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Insuring for resilience

Being able to predict the impact of natural hazards is fundamental to the global insurance industry - especially in high-risk areas of the world. Which is why the Met Office has recently developed new applications for its weather and climate science targeted at both insurers and the people they serve in vulnerable, emerging economies.

The UK's Great Storm of '87. The San Francisco quake of '89. Hurricane Andrew that hit the US in '92. These are just some of the extreme events that caused the insurance industry to rethink risk - and how much capital they held in reserve as a result. 'Because of this, two important capabilities emerged," explains Nick Moody, Head of Disaster Risk for Finance and Insurance at the Met Office.

"One was catastrophe modelling coming out of academic centres in Boston and Stanford as a response to insurance loss. At the same time, GIS mapping was being developed. Combining these two capabilities provides a much more scientific approach to understanding risk."

This type of modelling involves calculating three variables. The 'vulnerability' - of a property or crop, for example. The 'exposure' - which means the number of properties or crops potentially at risk. And the 'start point' - or natural hazard itself. This is where the expertise of Met Office Insurance and Capital Markets experts - alongside other applied science colleagues - comes into its own. Adding weather and climate expertise into the modelling process helps insurers - and reinsurers - understand the 'start points' in much greater detail.

Vulnerable emerging economies

Figures from the world's largest reinsurer Munich Re show around a 60% discrepancy between what is insured and average annual loss for the developed world. However, the gap in emerging economies - such as some countries in Latin America, Africa and Asia - is even more stark, where around 90% of annual loss remains uninsured. Lloyd's of London estimates this large-scale underinsurance compromises the reduction of poverty.

As part of the global disaster risk reduction community, we are well placed to help to address under insurance in emerging economies. Governments and the private sector are now working together to build financial resilience where it is most needed, as a key component of broader Disaster Risk Reduction efforts. Disaster Risk Finance and Insurance (DRFI) presents an opportunity for public-private partnership.

As Nick says: "UN agencies and aid organisations see financial resilience as an essential precondition for economic growth. For example if an agricultural community is dependent on unpredictable emergency aid after a tropical storm or prolonged drought, economic growth is impossible. The global insurance industry can help governments implement regional safety net schemes, while the Met Office can help in the risk modelling process that makes this possible."

Partnering with Lloyd's

In November 2015 eight Lloyd's syndicates launched a $400 million Disaster Risk Facility (DRF) with a focus on South East Asia. It's a good example of a growing international commitment to use reinsurance to build resilience.

The aim of DRF is to offer rapid payouts to people affected by floods, crop failure and other disasters. To do this, it draws together a range of organisations including World Bank, national governments, municipalities and NGOs. Recent events, such as the Nepal earthquake, highlight how slow and ineffective the international and local response can be without this kind of concerted and coordinated effort.

In late May 2016, Lloyd's and world leading reinsurance broker Guy Carpenter plc hosted a major Met Office event in London where they explored the Met Office's relevant expertise in detail.

Senior technical experts from Lloyd's reinsurance syndicates attended the event, 'Weather and Climate Analysis for Insurance'. We also welcomed representatives from government agencies such as the Department for International Development (DFID), the Environment Agency and Defra, the Bank of England, major re-insurance brokers, academia and others.

Trevor Maynard, Head of Exposure Management and Reinsurance, Lloyd's, said: "Lloyd's was delighted to host an event showcasing the Met Office's capabilities to model natural hazards. Our year-long study with them on global teleconnections was very illuminating and confirmed our prior modelling assumptions were appropriate."

Met Office showcase

At the event, the Met Office showcased cross-industry capabilities in measuring the frequency, severity and location of extreme natural events. We also presented our latest forecasting resources that draw on the huge increase in our in-house High Performance Computing (HPC) capacity.

"A case study then shared the potential of a new agricultural weather index designed for Vietnam, Cambodia, Thailand and Laos PDR," explains Nick. "This draws on the Met Office's understanding of the meteorology of the region and models the likelihood of extreme drought that could cause rice crop failure."

Developed in partnership with Lloyd's and Guy Carpenter plc, the Southeast Asia Agricultural Weather Index is a concrete illustration of how reinsurers can better understand their risk. But it also demonstrates how country agricultural or finance ministries could use reinsurance backing to make sure those affected receive a pay-out when conditions exceed the threshold determined by the index.

The Lloyd's event also saw a preview of the 'Global Teleconnections Report' due to be published this summer, which will outline additional groundbreaking work in this field. The consultancy was commissioned by Lloyd's and carried out by the Met Office. It was prompted when the regulator questioned the industry's assumption that extreme global weather events occur 'independently' of each other.

The Report analyses the interactions of global climate drivers and regional hazards to uncover possible 'dependencies' - how one phenomenon may affect another. It's significant because it could have important implications for how solvency risk is assessed - and how the capital reserves that cover it are calculated.

Where next for meteorological science and risk modelling?

At the moment, the risk modelling techniques that are being used are the best available. But with the world's top three risk consultancies turning over around half a billion dollars each year, it's clear that their application has much further to go. As Met Office HPC continues to generate more data, for example, it can be used to assess insurance risk at increasingly local levels - as well as in new areas altogether.

Professor Dame Julia Slingo, Met Office Chief Scientist said: "The global reinsurance sector has been at the leading edge of risk modelling for many years. It has developed techniques and platforms that could be applicable to sectors beyond insurance and regions beyond traditional markets, not the least in disaster risk research in vulnerable regions. Understanding the risk problem starts with a probabilistic understanding of the hazard; the Met Office is very well placed to offer this view based on simulations of extreme events that are in the 'tail' of the distribution curve but are still physically plausible."