Modelling uncertainty in climate risk

Submitted by matthew.rand@as... on Fri, 06/30/2023 - 13:02

Dr Viktor Roezer of the Grantham Research Institute on Climate Change and the Environment joins Insure TV to discuss: why insurers need to be involved early in any discussion on adaptation, the disadvantages of a one year underwriting cycle, and the need for public and private investment to tackle rising sea levels

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2023 - 00:15

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Friday, June 30, 2023

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Speaker 0: to discuss the challenges that climate change is going to present to the insurance industry. I'm joined now by Doctor Victor Rosa. He is research fellow at the Grantham Institute on Climate Change and the environment. Uh, Victor, thank you so much for joining us. Um, to start with, tell us a little bit about your role. Speaker 1: I'm, uh, doing mostly research on climate change. Adaptation, Um, in particular, um, how we can build resilience in cities. Um, I'm interacting with insurers. Uh, politician, local decision makers, national decision makers, um, informing them, um, talking to how we can better adapt going into the future and how we can manage, um, increasing risks. Speaker 0: Well, well, just picking up on that I I I suppose as a as a layman, I I say if you looked at climate and risk, but back in the day, everyone said, Well, we'll just build a great big barrier between us and nature. Problem solve. Now, there's much more of a sense that we have to accommodate and flex with nature. Um, is that a fair enough sort of broad overview? And if so, where are we on that? Where are the politicians? The insurers on that spectrum between those those two points? Speaker 1: Um, yeah, I think that has increasingly become a necessity. So I think it's not something that we've chosen voluntarily. It's more like that. We really start facing the limits of what we can do and also what we can pay for in terms of engineered solutions. And I believe politicians have Speaker 1: understood that. I think we just not really acting on it yet. Um, there's a lot of potential in the UK and overseas to invest more in nature and, um, to learn to live with these climate related powers rather than fighting them. But I think there's still a bit of a way to go in terms of the implementation. Speaker 0: Does that throw up any particular issues for for risk modelling? If you're an insurer, then if you have to sort of say, we got to let a bit of nature through the system rather than we've built a barrier and we've stopped it, Speaker 1: Yeah, um, it makes quantifying risk a bit harder. Um, if you think about a concrete wall compared to what we think now, um, trying in a lot of places, sort of like beaver dams and so on, which are like leaky dams. That sort of like, for example, when we talk about flooding, hold back to water. Speaker 1: That creates a lot of challenges because the way we model risk is sort of like we want, like an almost lap like space. And I think concrete walls are really good for that because we have sort of like a constant like a stream flow. We can measure it in a very contained space. While we don't have a lot of controls, for example, what do? Speaker 1: And in many cases this will, um, create a challenge on how to implement this in models. So Speaker 0: is this a case that when things are getting harder to model, the the sort of what comes out of the model is less certain? Or is it that you're gonna need more intellectual and computing power to go in to to get results that are as certain out the other end? Speaker 1: I I think it's both, um, it's the technology that helps us to get better measurements, get drone footage of, um, let's say, river beds and so on. Um, but it's also uncertainty. Um, that's increasing, and I think we need to find ways to deal with these uncertainties. Speaker 0: And what are the consequences of that greater uncertainty? If I could put it like that for the pricing of Speaker 1: risk, Speaker 1: um, it it will might become a bit harder to price risk. But that's for several reasons. That's nature is one of it. Climate change is another. Speaker 1: Um, there is certainly ways to deal with that. Um, we can think of like a like, other pooling solutions of risk. We can think, Think of governments becoming more involved in backing up these risks. Um, because in the end, I think we benefit all from it from having more nature based solutions. Um, in our flood risk or any other risk management. Speaker 1: And in Speaker 0: your professional role, Do you see the insurance industry getting involved early enough in these discussions around risk mitigation? Speaker 1: Um, that really depends. Um, also on which arm of the insurance you're talking to? Um, I would think sort of the, um, investment side. And, um so, like this part of insurance and risk advisory, I think is really thinking about these things. I'm not sure how far we are in terms of the underwriting. Speaker 1: Um, I think One real challenge is that insurance comes quite late into the planning process, for example, so I think insurers are always asked at the last point whether they're willing to insure something or not. I think getting insurers involved earlier would have to really benefit that we could all benefit from their knowledge on risk advisory. But Speaker 0: if we go back to say where people build in the first place in the insurance industry, Speaker 0: I mean, I was up near Battery Power Station recently, which they've redeveloped. It looks wonderful, but it is sort of sat next to a major river. We kind of hear the Thames flood barriers being shut More and more often, temperatures are rising, sea levels are rising. I mean, fundamentally, is it sensible? What? What can the insurance industry do when something that big and that important with all that money invested is is there and it's plonked there? Speaker 1: Um, yeah, I think that's a really Speaker 1: a public and private partnership here. And I would be less worried, for example, about like big construction projects like the Better Sea power stations, because it is an area where a lot of investment will go into to um, protect better sea power stations from these risks. Speaker 1: More worried about, um, the smaller place so don't attract the same amount of investment places where we need to build cheap. We need to create affordable housing. And we won't have the means to ensure that in the future and also secure it through any terms of barriers or anything like that. Speaker 0: But she is a really fascinating point, though, which is that the danger that this becomes the people who really are receiving it? It's the It's the social side. It's where it's where those with less money and influence end up being being sad. Yeah, Speaker 1: I suppose. Yeah, exactly. I, um, think that this is really a social question. As much as it is, sort of like a technical question, because if you look into, like, exams like the Netherlands or so, um, they have quite successfully with huge investments, that sort of like probably Speaker 1: would not meet any cost benefit criteria in any way. Um, and manage to sort of, like, um secure them from, for example, sea river rise for, like, a really long time. Um but it comes with a huge investment, which I think a lot of areas won't be able to afford. Speaker 0: And if we accept, an area is going to be more prone to flooding Speaker 0: in the future than it was in the past. What? What are some of the things you can do to help the infrastructure, the buildings, the community adapt? Speaker 1: Um, there are several ways to do this. Um, there are centralised, uh, solutions we could think of, like, large, like flood defences and so on. But I think these become more and more difficult to manage going into the future because with a lot of the uncertainty that comes from climate change, we don't know exactly how high the water will. Speaker 1: We don't know how much rain we expect in certain areas, but I think what, um can really help are like decentralised, um, solutions and solutions that are closer to nature. So I'm thinking of, um, little parks and sustainable urban drainage, um, adapted housing, and we can We can have data on this. There's Speaker 1: both like resistance and resilience. Resistance means you try to keep the water out of your house. Resilience means you let the water flowing through your house and we can even see talking so like to people and having survey data on this, people seem to be a lot more in favour with resilience measures, so letting water flow through the house. And I personally think this is probably the better solution in the long run Speaker 0: and and just picking up from that. Do you think it's likely that we're going to see um, industry insurers showing more interest, for example, in building techniques from other parts of the world where, you know, over time they've tended to have more extremes of weather such as monsoons or something? I mean, does, does bamboo become the building material of choice in the UK in 20 years time? Speaker 1: Um, Speaker 1: yeah, I think that's an interesting thought. And, um, in terms of building material, I think there's a lot of good reasons why we need to rethink the way we build our houses. Um, one is also just emissions. The building industry has huge emissions and we are really working hard to reduce these emissions. But on the other hand, also, a lot of building materials are better suited for flooding, for example, and there's a real balance here because we at the same time need to make Speaker 1: our buildings more energy efficient. But we also need to make them better adapted to climate related risks such as flooding, storms and so on. And I think we can learn from other parts of the world. I think Wood is a great building material. And if we sort of, like build it in a way, that sort of like it, doesn't it flood resistant and it doesn't start rotting and so on, building things on stills and so on. I think that there is precedent and there are case studies from other parts of the world where we can learn from Speaker 0: you. You're talking about some very long term trends in in the climate. Um, I just want to get your thoughts on where the insurance industry fits with this in terms of underwriting, because underwriting so so cycles are pretty short. So is there a Speaker 1: mismatch here? I agree. I think the one Speaker 1: the underwriting cycle is a challenge going into the future, Um, mainly because climate change is nonlinear, so it might go wrong for a really long time, and then we see a major step change with flooding, heat storms and so on. increasing on a really large scale Speaker 1: and D where, sort of like we have issues with, um payment, um, liquidity and so on. So, um, having longer time horizons, I think would really help to also on one hand, um, better manage these risks, but also, um, incentivize, for example, Speaker 1: um, adaptation measures and so on. Because if you if you're a commercial insurer and you, um, have your clients and you want to them to adapt, but then you always have to risk that they might move insurers. Um, the next year, um, you might have a low incentive to actually, um, invest in in these measures, Speaker 0: you're talking partly about the length of the the the insurance cycle. But also you say, Well, look, if you use backward looking data, it's not necessarily great for what the future might bring. What sort of confidence should people have in using predictive models? Speaker 1: Yeah, that's true. And I think humans are amazing in adapting to, um, like new conditions. And I think, uh, we have done well in the past, and I'm not too worried that we won't be able to do so in the future. So I think I would always take these predictive models with caution, but I think they give us a sense of what to expect. And, um, I think especially from sort of like an adaptation point of view. I Speaker 1: I think insurers, um, have a real case here to, um, use these models not so much about, for example, for the underwriting directly and for quantifying risk, but of getting a sense of where the market is going and sort of like whether they will face, for example, like markets in places that will become uninsurable and whether they want to do something about this. Speaker 0: You mentioned uninsurable. I mean, do you think we could reach a scenario where parts of the world are uninsurable? Full stop? Speaker 1: Um, I I think we will if we not adapt or we don't take any actions. I'm thinking of places like Florida or parts of Australia where, um, the amount of assets at risk in combination with sea level rise, tropical storms and Speaker 1: so on will make it really hard in its current state to ensure. But, um, I'm I still believe that we can adapt, and we can still, um, find the necessary investments to actually um, manage these risk in a way that they won't become insurable, but I think this is a real scenario. Speaker 0: But if you're an insurer, what are some of the signs you should be looking out for? So I I don't know. Let's assume it's Florida. It's got lots of millionaires in it. So the state will probably go out of its way to try and make things better in the realm for Florida, full of millionaires than somewhere else. That doesn't have millionaires in. But even if the state starts to say, Well, actually, I'm not sure the taxpayers are going to put up with this for much longer. What what are presumably? That's the point that it becomes absolutely uninsurable. You know, private money by itself can't make up for Speaker 0: the state, which is the ultimate, um, underwriter of risk. Speaker 1: Yeah, exactly. And I think it's, um, really a question of like, what is the price tag and what are we willing to pay? And what are governments willing to pay? Um, insurers, Um can always There. It's like a free market. They can always leave. I believe it's not in their interest because in the end you want to have more clients rather than, um, having fewer clients over time. Speaker 1: So, um, I think insurers have a real case here to also, like, um, do their part in, um, investing in adaptation. So not only leaving it to governments, but also sort of, like, take a more active role. Um, and by that in, like a public private partnership, I think we can find a model where, um sort of like this becomes sort of, like still, um, payable in terms of like taxpayers' money, but also becomes sort of like an attractive business proposition for insurers. Speaker 0: Final question. You're describing insurance solutions, building resilience in You talked about things like dams and and and and and overflows and over spills. But is that compatible, given the sheer number of people on the planet? I mean, if we look at the UK Speaker 0: plenty of resilience in the model, you could argue in the Middle Ages because there was a population of about four million people. So we had plenty of space for waters to sort of burst the banks of a big river and disappear and, uh, you know, into into water meadows and so forth with 70 million people in the country. That's just not possible. Speaker 1: Um, yes, I agree. Uh, to the extent that a lot of the risk we are seeing today, um and also probably going into the future comes from increases in exposure. So, like what we call it exposed assets. Um, but that doesn't mean that this is not manageable. It will be more difficult to manage. I agree it's more difficult to manage flooding, Um, and sort of like relocation and so on in a case where we have four million people versus 70 million, Speaker 1: um, sea level rise. Coast erosion also means that, like the space we have will rather become smaller than bigger. Um, but nevertheless, I think what I've previously touched on in terms of adapted housing and so on, I think what we need to learn is to live with flooding lift, um, with other climate perils. Um, and just go go with it. Rather than fighting Speaker 0: it. We have to leave it there. Dr. Victor Rosa, Thank you for joining us. Thank Speaker 1: you very much.

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