Parametric insurance: A captivating solution
Parametric policies, which pay based on the magnitude of an event, can bridge coverage gaps that are difficult to insure with a traditional indemnity policy.
The potential economic, health, and social impacts of climate change are both massive and difficult to predict. They test the limits of risk management and modeling capabilities. Insurers, investors, regulators, researchers, and not-for-profit organizations are all working to solve the problem of climate resilience, but their activities are often disconnected.
Milliman identified a need to cross-pollinate expertise by bringing together industry leaders from across the global community to discuss climate impacts and solutions. On March 2-4, 2021, the Milliman Climate Resilience Forum (MCRF) hosted exclusive conversations with a diverse array of speakers to share perspectives across business, government, academic, and not-for-profit sectors. All the sessions are available to watch free and on-demand at https://mcrf.milliman.com.
Throughout the three-day event, attendees asked questions of presenters and received answers in real time via a virtual chat. These conversations expanded shared knowledge on the topics and enriched the MCRF experience. To make this additional material more accessible to all, we combed through the transcripts of the virtual chat sessions and pulled out interesting insights and perspectives. You can find these below, organized by session.
Climate change is not a problem that will be solved in silos. Join us as we move forward to a more collaborative future of climate resilience.
Principal and Consulting Actuary, Milliman
Chair, Milliman Climate Resilience Initiative
Question: Where do you see the biggest challenges in explicitly quantifying climate effects? Where are we most reliant on historical statistics versus what can be updated now based on our physical understanding?
Adam Sobel, Professor of Applied Physics and Applied Mathematics and of Earth and Environmental Sciences, Columbia University: I think a big part of the problem is attribution—when we see a big event, or a bad year with many events, how much of that is due to human-induced climate change versus natural variability? The answer to that will be important to what we think it means for the future. Ultimately what matters, though, is the change in risk. In principle, it shouldn't matter much to our assessment whether a big event just happened or not. Psychologically, it does. Fortunately, the methods for attribution are, at their core, pretty similar to those for doing risk assessment more broadly.
Question: What would be the best modeling framework to combine model results with observed extreme-value statistics to account for model biases and climate change trends?
Adam Sobel: That’s the big question, isn’t it? Our group has developed a model to "downscale" climate-model output to generate synthetic tropical cyclones, but that's just one example for one peril. I think we need to see a spectrum of approaches being developed and evaluated. Ultimately, the question of which periods to compare in order to evaluate the change in risk is a business question rather than a science question.
Question: In the framework you use for your probabilistic model at KatRisk, do you consider the effects of urbanization over time, and do you have a global urbanization model that accounts for changes in exposure?
Brandon Katz, Vice President Model Solutions, KatRisk: We don’t currently model changes in exposure locations within our climate change model explicitly, but it could easily be done. Essentially one would run the model using current-day exposure, create a new exposure data set that takes into account where we think urbanization will occur, and then rerun the model before and after applying our climate scenarios.
Question: Do models being developed have the capacity to measure the impact of any climate and risk mitigation programs implemented by governments?
Brandon Katz: Yes, to an extent. We model defense structures, and one could run the model for future climate states with and without these defense structures, or with better defense structures.
Question: Do you believe a federal policy like the Coastal Barrier Resources Act would be beneficial for undeveloped wildland-urban-interface (WUI) areas?
Michael Wara, Director of the Climate and Energy Policy Program, Stanford Woods Institute for the Environment: Something like this has been a proposal in the California legislature for the last several sessions. Senators Hannah Beth Jackson and Henry Stern have both proposed bans on new construction in high-risk wildfire areas. Governors Brown and Newsom have not supported it. We will see what happens this session. I think the idea of withdrawing all support is untenable but perhaps we could withdraw certain types of implicit subsidies for development or require that developers pay up-front for the costs.
Question: You mention that the Newsom Administration's latest home-hardening initiative is not a long-term solution. Will it be enough to mitigate wildfire risk in the next few years, especially as it looks like CA is going into drought?
Michael Wara: My view is that the Newsom administration proposal is a start and more of a pilot for what needs to become a sustained program of building resilience to wildfire. We need to do much more, but we also have to get started, and this is a way to do that. No one has ever done a home-hardening program at the scale that California needs it. The Insurance Institute for Business and Home Safety (IBHS) is working on answering key science questions about how to do this, but we will also need a lot of learning by doing.
Question: In the interest of encouraging homeowners to fortify their homes against peak natural-catastrophe perils in their region, do you envision that leading mortgage entities would favorably consider differentiating catastrophe-resilient homes in the mortgage-application process, not unlike incentives provided for energy-efficient homes?
Ken Bjurstrom, Principal, Financial Consultant, Milliman: I think as better data on properties, financing, climate, and risk gets more developed and socialized, then homeowners, investors, insurers, and reinsurers will gravitate to better products and solutions to lessen the impact of climate events.
Michael Fratantoni, Chief Economist and Senior Vice President of Research and Industry Technology, Mortgage Bankers Association: At this point, the primary driver will be investors in mortgage assets changing their requirements with respect to the levels of property and casualty (P&C) insurance that are required.
Question: How do we increase trust between policy makers, the public, and modelers?
Samantha Medlock, Senior Counsel, U.S. House Select Committee on the Climate Crisis: The short answer is to organize and engage with policy makers. Your voices are important to the dialogue and design of solutions. For Congress, we need to hear from you all on what changes are needed in public policy and practices to catalyze partnerships and help overcome barriers. We benefit tremendously from hearing directly from local leaders, business leaders, practitioners, and risk experts on solutions that are needed. For the U.S. House Select Committee on the Climate Crisis, we welcome your ideas on what we should prioritize—for example, into the recovery and infrastructure packages that we are developing now. Remember, all reforms to federal programs started because groups raised their voices about their challenges, proposed solutions, and held us accountable.
Question: How do we get the federal government and corporate partners to engage in a holistic view of climate resilience that includes equity?
Samantha Medlock: Every investment to reduce emissions and advance renewables presents the opportunity to advance resilience. Conversely, every resilience investment benefits from lifting opportunities to reduce greenhouse-gas emissions. Fortunately, we see lots of opportunities to do both, for new development, for redevelopment, and for rebuilding following disasters. This needs to be prioritized in policy and in practice, including in the codes and standards that are applied to infrastructure, public buildings, homes, and other assets. These sorts of approaches can also reduce carrying costs, such as insurance and utility costs.
Question: Are parametric products available for individual customers or would you need a collective/wider community to get a policy issued?
Samantha Dunn, Head of the Natural Catastrophe Protection Gap Initiative & Reinsurance Sustainability Co-lead, Swiss RE: We have them deployed globally on a personal lines basis as well as small business and governmental. Now, each country has its own regulations on how these products can be deployed. In the United States there is a product call Storm Peace that is a great example and there are a few products in California. These sorts of approaches can also reduce carrying costs, such as insurance and utility costs.
Question: What are some actions the healthcare ecosystem can take to address climate change?
Rich Moyer, Principal and MedInsight® Chief Product Officer, Milliman: There’s a variety of things. There’s a group called Health Care Without Harm, which is making sure that healthcare organizations minimize their carbon footprint. Additionally, understanding the impacts of climate events on healthcare-delivery needs. Also, we should be considering the resilience of the healthcare delivery system, which COVID-19, wildfires, and floods have shown needs work.
Yommy Chiu, Senior Product Manager, Swiss RE: There is a bit of work being done looking at the carbon footprint of hospital systems themselves, such as that resulting from delivery of care to patients, and asking the question of how can I reduce my own carbon footprint. Another action is to think about mitigating the risk of increasing care needs resulting from climate change.
Question: Do you integrate analysis of your climate targets and goals into your asset-liability management (ALM) and/or strategic asset allocation, and do you expect different results if you do?
Sylvain Vanston, Group Head of Climate Change & Biodiversity, AXA: We have several targets that operate differently: coal phase-out, which is monitored through runoff; green investment target, monitored annually; 20% carbon footprint reduction target (2019-2025; corporate assets and real estate), monitored through asset management mandates; and finally, a long-term "1.5C" target, which currently requires further methodology convergence work. Have a look at our latest Climate Report in conjunction with the Task Force on Climate-related Financial Disclosures (TCFD), with full context and explanations, available at https://www.axa.com/en/press/publications/2020-climate-report.
Question: How will climate risk and environmental, social, and corporate governance (ESG) be incorporated into standard Fannie Mae due-diligence assessments at the property level (such as Phase I Environmental Site Assessments, Physical Needs, Property Condition Assessments, and Green Assessments)—or will they be handled at the portfolio level?
Timothy Judge, Vice President of Climate Impact, Fannie Mae: We need to do more work in this area. Do we move to building standards that incorporate future climate change? For example, should there be a 2050 and a 2100 building standard? For ESG, we have frameworks for Green and Social bonds that serve as standards in those areas.
Adam Sobel, Professor of Applied Physics and Applied Mathematics and of Earth and Environmental Sciences, Columbia University
Adam Sobel is a professor at Columbia University’s Lamont-Doherty Earth Observatory and Engineering School. He studies the dynamics of climate and weather, particularly in the tropics. In recent years he has been focused on understanding the risks to society from extreme weather events and climate change. He directs the Columbia Initiative on Extreme Weather and Climate.
Brandon Katz, Vice President Model Solutions, KatRisk
Brandon Katz is a seasoned model developer and client relations expert with a wealth of previous experience building and contributing to catastrophe models ranging from flood to terrorism.
Ken Bjurstrom, Principal, Financial Consultant, Milliman
Ken is a principal with Milliman in Milwaukee and joined the firm in 1998. He manages a practice dedicated to analyzing the financial risks associated with issuing and servicing mortgages, mortgage guaranty insurance, and mortgage credit risk transfer.
Michael Fratantoni, Chief Economist and Senior Vice President of Research and Industry Technology, Mortgage Bankers Association (MBA)
Michael Fratantoni is responsible for overseeing MBA's industry surveys and benchmarking studies, economic and mortgage originations forecasts, industry technology efforts, and policy development research for both single-family and commercial/multifamily markets.
Michael Wara, Director of the Climate and Energy Policy Program, Stanford Woods Institute for the Environment
Michael Wara is a lawyer and senior research scholar at the Stanford Woods Institute for the Environment, where he provides fact-based, bipartisan technical and legal assistance to policy makers engaged in the development of novel climate and energy law and regulation.
Rich Moyer, Principal and MedInsight Chief Product Officer, Milliman
Rich has been with Milliman for 17 years. In addition to his product role, he started analytics practices in New Delhi, Dubai, Manchester UK, and China. His recent interest has been in measuring and mitigating the healthcare impacts of climate change.
Samantha Dunn, Head of the Natural Catastrophe Protection Gap Initiative & Reinsurance Sustainability Co-lead, Swiss RE
In her role, Samantha fosters creative ideas and solutions that make effective strides toward closing the protection gap. In addition, Samantha is a co-lead on Swiss RE's reinsurance sustainability strategy and responsible for its global implementation.
Samantha Medlock, Senior Counsel, U.S. House Select Committee on The Climate Crisis
Samantha Medlock has more than 20 years of experience in land use and disaster law and is instrumental in advancing insurance capabilities to address risk and resilience requirements for the corporate and public sector.
Sylvain Vanston, Group Head of Climate Change & Biodiversity, AXA
Sylvain Vanston is in charge of integrating climate change and biodiversity-related factors into the AXA Group’s strategy and processes, and generating new policy developments in both investments and underwriting.
Timothy Judge, Vice President of Climate Impact, Fannie Mae
Timothy leads a group that is responsible for leading the Fannie Mae enterprise response to climate-risk-related efforts, including understanding current and future exposure and the developing response to climate change.
Yommy Chiu, Senior Product Manager, Swiss RE
Yommy works with federal, state, and local government clients to assess risk exposure and to design risk transfer solutions. Yommy is passionate about building strong and resilient communities to better address and withstand emerging risks like climate change.