Property Natural Catastrophe Risk Analysis in an Era of Climate Change: Some Financial Services, Investment, and Public Policy Implications

Abstract

Environmental, social, and corporate governance issues have become a hot topic that many firms are grappling with, given the increasing level of investor and consumer focus on the sustainability credentials of their businesses and what they are doing to improve them. For example, major institutional investors are beginning to apply pressure to boards of directors to proactively address climate change–related issues. Climate change manifests through both transition risks (as we move to a lower carbon economy) and physical risks (due to physical changes in the climate), including changes in natural catastrophe (nat-cat) frequencies and severities. Property and casualty insurance companies have been intensely tracking their nat-cat property accumulations since Hurricane Andrew in 1992. This article profiles the basic mechanics of nat-cat modeling and discusses how these mechanics are being influenced by climate change and the trend of recent nat-cat activity. Implications of this output on insurance/financial services, the investment community, and policy advisors are then profiled. In sum, there seems to be ample time for these parties to address the physical risks of climate change on future nat-cat events; however, the implications of inaction could be severe. We hope they use the time wisely.

TOPICS: ESG investing, real estate, risk management, tail risks, legal/regulatory/public policy

Key Findings

• ▪ Many firms are grappling with environmental, social, and corporate governance issues given the increasing level of investor and consumer focus on the sustainability credentials of their businesses and what they are doing to improve them.

• ▪ Institutional investors are beginning to apply pressure to boards of directors to proactively address climate change–related issues. Climate change manifests through both transition risks and physical risks, including changes in natural catastrophe frequencies and severities.

• ▪ There seems to be ample time for insurance/financial services, the investment community, and policy advisors to address the physical risks of climate change on future nat-cat events; however, the implications of inaction could be severe. We hope they use the time wisely.