Managing physical climate risk: Leveraging innovations in catastrophe risk modelling

The global insurance industry has been leading the way in innovating and advancing cat modelling since the late 1980s, prompted by unprecedented insurance losses and company insolvencies in the 1980s and 1990s, owing to major catastrophes in the U.S. and Europe. Over the last few years, the (re)insurance industry has been working closely with the international community to transfer these technologies for the public sector to areas such as disaster risk management, development planning and sovereign risk transfer in the middle-and low-income countries (The Geneva Association 2017). A few initiatives are underway to explore the value proposition of the insurers’ expertise and cat modelling tools for assessing physical risk exposure in other parts of the financial system (ClimateWise 2018).

In this report, cat modelling is examined as a critical tool to help improve and even reshape the future of disaster and climate risk management. To this end, The Geneva Association has brought together leading international experts from the commercial cat risk modelling firms, the (re)insurance industry, the scientific community (specifically, operational weather and climate modelling) and academia to explore this issue and offer collective insights for future consideration. This report has also been informed by the 2017 Geneva Association Forum on Extreme Events and Climate Risks on ‘How Will Risk Modelling Shape the Future of Risk Transfer?’ co-organised with the SCOR Foundation and hosted by SCOR SE in Paris.

Section 2 describes the evolution of cat modelling since the 1980s. In Section 3 demonstrates challenges of developing and utilising cat models. Section 4 outlines a number of potential areas where expansion of cat models could help with improving decision-making and risk management practices. In Section 5 the report highlights some technological developments that could be leveraged for improving cat modelling. Recommendations for the way forward are provided in Section 6.