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Nat Cat Modelling - Cat Models and Climate Change

Nat Cat Modelling enables Companies to make more robust plans about Risk.

Scientists agree the climate is changing, but apart from this fact, very little is actually known about the specifics of future global warming and its effects. Scientists do not know with any degree of certainty how much warming will occur in the future, how fast it will occur, or how future warming will affect precipitation patterns, droughts and storms.

According to the most recent report from the Intergovernmental Panel on Climate Change (IPCC), the bestestimate range of projected temperature increase by the end of this century is 3.1 to 7.2 degrees Fahrenheit (1.8 to 4.0 degrees Celsius). That is a fairly wide range and over a long time period—the next 100 years. Predictions about sea level rise are even more uncertain. While the best estimate range is between 7 and 23 inches (0.18 and 0.59 meters), some models project irreversible melting of the Greenland ice sheet which would lead to a 23 foot (7 meter) rise in the global sea level.

Given this high degree of uncertainty and possible doomsday scenarios, how can company executives and risk managers effectively plan and prepare for the future state of the climate? It is not possible now to make accurate predictions, particularly for a 10- to 20-year time horizon.

But the evidence so overwhelmingly supports future warming and potential adverse consequences that climate change cannot be ignored in business planning. Catastrophe models can be useful planning tools, particularly for businesses with high property concentrations vulnerable to extreme weather events. Insurance companies have used these models extensively over the past 10 to 15 years to assess potential property losses from extreme events. The models cannot predict future losses, but they can provide useful information on the property losses that could result from future events.

One effective approach for using the models is to develop a range of plausible planning scenarios that are most relevant for a business. For example, most hurricane researchers expect some increase in hurricane intensity over the next 10 to 20 years based on sea surface temperatures increasing by just 1 percent. If maximum hurricane wind speeds increase by even 2 percent to 5 percent—the most likely range—there could be adverse consequences on a business that catastrophe models can help quantify.

Models can also help companies estimate the impacts of various loss-mitigation strategies that should result as companies start to incorporate climate change into their financial planning and strategy development. Studies have shown that effective loss-mitigation devices and initiatives can reduce damage to certain properties by up to 80 percent. Clearly, loss mitigation is good business whatever climate change brings.

Download "Global Risk Dialogue" spring 2008