Climate Change Quantification of business impacts by means of catastrophe modeling leading to tailormade risk transfer solutions Or: Nat Cat Reinsurance

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Climate ChangeQuantification of business
impacts by means of catastrophe modeling leading
to tailormade risk transfer solutionsOr Nat
Cat Reinsurance how it works and what it needs
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(Nat Cat) Risk Management

• Identification/Awareness
• perception is based on a shared mental model that
  can be conceptualized
• Quantification
• From conceptual to quantitative model
• Mitigation
• Explore/quantify options through quantification
• Transfer
• costing of options need for integrated models
  loss costs (expected loss), cost of capital (or
  for capacity)
• portfolio management ? diversification
• Market price the option and trade etc.

generic
conceptualize
apply
integrate
specific
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Reality and Model
Reality
To be more precise Perceived reality
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Reality and Model
Reality Model
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Reality and Model Proportions
Reality Model
additional perils
Economy
Legal Framework
Society
Environment
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Reality and Model What can be described
Reality Model
Unrealistic?
Not modeled
Modeled
Reality ? Model Abstraction Described in
Model Model ? Reality Interpretation
(Verification/Falsification/Calibration)
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Reality and Model Development
Reality Model
conceptional
incremental
Unrealistic?
Not modeled
Modeled
Reality ? Model Abstraction Described in
Model Model ? Reality Interpretation
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Reality and Model Development
Reality Model
conceptional
incremental
Unrealistic?
Not modeled
Modeled
Reality ? Model Abstraction Described in
Model Model ? Reality Interpretation
Be reminded Perceived reality
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Nat Cat loss model4 elements
Hazard
Vulnerability
Value distribution
Cover conditions
How strong?How frequent?
How well built and protected?
What exactly is covered ... where...
and how?

• Sums insured
• Cover limits
• Deductibles
• Exclusions
• etc.

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Example Detailed Single Event SimulationLiterall
y hundred thousands of such simulations are run
in e.g. the catXos Nat Cat model to assess a
portfolio
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TC North Atlantic probabilistic (zoom)
North Atlantic tropical cyclone event set
historic1000 events100 years
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The largest loss potentials
110
75
Hurricane USCarib. (100y)
Quake California

• Peak risks
• Earthquake or storm
• In industrialisedcountries
• With high insurancedensity

Quake Japan
50
45
Typhoon Japan
19
20
7.2
JER
8.4
Daria 1990
FHCF2007
Northridge 1994
Mireille 1991
Katrina 2005
Insurance loss potentials in USD billions
Nat cat events (indexed to 2006, source sigma
2007)
Loss potentials from events with a return period
of 200 years (100 years for Hurricane North
Atlantic)
FHCF Florida Hurricane Catastrophe Fund
state-run JER Japan Earthquake
Reinsurance Scheme schemes
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How will climate change impact the re/insurance
industry?
Possible change in mean AND variance
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The next 100 yearsIncreasing variability
summer heatwave
What has been exceptional in 2003 might become
usual by 2070
Source Schär et al., Nature 2004
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The next 100 yearsIncreasing variability
summer heatwave
What has been exceptional in 2003 might become
usual by 2070
Source Schär et al., Nature 2004
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The effects of climate change Storm damage in
Europe on the rise Climate change is affecting
winter storms in Europe. Based on the findings of
a scientific study, Swiss Re forecasts a
significant rise in damage from storm events in
the long term, creating additional risk for
society and insurers to manage CORNELIA
SCHWIERZ1, PAMELA HECK2, EVELYN ZENKLUSEN1, DAVID
N. BRESCH2, CHRISTOPH SCHÄR1, PIER-LUIGI VIDALE1
and MARTIN WILD1 1) Institute for Atmospheric
and Climate Science, ETH Zürich, Schweiz 2) Swiss
Reinsurance Company, Zürich, Schweiz
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IPCC Scenarios
Current, Control
Future, A2
Source IPCC 2007, Summary for Policy Makers
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European Winter StormsGoal and Methodology

• Compare wind storm losses on a Europe-wide
  property insurance portfolio in current and
  future climate conditions
• Use 3-dimensional global climate models (Int.
  community, ETH)
• Drive regional climate models over Europe with
  initial and boundary conditions from global
  models (ETH)
• Couple windfields (climate model output) with
  Swiss Res state-of-the-art loss model
  (probabilistic storm hazard set for current and
  future climate conditions)

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European Winter StormsClimate Change Impact

• Increase in annual expected loss for the period
  20712100 compared to a 19611990 reference
  period
• Climate models show an increase in both storm
  severity and frequency.

Climate model 1
Climate model 2
Climate model 3
Swiss Re loss model
68
48
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Source Schwierz et al, Modelling European winter
windstorm losses in current and future climate,
submitted to climatic change
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Climate Impact StudiesOn-going Joint Projects

• Winterstorm Europe
• MeteoSwiss, Zürich (NCCR climate), see P. Della
  Marta
• Tropical Cyclones North Atlantic
• University of Bern, (NCCR climate)
• Flood Europe
• EC Joint Research Center, Ispra, Italy
• Drought and Subsidence Europe
• ETH, Zürich (NCCR climate)
• Sea Level Rise, Coastal Risks
• University of Bern, GKSS Hamburg
• Tropical Cyclones West Pacific
• City University of Hong Kong (more general study,
  done)

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Conclusions

• Past and Present Climate
• solid base period ? longer re-analysis period,
  better representation of extremes (tail events)
• comprehensive probabilistic set ?(multimodel)
  ensemble based re-analysis
• variables to best represent the cause of loss ?
  gust better than mean wind, flood water level
  better than run-off (? e.g. coupled hydrological
  and hydraulic models)
• reasonable resolution to capture local risk and
  consistent spatial signals ? footprint
  (dependency)
• Future climate
• Avoid surprises, abrupt change (prevention,
  mitigation, adaptation)
• Near future (decade) of more immediate concern
  (from time-slice to continuum)
• Ceterum censeo Easy data access (at adequate
  costs, simple legal terms)

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Further reading
www.swissre.com Research Publications ? Swiss
Re publishing
David_Bresch_at_swissre.com