New report provides long-awaited guidance for Regulators, (Re)insurers and Risk Modellers to problem solve, achieve consistency and focus on climate change goals.
London, 27 February, 2023: Research collaboration organisation, Lighthill Risk Network Ltd (Lighthill), today announces the publication of a significant and far reaching research report, Best practices for modelling the physical risks of climate change, that addresses the challenges facing regulators and the (re)insurance industry as they look to model the impacts of climate change.
Regulators have different approaches when it comes to guiding (re)insurers to deal with climate change, resulting in a lack of consistency and inadvertently hindering (re)insurers in their efforts to model climate change risks as accurately and completely as possible. Lighthill has identified this conundrum and responded with a report that details best practice methodologies based on industry modelling and reporting standards for the benefit of its members who include Aon, Hiscox, MS Amlin, Guy Carpenter, Liberty Syndicates and Lloyd’s.
Amid strong policy signals from regulators and governments that climate change impact reporting must be factored into the whole financial services industry, to date a myriad of disparate measures have been deployed globally to try to quantify how longer time scale climate change shocks might impact the balance sheets of banks, (re)insurers and investment funds. This report examines what a warmer world implies for (re)insurers, and best practice guidance for how catastrophe models can be used to estimate climate change impacts across different time horizons.
Lighthill Chief Executive Dickie Whitaker said:
“The world of risk is evolving ever faster and, to ensure that appropriate risk modelling is used moving forwards, a collaborative and harmonious approach must be found to eliminate the cost of complying with the requirements of (re)insurers which, if not addressed now, will ultimately spiral and impact the effectiveness of regulated entities. We need more models to be able to reflect changes to the climate already taking effect and we need greater appreciation for which approaches suit which types of questions.
This report could therefore not have come at a better time. With a focus on the learnings from the latest IPCC Assessment Reports, plus Best Practices in Modelling Climate Change, we hope that industry stakeholders will find this open and collaborative paper invaluable in helping them better understand and update their models to factor in the risks of climate change, and how best to model weather hazards over time.”
Jeremy Hindle, Lead Report Author and Director & Consultant – Risk, ESG, Climate, Data Standards & Modelling, said:
“The impacts of climate change, especially for perils such as severe convective storm, flood and wildfire, already presents challenges to ensure that models reflect current climate conditions.
Predicting how future climate will influence changes in frequency and severity against different pathways, time horizons and temperature changes has created a lack of consensus as to how best to derive decision useful outputs that could provide all stakeholders with what they need . As the insurance sector plays such a key role in helping bring financial relief to victims of such disasters, fully understanding and modelling the future impacts of climate change requires a holistic view of all approaches to climate change risk modelling.
The time horizon of the questions being asked will determine, to a large degree, what analytical approaches are used, and catastrophe models are useful for near term decision making whilst deterministic approaches are better for long term. Conversely, the extended time horizons chosen by regulators for climate change scenario analyses have little value to the non-life insurance industry for pricing, solvency or risk assumption, so one can see that different approaches are required to measure both shorter and longer time horizon impacts of climate change.
(Re)insurers, working closely with catastrophe model vendors, need to ensure that risk modelling accurately reflects the risk, including current climate change. This report – which is free and open to anyone to access – provides a basis for collaboration across industry stakeholders to make the best use of the available resources, and to help them simplify and align best practices for modelling climate change.
I would like to thank the expert and insightful contributions of all Lighthill Risk Network members, as well as AXA XL, Hiscox, Impact Forecasting, JBA Risk, Lambda Climate Research, Maximum Information, The Institutes, and Zurich Insurance, who have been instrumental in the creation of this report.”
Kirsten Mitchell-Wallace, PhD, Director of Portfolio Risk Management Markets, Lloyd’s, said:
“Understanding and quantifying the physical risks of climate change is necessary for the (re)insurance industry to fulfil its role in assisting the transition to a carbon neutral economy. Lloyd’s welcomes this report’s drive towards dialogue and cooperation, which should increase the efficacy of regulation in this area.”
Dr Jessica Turner, Head of International Cat Advisory at Guy Carpenter, said:
“This landscape is evolving rapidly – and the need to disclose and report on climate change impacts is valuable and necessary. As well as highlighting how the use of catastrophe models has evolved over the years, the report establishes best practices in the use of data, methodologies and tools for the modelling of climate change risk assessment. It also addresses several key themes, including time horizons and climate scenarios, climate-related financial disclosures, and the impact of future temperature changes.”
Access the report Flood Research Needs of the (Re)Insurance sector: collaborating to improve risk understanding and management here: https://lighthillrisknetwork.org/reports/
Notes to editors
About Lighthill Risk Network
The Lighthill Risk Network is an all-encompassing and inclusive organisation with the specific aim of facilitating and enhancing knowledge transfer into business from academic, government and commercial experts at the forefront of risk-related research.
For more information, please visit: https://lighthillrisknetwork.org/