Climate risk remains insurable if it can be quantified: KCC
Climate change does not have to make catastrophe risk uninsurable, provided insurers and reinsurers can confidently quantify its impact and distinguish it from other factors driving losses, according to Karen Clark & Company (KCC).
As the industry grapples with changing catastrophe patterns, Karen Clark, co-founder and CEO of KCC, argued that the ability to measure the impact of climate change gives carriers the confidence needed to continue pricing and underwriting the risk.
“Are insurers and reinsurers afraid of climate change? Not if they’re confident in their ability to quantify it,” Clark told Bermuda:Re+ILS ahead of ILS Convergence, held October 12-14.
“If you can quantify it, then you’re comfortable that yes, it is happening, but we can get our head around it. We can quantify it, we can price it and then we can underwrite it.”
For catastrophe risk, that requires distinguishing the impact of climate change from other factors contributing to rising insured losses, including inflation, changing property values, development and greater concentrations of exposure.
Clark cautioned against assuming that increases in insured catastrophe losses necessarily reflect an equivalent increase in the underlying hazard. “There's this perception that the risk is increasing. So first of all, insured losses are obviously increasing, but the biggest driver is still exposure increases,” she said.
Over the past decade, the cost of constructing the same single-family home in the US has doubled, according to Clark. At the same time, properties have become more expensive and urbanisation has created greater concentrations of value that can be affected by individual events. That distinction matters when assessing how catastrophe risk itself is changing.
Conditioning history for today’s climate
KCC seeks to isolate the climate component within its catastrophe models so changes attributable to the hazard can be assessed separately from changes in exposure.
For hurricanes, Clark said the scientific consensus points towards increasing intensity rather than a significant increase in frequency. Thus KCC uses what it calls a “climate-conditioned” hurricane model. Historical hurricane data remains an important foundation, but individual events are adjusted to reflect how they could behave under current climatic conditions.
Clark used the 1900 Galveston hurricane as a hypothetical example. If a historical storm had maximum wind speeds of 140mph, KCC could assess whether the same event occurring under today's conditions would instead produce winds of 150mph.
The figures were illustrative rather than estimates for the Galveston hurricane, she stressed, but the example demonstrates the methodology.
“We go back to all the historical hurricanes. We climate condition them based on what the wind speeds would be today, then we build our model on that,” Clark said. KCC can then compare estimated losses produced by climate-conditioned and non-climate-conditioned versions of the model. “We can clearly quantify how much increase has been caused by climate change,” she said.
The approach also highlights the importance of separating climate effects from the broader upward trajectory in insured catastrophe losses. Alongside rising replacement costs and concentrations of exposure, Clark argued that improvements in catastrophe modelling can themselves change perceptions of the trajectory of risk.
If previous models underestimated loss potential, more accurate estimates today can create the appearance of a significant increase even where part of the difference reflects improved understanding of the existing risk.
For insurers, reinsurers and the capital supporting catastrophe risk, Clark’s central message is that a changing climate does not automatically put risk beyond the industry’s reach.
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