What is the price of a hurricane?

Insurers' models are based on past data combined with the latest research findings. "We also look at very old publications and data," says Thierry Corti, Head of Sustainability Risk Management at Swiss Re.

"We have decades of thinking about climate change." But that doesn't mean it's possible to quantify the damage caused by global warming, he said. It's hardly possible to isolate just one factor from a hurricane's damage history, he said. "Ten years ago, the world was a different place," stresses the insurance expert.

"For a few years now, people have been pushing further and further into areas such as coastal regions that are exposed to natural forces. Areas of land are being concreted over with houses and roads, so that the water can hardly drain away during heavy rainfall," says Lucia Bevere, Senior Catastrophe Data Analyst at Swiss Re, explaining the weighting of new insurance analyses.

The economic development of a region brings higher asset values. This influences the amount of damage in the event of a disaster. For this reason, rising loss amounts cannot simply be attributed to climate change.

But even if the actual responsibility for past catastrophes can never be fully quantified: The immense damage caused by natural catastrophes inevitably makes climate change an issue for insurers.

The way of the wind
"Andrew" began as a tropical wave and brought destruction to Florida. The hurricane caused $26.5 billion in property damage in 1992. $7.3 billion was covered by insurers. "An-drew" showed that hurricanes are among the most devastating natural disasters. "This event," reads the introduction in SVV's 2018 annual report, "was the catalyst for insurers to develop risk models for natural catastrophes."

"As an insurer, we have to put a price on risk."

"We calculate hundreds of thousands of possible hurricanes and their likely paths," says Lucia Bevere. Using these hypothetical events, analysts at the reinsurer model scenarios to estimate the impact on the portfolio: What is the expected loss and what financial consequences can be expected?

"As an insurer, we have to put a price on risk," the analyst says. The price is determined anew every year. "We adjust the price every year to the new realities and are thus able to reflect the current risk in the best possible way," she says. The latest findings in climate research are taken into account. The analysts take into account short-term changes in the climate as well as the development of losses following catastrophic events.

However, due to the short duration of one year, the long-term risks of climate change do not play a direct role in price formation.

"Whether we expect a 0.5-degree or a 5-degree scenario makes little difference to the pricing of the next renewal round," adds Thierry Corti, Head of Sustainability Risk Management at the reinsurer. The effects over the next 15 years differ only slightly for the two scenarios. Only then do they drift apart. "This is because the development of the coming years is the consequence of the emissions of the past years.

Climate experts for immense events
Natural catastrophes are a risk. And global warming is having an impact in the insurance industry. "Climate change needs to be taken seriously," Corti says. "Ignoring it is not an option."

After all, he says, insurers are in a privileged position: "Catastrophe analysis is our business," he says. "We think about risk, we think about what could go wrong."

With their models, insurers can calculate what could happen in scenarios. Corti: "We can make statements about what can be expected for a portfolio if sea levels rise by one metre, for example. This knowledge makes insurers ideal partners when it comes to climate change.

"We are neutral, we are the risk takers," explains Thierry Corti. If a coastal region is no longer insurable, this can have fatal consequences for those directly affected. "For us, on the other hand, it is a market that would be lost." This objective

Distance allows for a balanced assessment.

"With our clients, we look at long-term scenarios. We can't just bet on one particular scenario," Corti says. For example, the analysis may show that a client could have a problem because they have too much exposure to a coastal region. This is where reinsurers can advise. It is possible, for example, that structural measures are needed before a location can become insurable again.

Disaster models for Switzerland
There are also catastrophe models for Switzerland. "We have models for winter storms and hailstorms, for example," says Corti. Because Switzerland will also have to reckon with noticeable changes:

Dry summers, heavy precipitation, more heat days, winters with little snow: The CH2018 climate scenarios of the National Centre for Climate Services (NCCS) show how climate change may affect Switzerland by 2060. An additional warming in Switzerland of 0.5 to 1.5 degrees by mid-century is likely. And this is the positive scenario. This is to be expected if effective climate protection measures are taken. Without these measures, warming of 2.5 to 4.5 degrees can be assumed.

Parametric insurances
For the economy and society, it will be important for the providers to further develop their models, also depending on other factors such as "urbanisation". The industry, as the SIA Annual Report 2018 concludes, must adapt to the changed circumstances. New products have now been launched by Swiss Re. States can now insure themselves against climate catastrophes such as droughts.

With so-called "parametric insurances", help can be provided quickly and unbureaucratically. The advantage of these products is that no damage has to be assessed first. The payout depends on a parameter such as the amount of precipitation. In contrast, we know from pandemic disasters that rapid assistance can prevent greater damage.

"The difficult thing was to define the right parameters so that the money would be paid out when it was needed," stresses Thierry Corti. "But today, this is part of our standard offering." The only thing is that there will be no long-term insurance against climate change. For Thierry Corti, that makes no sense. He also has a compelling argument for this: "Such insurance would take away the motivation to curb climate change."