Advancements in risk modelling offer a big opportunity for the reinsurance market to better understand and price secondary perils, the co-founder and CEO of Karen Clark & Company (KCC), Karen Clark, shared in a recent interview with Reinsurance News ahead of the annual meeting of the reinsurance industry in Monte Carlo.
Traditionally, the reinsurance market has focused on primary perils, major catastrophic events like hurricanes and earthquakes. However, KCC has dedicated significant resources to modelling secondary perils since the beginning of the company.
Clark said: “Convective storms make up most of the insurance claims each year. But what we see now is that secondary perils like this are a big opportunity for the reinsurance market. Because there has been such little confidence in the other models, which are still more widely used in the market, reinsurers over the past several years have been shying away from severe convective storm losses, for example.”
This has led reinsurers to ask insurers to raise their retentions, leaving them to take on more risk themselves, Clark explained.
With its new methodologies, KCC believes it can provide the market with the confidence needed to price and understand these risks.
“Thanks to our newer models, this presents a great opportunity for the market. And I believe that now secondary perils have become equally significant as primary perils. And in fact, I would say they even provide more opportunities for reinsurers,” the CEO stated.
Clark also addressed climate change. According to Clark, the most straightforward perils to quantify the impacts of climate change are hurricanes, wildfires and floods, because they are primarily influenced by a single variable.
For hurricanes, the key variable is sea surface temperature, which has a known relationship with hurricane intensity. While there is a scientific consensus that climate change is increasing hurricane intensity, there’s no consensus on frequency.
KCC strategy has two parts. Clark explained: “One is that you have to make sure that the models providing loss estimates for the current time period have been climate conditioned for past climate change.
“So we know climate change has been happening since 1900. So for hurricanes what KCC scientists have done is gone back to all those historical hurricanes and said, okay, if they happened today, what would their severity be in terms of maximum wind speed? We call it VMax. KCC scientists take that variable and adjust it for every hurricane so it reflects the peak wind speed for today. And then we use those climate conditioned events to build our model.”
The second one is its “climate-condition future catalogues”, which the company has developed in order to provide future views for each peril.
“These look ahead to 2030, 2040 and 2050, offering multiple scenarios (best, worst and expected). Because when you’re going out that far, there’s a lot of uncertainty as to how the temperatures will change. So, we provide five future climate conditioned catalogues. We also do that for wildfires and we do the same thing for floods.”
However, Clark highlighted, the same methodology cannot be applied to severe convective storms, which are “a much more complex peril.”
“These are driven by dozens of variables and the interactions of those variables. Some of which may be enhanced by climate change, while others may not,” the executive explained.
She continued: “Due to this complexity and the lack of scientific consensus, KCC’s model for SCS is based on recent atmospheric data, which instead of going back 50 or 60 years, it’s based on the more recent time period. We know that our model is based on current atmospheric data, therefore the impacts of climate change are in that data and are automatically Incorporated into our model.”
“The bigger challenge is looking to the future because in the future, there’s just more uncertainty,” Clark concluded.
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