By Bradley Winfield, Head of U.S. Open Market Property, Canopius USA
As the year comes to a close, it’s a good time to reflect on the cat-related insurance challenges faced and the impact sophisticated, forward-looking modeling can have on assessing risk.
We are seeing direct effects from climate change
Severe drought, extreme heat, deep freezes, and torrential rains have wreaked havoc across the country – indeed around the world – this past year. The effects of climate change have been severe and far-reaching. Storms have repeatedly battered hard hit areas such as the Gulf coast, escalating in both frequency and severity. Eroding landscape from storms in these areas has amplified the problem, resulting in increasingly severe damages both along the coastline, as well as inland.
Climate effects are also being felt in western states, with a record number of wildfires ravaging millions of acres in recent years. Although human beings are the leading cause of wildfires, there is clear evidence that climate change is having a significant impact on the dramatic increase, spread and severity of fires. Changes in precipitation patterns, warmer conditions and a longer fire season are a few of the climate changes that are boosting wildfire risk. These changes enhance the drying of organic matter, the material that burns and spreads wildfires, in forests. They also advance the spread of insects that can weaken and kill trees, providing further fuel for the fires.
Assessing catastrophe risk, and managing aggregation in these areas requires sophisticated modeling that takes many risk factors, including climate effects, into account.
We are leading with a science-based approach
Canopius’ underwriting philosophy with regards to natural peril catastrophe risk is to be driven by science. To this end, Canopius invests heavily in its research and exposure management capabilities. The challenges and opportunities posed by climate change are embraced as part of our approach to catastrophe management, implemented through the following approaches.
Understanding the science
Extensive review of scientific studies including impacts to date, and forecast changes to perils globally forms the basis of our approach to managing climate change risk. Our ongoing analysis of the evolving science allows us to incorporate a range of views, align with the scientific consensus and consider regional and peril specific uncertainties. As part of this, we ensure our current view of risk captures climate change to date, adjusting where necessary.
In addition, we engage with the wider insurance and scientific community, forming bespoke partnerships with third parties to build out market leading capabilities for our key perils. Partnering with market-specific climate change experts further contributes to developing best-practices.
Quantifying the impact
We have developed a suite of probabilistic scenarios to assess the impacts of future change across all our meteorological perils. These consider a range of possible emissions pathways and timeframes, allowing us to understand possible scenarios over the near, medium and long term.
Corresponding quantification is carried out to assess the potential impact of future climate change on our investment assets and liability portfolio.
Informing risk selection
Canopius is embedding a framework that will allow underwriters to assess the relative future impacts of climate change on property business at a location, account and portfolio level. The framework is built using credible data from the scientific community to consider future changes in hazard globally for natural peril risk, and allowing us to embed considerations of climate change into our risk selection process.
Managing wildfire risk
Canopius has developed a proprietary high resolution wildfire tool set for assessing wildfire risk and managing aggregations in California. The system takes advantage of satellite data, decades of well established research on wildfires and innovative combinations of data to produce a comprehensive assessment of the wildfire hazard which accounts for the ecosystem, fire history and influence of the built environment. We also utilize a proprietary aggregation system for risk accumulations in areas prone to the greatest wildfire losses, managing exposure aggregation and encouraging diversification at multiple levels.
Using sophisticated tools and forward looking modeling that accounts for the effects of climate change affords us the flexibility to take a broad view of risk. These tools form the basis of our technical approach to pricing. We understand that evolving climate-related challenges will prevail. And we are confident that our proactive approach and underwriting expertise will allow us to provide innovative methods to address the unique risks of each client.