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Home > Financial Risk Management Best Practice > Climate Change and Alternative Risk Financing: Adapting Current Methods for Assessing and Transferring Weather Risks

Financial Risk Management Best Practice

Climate Change and Alternative Risk Financing: Adapting Current Methods for Assessing and Transferring Weather Risks

by Alex Bernhardt, Tanya D. Havlicek and Neal M. Drawas

This Chapter Covers

  • Climate change is having a recognized and evolving impact on local weather patterns, vulnerable individuals and global businesses.1

  • The current probabilistic weather risk models used to evaluate a variety of risk management decisions are based largely upon historical data and do not adequately account for the likely future effects of climate change.

  • Relatively large shifts in hazard distributions, such as those being engendered by climate change for certain weather risks, may cause such models to fail.

  • In order to better account for the impacts of climate change and to continue to present reasonably accurate risk assessments, the next generation of weather risk models needs to evolve. This will entail the incorporation of new modeling techniques based on interdisciplinary methods, synthetic/modified datasets and “big data” climate inputs to improve their adaptive capacity.

  • Until models improve, risk managers and underwriters must recognize the possibility of model failure and decide what approach is best at predicting the impact of climate change based on specific scenario, exposure type, and duration.2

  • In the meantime, risk managers have access to a number of viable risk financing options which can diminish the volatility of their weather-related risks. Specifically index-based or parametric risk transfer solutions can be designed to protect both tangible (e.g owned buildings) or intangible (e.g. supply chain) exposures which would otherwise be difficult or expensive to insure on a traditional indemnity basis due to gaps in the availability of relevant probabilistic models.3

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