The RMS chief modelling officer and executive vice president said it is important to look at the past to understand how climate change has been affecting natural catastrophes and to factor this into the modelling of future events.

In conversation with The Insurer TV at its pop-up studio in Monte Carlo during the Rendez-Vous, Rahnama expressed concerns over the mounting losses coming from natural catastrophes.

“Given the level of severity we have seen in the last five years, you will expect at the end of 2030 you’re going to see almost close to $1.5trn to $2trn of industry losses,” Rahnama warned.

“How much do we know about that coming from climate change? Climate change is important, and the scientific community does an enormous amount of research. And we as the insurance industry have to step back and look at exactly what are the things we need to do to prepare the industry to respond to the [effects of] climate change,” he added.

Data presented by Rahnama during the interview points to industry losses of up to $2trn from 2020 to 2030 based on events in the 2010s, which incurred losses of $873bn, as well as the severity of cat events observed over the last five years.

$1bn+-events-by-decade

There is mounting evidence that climate change has been increasing the frequency and severity of natural catastrophes.

But according to a recent presentation from Guy Carpenter, climate change mainly impacts secondary perils at present, although it warned the worst effects will occur in the longer term. The broker has estimated the global impact on average annual loss from climate change in the near term at less than 1 percent per annum.

Rahnama noted that he leads a team of 250 scientists who are “working very hard” to embed climate change into the RMS models.

Mohsen Rahnama, chief modelling officer and executive vice president at RMS

He believes that understanding the impact of climate change over the last five years by “taking a step back” would provide a “signature” of its impact across events going forward.

“This [climate change] is really an issue for the industry and I believe that climate change and the severity of the type of events we have seen in the last five years, in the next decades is going to be much more … and we have to step back and look at what we should do to overcome,” he noted.

Average model “not good enough”

Rahnama also stressed that underwriters must use the most sophisticated tools to understand pricing as new and emerging risks like climate change intensify the risk landscape for the (re)insurance industry.

The industry needs to factor in the effects of climate change in its models in order to understand how to price risks, he said.

“Underwriters have enormous insight about what they do, so they have to step back and look at what they need to do to adjust their underwriting to overcome the challenges of climate change,” Rahnama said.

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“I need to really look at the exact pricing, I need to really look at the way that elements are contributing to managing the risk, or pricing the risk at the right level and also transferring the risk to other parties. I think it requires analytics, technology, better science,” he added.

Amid a multitude of challenges involved in the underwriting of such risks, underwriters should make use of the most sophisticated tools at their disposal.

“Believe me, the average model is not going to be good enough to satisfy the dimension of climate change. It requires a fair amount of holistic view and engagement with the industry,” Rahnama noted.

Rahnama cited Hurricane Ida in the US and flooding across Germany, China and Australia as examples of events for which the industry must find a sustainable solution.

“Flood is often covered by government, but that’s not going to be sustainable in the future. What the insurance industry needs to do is to develop the product that can actually help the industry to work as a partnership with the customer to really help them mitigate the risk,” he noted.

Rahnama suggested that a solution for the (re)insurance industry will involve the application of insights from data collected over the years, as well as the extensive knowledge it has garnered around this subject.

In this video, Rahnama provides more detail on the following topics:

  • How much climate change has affected the (re)insurance industry
  • How RMS incorporates climate change into its models