Climate Risk Will Require Models To Be Overhauled, Replaced: Survey

Over 80% of insurers surveyed said their risk models will need to be upgraded or replaced.

Climate Risk Will Require Models To Be Overhauled, Replaced: Survey
Photo by Matt Palmer / Unsplash

The vast majority of insurance executives say that their existing risk models will need a significant rethink given the rapid changes in climate, according to a report by Moody's Analytics.

“Rapid integration of climate into all aspects of an insurers business, with climate scenarios being at the forefront, will give insurers operational advantage and better insights into the management of increasing physical and transition climate risks,” the report released last week said. ”As more data becomes available and models continue to get more sophisticated, climate risks and opportunities become better understood, and can be more integrated into insurers’ strategic decisions. “

Specifically, 86% of the insurers survey said that current modeling tools will need “significant changes” or they will need to replace or acquire new models. Adding that overhauling their models to adapt to climate risk what “common” among reinsurers, 62% of survey respondents said that they would like to have a single system, able to support both quantitative and qualitative disclosures.

Only 14% of respondents plan to handle climate risk by using their existing risk management capabilities, the report says.

“Integrating climate into risk management, strategy, and reporting will require significant changes to existing data, systems, and processes,” the report states. “Some insurers indicated that they might need to build new tools and models. The majority plan to use their existing systems. However, this will still require significant enhancements; such as emission data collection, or stress testing their strategy’s resilience to various climate shocks, over the short-, medium-, and long-term.”

According to Moody’s, the the report is based on a survey of 30 insurers from Europe, North America, Asia and Australia.

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