Hurricane Risk Management Strategies for Insurers in a Changing Climate

Abstract

AbstractThe insurance sector is among the earliest private sector industries to see substantial losses associated with climate change, and the risk signals embedded in insurance premiums could be a key driver for how climate adaptation decisions are made by individuals and communities. Therefore, risk assessments made in the insurance sector are critical for determining how the built environment responds to and rebuilds from natural disasters, and how society prices in the changes in disaster risk associated with climate change. Catastrophe models are the key tool the insurance community can use to bridge the gap between climate models and the extreme events that are the primary way in which society experiences climate change. The following discussion provides concrete suggestions for extending established catastrophe risk management practices to include emerging climate risks. Incorporating climate change into hurricane risk management requires risk managers to 1. Explore catastrophe and climate model sensitivity to inputs in the built environment, 2. Divide hurricane risk by subperil so risk management strategies can be tailored to variable levels of uncertainty, and 3. Translate climate impacts into metrics that tie directly to decision-making and business outcomes. Each of these steps also highlights opportunities for collaboration between the insurance sector and scientific community. The general strategy of assessing sensitivity to model inputs, tailoring risk management strategies to the level of uncertainty in the hazard, and producing outputs that are useful for end users is broadly applicable for climate data services across a wide variety of sectors.KeywordsInsuranceClimateCatastrophe ModelingHurricaneRisk management