When it comes to effective risk management and fulfilling climate reporting obligations, physical climate change risk modelling is an essential part of the process.
Driven largely by rising global temperatures, extreme weather events such as typhoons, floods, and heatwaves are becoming more frequent, with climate-related disasters worldwide increasing 83% in the past 20 years.1 Severe extreme weather events, such as floods, storms, and wildfires, have caused a magnitude of losses unheard of prior to 2011 — with insured losses of US$5 billion or higher in four of the last five years.2
Further challenging businesses’ ability to recover from impact of these climate hazards is the inadequate level of insurance coverage in Asia, where 90% of losses are uninsured.3
With the sustainability of businesses on the line, accurately diagnosing and pricing physical climate change risks can help organisations answer many of the questions on how to mitigate and transfer the risk optimally. Physical climate change risk modelling can achieve this by providing an understanding of potential losses for an asset or portfolio of assets across a variety of peril scenarios and timeframes (i.e. both near-term and long-term).
What is physical climate change risk modelling?
Physical climate change risk modelling uses a combination of historical event data and downscaled global climate projections to identify the impact of different perils, from catastrophic threats like flooding and typhoons to more chronic stresses like droughts on a business’s assets and operations.
The results should provide businesses with a highly-detailed, asset-level view on damages and business interruption implications for specific perils, as well as an organisational-level perspective on key risks.
Common mistakes when modelling physical climate change risk
Not all physical climate change risk models and approaches are the same. To obtain actionable intelligence, businesses need to ensure their chosen process is robust and backed by reliable scientific and engineering data appropriate for the geography of interest. When starting the process, businesses might overlook the following considerations:
- Not selecting the right and most critical perils to model.
- Not modelling the appropriate climate scenarios and time horizons.
- Not knowing the right vendors and how many to go with.
- Model is not up-to-date or use inaccurate geolocation data.
- Model cannot be interrogated, customised or challenged fully to ensure its accuracy and integrity for business use.
- Vendor is unable to supply the relevant outputs to actively support your business in meeting regulatory requests.
How to overcome the challenges of physical climate change risk modelling
Choosing the right risk advisor is vital. Look for an expert that can work with leading catastrophe and climate change risk model providers to create an up-to-date, model-agnostic, and fully-owned approach to climate risk, and ensure accurate and relevant outcome data from physical climate change risk modelling. This seven-step framework can help businesses extract meaningful value from the outcome data:
