that transition to occur. Outside of product, you know, data, physical data being more precise, data about our built environment, is really lacking outside of the insurance industry. We're really good at knowing if a house has a hurricane, you know, reinforced window shutters or a new roof with the right attachments in Florida. We're pretty good at understanding that kind of information and detail about the homes and businesses we insure. Banks and investors, they don't know that information. They don't have that kind of detail, because it's not relevant to the credit risk that they've been concerned about to date.
So more transparency around the built environment is, I think, also an area where we'll see a lot of advancement and increased transparency.
Thank you, Liz. We're nearing the end of our time together, so I'd like to go around the virtual panel one more time and ask our excellent speakers to give us what they would like the audience to take away from our discussion today. If we could please start with Tobias, and then go to Steve, and then Liz, and then Pradeep.
Yes, happy to. I think the last point, Liz, was also an important one. You touched on the net zero race. We do see here some risk already there of greenwashing also in the industry. We need to be very cautious on that. What is really a material risk to be addressed here? On the Nat Cat and climate risk data topic that we discussed most of the time today, I think our stance is pretty clear. We have an affordability topic that is appreciated, that's highly reflected and accepted in the markets. We need to analyze climate and Nat Cat data thoroughly. We have here at Munich Re lots of expertise dealing with these kinds of changes.
We have a long history and heaps of historic data as well, and we have an appetite to grow in that, in that segment. So we will not step out of the market, but it's paramount to run our business model to have risk-adequate pricing. And climate change presents a changing risk, so we need to be on top of that and understand it very well with all the uncertainties that we discussed extensively.
Thank you, Tobias. And to Steve.
Yeah, I mean, this is a pretty familiar frame for me. It really comes down to the communication of risk, right? I think that all of this really translates in terms of how are we as an industry, an insurance industry, and I think we are very uniquely positioned. In fact, we sort of sit in the middle, right? I mean, we can work with academics, we can work with governmental entities, we can work with various financial segments, various financial sectors, to really, you know, drive innovation, drive conversations in terms of how we actually are turning around and communicating the view of risk, not just at a global level, not just at a regional level, but actually down to an individual asset where people actually live.
I think that within an industry, in terms of insurance, we sit on, frankly, almost more data than anybody else. You know, as we continue to invest, we continue to prioritize ways of updating our hazard maps or identify just other types of modeling output to be able to showcase to all the way down to an individual policyholder, what the risk looks like, where somebody actually lives. I think that can really be a pretty significant turning point in terms of people understanding what type of risk that they face, you know, where are their houses, and if we're able to get more investment from the federal government or the states, or even private sector investment, you know, deals with, you know, seeing relationships with the World Bank continuing to take off, or the United Nations.
Where this funding comes into place, where we can start to help people that may not have the means to protect themselves. But if they understand what the risk is, maybe that will help push forward more of this, you know, financial protection, to ensure that we are better prepared for this increasingly risky world.
Thank you, Steve. Liz?
Yeah, I mean, great panel, and thank you for the discussion today. If I were gonna say something maybe additive, I think one thing is, I see a lack of innovation really in the insurance sector to lean in and solve for some of the climate related challenges more broadly than physical climate risk. I think that we should take comfort in the fact that the models we've relied on to date, while there are challenges and there are gaps and there are needs to improve, that they've led to a fairly sustainable, resilient industry over the long period of time. You know, but we're not at the table around the energy transition. We're not really in the room when we're talking about the type of investment needed to achieve net zero. How are we, as an industry, protecting nature?
How can we close the protection gap? How can we bring insurance coverage to parts of the world where it doesn't exist right now? How can we support regenerative agriculture, carbon capture and storage technologies, renewable technologies? Those are things that are so critical in order to offset the impact that climate change will have on our own results. It's mutually beneficial for our industry to help to solve that, because if we can reduce the carbon in the atmosphere, then we can prevent the increase in climate-related hazards in the future, which, of course, is something that we wanna see. So I think that call to action for me is really important for people to take away.
Thank you, Liz. And Pradeep?
Yeah, thanks. I think that we're going to... On the data side of things, we're going to get better at both analyzing climate data and predictions, but also in terms of the education piece, just speaking about these risks, going from this is the expected loss to this is the probability of loss or the climate value at risk or the distributional impacts. And I think that's a market education piece that we'll really see take off in the next few years. I do also anticipate more government intervention and interaction, both in terms of regulations, but also in terms of government insurance pools starting in, to build up-
Mm-hmm
... with the attenuated moral hazard and other issues. Yeah, certainly would expect a little bit more regulatory involvement as well, and so definitely an exciting place to be in the next few years.
Thank you, Pradeep. I'd like to thank our panel, Tobias, Steve, Liz, and Pradeep for sharing your insights. Thanks to our audience for tuning in. We'll have a replay of the webinar available in just a few minutes. For Insurance Insider, I'm Meg Green.