Part of a new industry series Insuring the Future™: Climate Risk Intelligence™ for Insurance Services
What Is Climate Risk Intelligence™?
Climate Risk Intelligence™ is the structured translation of climate science into actionable risk information for insurance decision-making. It brings together four building blocks. First, climate scenarios describe plausible futures for greenhouse gas emissions, warming levels, and regional climate responses across multiple horizons, often extending to 2030, 2050, and 2100. These scenarios may be drawn from frameworks used by the IPCC, central banks, and supervisory networks.
Climate Scenarios: Defining Plausible Futures
Second, hazard models estimate how the frequency and severity of specific perils change under those scenarios at granular spatial scales. For example, hydrodynamic models can estimate flood depth for multiple return periods under different sea-level and rainfall assumptions; fire-weather indices can project conditions conducive to wildfire; and storm-track models can simulate how the intensity and paths of tropical cyclones may change (IPCC, 2021).
Hazard Modeling: Translating Scenarios into Perils
Third, exposure and vulnerability data characterize what is at risk and how sensitive it is. This includes the location, construction, age, occupancy, and value of buildings and infrastructure; critical equipment and inventory; supply chain dependencies; and business processes that could be interrupted. Vulnerability functions, derived from engineering studies and observed losses, relate hazard intensities to expected damage or downtime.
Exposure and Vulnerability: What’s at Risk and How It Fails
Fourth, financial translation models convert physical impacts into monetary metrics such as average annual loss, loss exceedance curves, probable maximum loss at different return periods, expected business interruption, and the capital required to absorb those risks. This enables direct comparison across perils, portfolios, and scenarios and supports decisions on pricing, reinsurance, and capital.
Financial Translation: Converting Physical Risk into Decision Metrics
Climate Risk Intelligence™ differs from traditional catastrophe modeling and actuarial analysis in that it is explicitly forward-looking. Catastrophe models have historically been calibrated to the current or recent climate; Climate Risk Intelligence™ extends them by conditioning on projected hazard shifts and by exploring multiple scenarios. Actuarial methods often rely heavily on past claims; Climate Risk Intelligence™ recognizes that, for many perils, the statistical properties of extremes are changing, so the past alone may understate future tail risk (IPCC, 2021). Embedded across the value chain, Climate Risk Intelligence™ becomes a set of decision-ready signals that can be monitored, managed, and communicated.
Frequently Asked Questions (FAQs)
- What is Climate Risk Intelligence™? Climate Risk Intelligence™ is the structured translation of climate science into actionable, forward-looking risk insights that support insurance, financial, and asset-level decision-making across multiple time horizons.
- How is Climate Risk Intelligence™ different from traditional catastrophe modeling? Traditional catastrophe models are typically calibrated to historical or recent climate conditions. Climate Risk Intelligence™ explicitly incorporates future climate scenarios and projected hazard shifts, enabling analysis of how risk profiles may change over time.
- What role do climate scenarios play in Climate Risk Intelligence™? Climate scenarios describe plausible future pathways for greenhouse gas emissions, warming levels, and regional climate responses. They provide the foundation for evaluating how hazards, losses, and financial risk may evolve under different futures.
- Why is downscaling important for Climate Risk Intelligence™? Downscaling translates outputs from global and regional climate models into high-resolution, local hazard data. This is essential for accurately assessing asset-level exposure, vulnerability, and loss potential, particularly for perils like flood, heat, wind, and wildfire.
- How is physical climate risk translated into financial metrics? Climate Risk Intelligence™ uses financial translation models to convert physical impacts into monetary measures such as average annual loss, probable maximum loss, business interruption, and capital requirements, enabling comparison across portfolios, perils, and scenarios.
More in the next post on Insuring the Future™: Climate Risk Intelligence™ for Insurance Services…
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