In a recent reinsurance outlook briefing, specialists from Moody’s Ratings examined how primary insurers have had to retain more exposure to small-to-mid-sized cat events as reinsurers have withdrawn capacity or significantly increased prices.
A lot of these risk events relate to severe convective storms, noted Brandan Holmes, VP-senior credit officer at Moody’s Ratings. This has prompted primary insurers to make decisions whether to retain the risk and pay more for reinsurance, retain the risk and get comfortable managing it, or withdraw from the risk in certain higher-risk areas. Moody’s research indicates that insurers are retaining more risks, which has contributed to the difference in profitability performance between reinsurers and primaries in the past few years.
The question now for the market is how climate change – identified as one of five factors impacting the outlook of the global reinsurance market – is likely to contribute to those perils going forward.
Offering his perspective, Joss Matthewman (pictured), senior director of climate change product management & strategy at Moody’s Ratings, looked to severe convection storms as an example. With regard to that peril, he highlighted that the impact of climate change remains very uncertain. “To really understand the impact of climate change, we have to think about what drives severe convective storm activity,” he said. “So, we have convective available potential energy, or CAPE, that’s a measure of the amount of energy which is available for convection. That’s really important for storm generation.
“You then have the vertical wind shear, so that’s the change in the size, wind speed or direction of the horizontal winds as you move up in the atmosphere. And then you have convective inhibition, that’s the resistance of the atmosphere to getting convection going. It’s the energy required to lift an air parcel to a level such that it can just keep on rising.”
When CAPE and vertical wind shear increase, you get a corresponding increase in the severity and frequency of these severe convective storm events. But conversely, Matthewman said, when you get more inhibition, you’re going to suppress severe convective storm activity. “So, the question really is, ‘how are these climate drivers going to be impacted by climate change?’”
Looking at the climate change impacts which have occurred to date, he noted that trends have been observed in only a small minority of regions, and even a small subset of geographies within those regions. European severe convection storm research has found that there are significant trends in combined CAPE and wind shear around the Mediterranean, but particularly in the Po Valley. That’s especially problematic, he said, as it’s an area of existing high risk for severe convective storms.
“We are seeing trends in that geography, but not really across the domain as a whole for severe convective storms,” he said. “But as for what the future could hold, projecting out the impact of climate change on those parameters which drive these severe convective storms is really challenging. Severe convective storms are driven by these micro scale processes. And the climate models which are used to produce these future climate projections really have resolutions which are on the 10s or hundreds of kilometers, so those micro scale processes can’t really be resolved at that resolution.
“And so, there’s going to be a degree of approximation which has to be made in how these events are captured in these models, and that’s going to come with higher uncertainty.”
Matthewman highlighted that should there be an increase in both the convective inhibition and the CAPE, that could lead to a situation where there are fewer events overall, due to the increasing inhibition. However, the events which are seen could be more severe because of the increase in CAPE. “So, you can get that competing effect, and that’s going to impact different contracts in the insurance and reinsurance industry in different ways.
“But overall, I would say severe convective storm does remain one of the more challenging extreme weather perils when it comes to understanding both the impact climate change may have already had, but also the impact we might see in the future.”
