The increasing frequency and severity of catastrophic flooding has become such that the (re)insurance market needs to readjust its view of the risk substantially, according to risk modeller RMS.
Speaking to Emerging Risks during this year’s Monte Carlo Rendez Vous, Dr Mohsen Rahnama, chief risk modelling officer and executive vice president, Models and Data at RMS, was speaking in the wake of the UN suggesting that economic losses from the recent devastating Pakistan floods could be in the region of $30 billion.
Addressing the issue of whether we should prepare ourselves for more losses on this scale in future, he suggested if we take a look at the last five years, a significant number of climate-related events have happened across the world:
“I take a step back and look, $1.1 trillion of economic losses have occurred in the last five years, with the insured loss somewhere around $500 billion. If you were to step back and look at what happened in 2021, then we had in Europe – in Germany and Belgium – close to $11-15 billion insured losses, and then you also had Hurricane Ida, which was somewhere around $10 billion.”
“So last year, the entire flood loss was an $80-85 billion loss, which means that flood is the most active peril compared to anything else. And what’s driving that is that I can see more frequent types of flood; I can see more severe types of flood; and I can see that the return period of flood is actually getting shorter and shorter: a 100-year return period for flood is now maybe a 20- or 30-year return period. And what’s contributing to this is really climate change.”
As well as the Pakistan flood loss, he pointed to other severe catastrophic events which have also occurred recently, such as flood losses in Australia and also in the Middle East, underlining a definitive climate-related trend:
“We don’t have the exact number right now, but by the end of the year we will see how this number adds up. Flood is really a major outcome of climate change.”
“Do we understand how to manage it?” he asked. “Most of flood, especially in the residential line of business, is dominated by government support, and this cannot be sustainable in the long-term. What is needed is a partnership between the private sector and government to solve the issue.”
Dr Rahnama stressed that for the insurance market, avoiding the risk is not the solution, understanding the risk is the solution, and then pricing it appropriately, adding that today, modellers are developing a better understanding of flood risk in particular with the development of a higher resolution model.
He also said that RMS is building a climate condition model, which looks at public information from the scientific community and incorporates that into the new model. What’s potentially of huge impact here for the (re)insurance market, he claimed, is that this provides a climate model which can be adjusted to predict the future, rather than only relying on historical data.