The reinsurance industry is making measured headway in accounting for the potential impact of climate change in operational areas such as underwriting and catastrophe modeling, experts say.

One of the primary challenges the industry faces in addressing the issue is that while climate change is a complex, long-term phenomenon, the industry operates on an annual cycle, said Carl Hedde, Munich Reinsurance America Inc.'s head of risk accumulation.

“From a day-to-day impact on our modeling and pricing, I wouldn't say that climate change by itself has a significant impact,” Mr. Hedde said. “The models are based on historical data sets that may have embedded in them signals from climate change, but you can't say the exact amount related to climate change.”

Likewise, Sibylle Steimen, head of catastrophe risk management for Allianz S.E. Reinsurance, said reconciling a long-term projection with short-term business operations was a challenge.

“We have to keep in mind that we are talking about long-term developments here,” she said. “At the moment, long-term thinking is more prevalent in the life insurance sector. In (property/casualty), we are used to a more short-term view, so the whole industry is still working through how to implement this sort of thinking.”

Nonetheless, Ms. Steimen said the company was starting to address climate change from an operational point of view. “We are regularly monitoring 45 scenarios two times a year, so we have quite a broad view to what is going on, but more and more the topic of climate change is on our agenda as well,” she said.

Mr. Hedde agreed that it is important for reinsurers to better understand what is going on in the environment and how that is reflected in the commercial models and internal models, noting that Munich Re was one of the first reinsurers to hire scientists to study weather-related issues.

%%BREAK%%

“We study the perils ourselves and we have our own view of risk,” he said. “We think it's important not just to license the third-party models, but to also understand how they work. So, we don't use any of the models off the shelf, we make our own internal adjustments.”

Lara Mowery, head of the global property specialty practice at reinsurance broker Guy Carpenter & Co. L.L.C., said the industry has made strides in how to better leverage the models provided by third-party catastrophe modeling firms such as Risk Management Solutions Inc., Eqecat Inc. and AIR Worldwide Corp.

“We are seeing insurers and reinsurers becoming more sophisticated about how they want to understand what goes into technical risk assessments and the assumptions made by modeling companies,” she said.

In addition to increasingly making the assumptions behind their models open for analysis by users, catastrophe modeling firms also are continuing to improve their models as new scientific research becomes available and computers become more powerful.

Peter Dailey, San Francisco-based vice president and director of atmospheric science of AIR Worldwide, said his firm's models continue to improve as new research becomes available, citing newly gained understanding of how three well-measured climate variables — sea surface temperatures, wind shear and steering currents — interrelate.

“The key climate conditions that we focus on are the ones that most highly correlate with the historical record,” he said. “The reason wind shear is important from a climate perspective is that El Niño and La Niña, which are Pacific phenomena, directly correlate with Atlantic windstorms.”

%%BREAK%%

Mr. Hedde also is optimistic about the improvement of models.

“Aside from the research being done in physical science and engineering, one of the catalysts for change has been increased computing power,” he said. “This is allowing modeling firms to use more information and model in "high definition.'”

Yet, Mr. Hedde said the industry should not ignore some more immediate ways to combat the potential effects of climate change, such as improved building codes.

“We are very active in promoting better building design and construction techniques,” he said. “For example, what we are finding is that it is not much more expensive to put a roof on a house that stays on at higher wind speeds.”