Arbol: Physical climate risk assessment and parametric solutions

Hong Guo, chief insurance o­fficer at Arbol, on the impacts of the rising frequency, extremity and costs of weather-related events and how Arbol’s global risk solutions platform helps businesses assess and manage climate risks

 

Climate change is significantly affecting communities, businesses and governments all over the world.

Weather and climate events are increasing in frequency while also becoming more extreme, unpredictable and costly than ever before.

Over the past 15 years (2005- 2019) there have been 156 separate billion-dollar weather- or climate-related disasters in the US alone that have resulted in a combined $1.16 trillion in damages.

In 2021, over 400 natural catastrophe events resulted in $343 billion in economic losses globally. Insurance programmes covered only $130 billion of these damages.

Adverse weather disrupts the operating and financial performance of 70% of businesses worldwide

According to AXA’s 2021 AMRAE Climate Commitment Barometer study, more than 80% of respondents (risk managers) fear the impact of floods or temperature increases, while more than half of the respondents report that they have poor visibility into the climate risks affecting their value chain.

Often, businesses struggle with how to take proactive action to respond to climate risks despite the mandate from various stakeholders such as regulators, investors, customers, business partners and employees.

The issue is that they don’t have the necessary data and tools to properly assess the climate risks they are facing.

The solution: Arbol’s physical climate risk assessment services

Arbol is a global climate risk solutions platform offering full-service solutions for any business looking to analyse and mitigate exposure to climate risk. Arbol’s physical climate risk assessment services help businesses assess climate risks. Leveraging our extensive dClimate global data platform and analytical tools, we help businesses around the world perform a 360-degree scan of emerging physical climate risks at the asset level, assessing climate perils such as:

  • heatwave/cold outbreak
  • excessive rainfall/drought
  • solar irradiance and wind speed for renewable energy
  • tropical cyclone/windstorm
  • flood
  • wildfire
  • sea level change
  • severe convective storm (hail, tornado)

For all these perils, Arbol can produce:

  • Heat maps: Comparison of future climate scenarios to current climate conditions.
  • Trend plots: Estimation of a certain climate variable change over time.
  • Event probability: Prediction of heat waves, flooding, drought, etc.
  • Temperature exceedance probability: Analysis and change in the probability of 100 degrees for New York City from 1%-2% in 2022 to 3%-4% in 2040.
  • Estimated loss for various return periods: Estimation of loss in dollar amounts over the next 10-15 years caused by major and/or rare climate events such as a tropical cyclone.
  • Hazard maps: Evaluation of risk from severe convective storms, flood, earthquake, volcanic eruptions, etc.
  • Relevant climate change indices: Analysis of how the growing season changes or how many tropical nights there will be in 2060 vs 2025.

A good example of the climate risk assessment use case is the heatwave projection for the area where Arbol is headquartered – New York City.

According to the National Oceanic and Atmospheric Administration (NOAA), a heatwave is generally defined as a period of abnormally hot weather lasting longer than two days.

We define a heatwave as a three-day period where the maximum temperature exceeds the 95th percentile. The probability of a heatwave in New York City is around 5%-6% in 2022 during the summer months.

Through future projections made using the Climate Risk Platform, the probability climbs to almost 18%-19% in 2100 under the SSP5-8.5 scenario (worst case) or 8%-9% under the SSP2-4.5 scenario. Public officials can plan for both scenarios by understanding the risk that increasing probability of heatwaves can have for the local communities and ecosystems and plan ahead to mitigate the risk impact.

Private companies can plan for increased costs over the next several years when it comes to HVAC, building costs, etc. The ability to properly assess climate risks provides the foundation for insurance applications to manage such risks.

Arbol Parametric Climate Risk Solutions+Captive Solutions

Arbol’s key differentiator versus traditional insurtech or climate analytics platforms is the complete ecosystem it has built to address climate risk. Further to climate risk assessment services, Arbol offers parametric protection products to customers.

We take a unique data-driven approach in designing how our protection products work. Instead of paying losses based on traditional loss adjustment, our protection is based on pre-defined data parameters such as temperature, rainfall, drought, water level, wind speed, solar irradiance, crop yield and so on.

Our parametric protection products are offered in insurance and reinsurance forms depending on our customers’ needs. We leverage our extensive, state of the art dClimate data platform, AI-based underwriting algorithm and digital transaction platform to bring pricing and operational efficiency to fill the coverage gap created by lack of sufficient coverage of climate risks by traditional insurance.

In April 2022, Arbol developed a parametric reinsurance product covering hurricane risks in Florida. The payout is calculated using a pre-defined notional portfolio of policies to determine parametric payouts for each policy location, aggregate them, and then apply a reinsurance structure.

Location-level payouts are determined based on the distance of each location from a particular hurricane track and the maximum sustained wind speed captured along the hurricane track. The data is transparent as it comes from the National Hurricane Center and the calculation mechanism is transparent as it is pre-agreed.

Hurricane Ian, an almost category five tropical storm, hit Florida hard on 28 September 2022. Hurricane Ian has validated the utility and efficiency of this product. After such a historical event, it usually takes a long time for traditional property coverage losses to be adjusted and settled.

The buyer of this parametric product received confirmation that they would receive payment as soon as the hurricane track data was published, which was 10 days after the hurricane struck, compared to the months- or even years-long lag for traditional reinsurance to pay out losses.

The insurer received the loss payment from the reinsurer merely three weeks after the strike. Such timely payment is crucial for the Florida home insurers that often operate on very tight cash flow. One distinguished advantage of parametric protection products is that the coverage can be tailored based on each customer’s needs.

The risk assessment can be carried out at the asset level rather than traditional insurer assessment at the entity level. The assessment can also be structured at various retention levels based on a customer’s risk appetite and risk profile. All these characteristics make the parametric climate risk insurance products a good fit for captive programmes.

The flexibility and creativity in coverage and the nature of the risk financing mechanism give captives a perfect stepping stone to manage climate risks and support parent ESG strategy.

Based on this understanding, Arbol developed the following three steps of parametric captive solutions:

  1. Assessing potential financial impact from direct and indirect losses caused by climate risks;
  2. Providing parametric structure design and pricing that allow captive owners to manage risk retention using a captive vehicle as a starting point for climate risk mitigation;
  3. Helping to transfer the risks to reinsurers or capital markets when the captive owner is ready to do so.

 

For more information about Arbol parametric products and captive solutions, please contact Jun Deng at jun.deng@arbolmarket.com

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