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Jun 2023

Climate change and insurance: Putting scientific knowledge into action

Source: Asia Insurance Review | Dec 2021

Sibylle SteimenClimate change is making scientific insights all the more important. As the world gets warmer, the climate-related risks change and the way humans are developing is only intensifying any effect we will see in the future, says Allianz Re’s Dr Sibylle Steimen.

When I heard that this year’s Nobel prize in physics had been awarded to the inventors of the climate model, - Syukuro Wanabe and Klaus Hasselmann – as well as Giorgio Parisi for his work in supporting these models I was overjoyed. After all, the models they started to develop back in the 1960s and 1970s still form the basis of a lot of the work we do today in Allianz Re’s Cat Management team. As a fellow scientist, I am always happy to see great achievements being awarded.

Yet, part of me was also a little bit upset: already fifty years ago, their work had demonstrated the lasting effect that greenhouse gases were having on the planet: global warming. Meaning, we have known for decades what is happening to our atmosphere and in consequence to the livability of our planet. However, what have we actually done about it?

Climate change and the threats of man-made environmental issues were also a big topic when I was at school. I recall taking part in a project on solar energy and solar mobility in the 1980s when I was in eighth grade. We knew then that fossil fuels would come to an end and that they were already causing problems. This knowledge has driven many of my colleagues and certainly myself to want to do something about the effect of climate change in our careers.

Today, I head a department at Allianz Re that includes over 30 people all working on understanding and managing climate-related and other natural risks. Like myself, many of them are scientists. Our job is to understand both the science behind climate risks and how it relates to the insurance business. We use scientific insights to get a better understanding of the risks our customers face and to help our colleagues in the Allianz entities to best consult them.

For example, we translate a scientific indicator, such as an expected flood depth or wildfire risk at a specific location into a relevant business parameter, such as an adequate price element for flood in a given property policy. We can also use this information to adjust insurance terms and conditions such as a deductible in order to keep the price at an acceptable level for the customer.

The focus of our work is on getting our scientific insights to where the decisions are made for the customers, so with the entities of Allianz. In order to achieve this, we have been investing in adequate data and analytical systems for years. Now we can use them as channels to transfer our knowledge in an adjusted manner to the business processes of the individual Allianz operations.

We do this work for a multitude of different natural perils, from floods to hail storms, wildfires and more, for locations at every point on the globe. This means that we are working with very large amounts of data. We have systems and algorithms in place that do the required translation work at a large scale so the information can be used for pricing insurance products, deciding on risk acceptance, advising our customers or adjusting insurance terms. So in addition to scientific insight, we also need to be tech savvy and, together with our IT colleagues, make sure our knowledge is dispersed throughout the Allianz Group to where it makes a difference.

The science in our field is constantly evolving, which is why we actively reach out to the scientific community on a regular basis to stay on top of the latest developments. Most prominently we do this with our Climate Risk Research Award, now in its fifth year.
We invite young scientists from all over the world to submit their latest research on climate risks and present to a jury consisting of both internal and external experts. We are also part of the Oasis Loss Modelling Framework, an open-source catastrophe-modelling platform, which gives access to modelling technology also for scientific sources. In addition, we frequently collaborate with universities to stay on top of the latest developments. We need to work with the newest insights to ensure we can offer the best possible protection to customers.
Rise of Nat CAT
As urban populations grow and climate continues to change, the risk we face from natural catastrophes is on the rise. In cities or towns along the coast, on floodplains or near wildland – climate change is fuelling the risk in these areas, making weather-related disasters more likely and more severe.
In terms of exposure to severe weather risks resulting from climate change, virtually every (inhabited) region on the planet will see a higher frequency of weather extremes (both dry and wet) and less moderate weather compared to what these regions experience today.
In order to bundle our know-how and make it easier to access, we have started to work on our own climate change risk scores intended to use within our core processes such as underwriting, portfolio steering and risk assessment.
We have derived these risk scores from our hazard scores of climate perils we use in pricing and portfolio assessment procedures and used the output of climate models to adjust them to both a warmer and a hot world condition, meaning we are creating a tool that will help us look forward to potential changes under different scenarios of climate change.
The advantage of this approach is that we have an in-depth understanding on the assumptions which went into developing these scores so that we can better judge uncertainty ranges and applicability into our business than if we purchase a product or have it developed by a partner. Once again, the key is having in-depth understanding of the effects that climate change can have to make it applicable to our business.
Collaborative approach
Climate change is a challenge that the insurance industry cannot face alone. We need to join forces with all stakeholders. Allianz is ready to support clients, governments and businesses on the path to sustainable economic growth. However, we depend on appropriate zoning laws and adapted building codes to support financial resilience against climate risks.
One of our goals is to finance the transition to a net-zero economy and helping to protect our customers against climate-related risks and advise them how to adapt.
As a trusted partner for international organisations, governments and our clients, we are supporting the shift to a climate-neutral global economy. We are implementing the 1.5°C degree target in our investment and insurance portfolios as well as in the asset management portfolio of our asset manager Allianz Global Investors.
All of this work cannot be done without an understanding of the climate risks we face. And this would not be possible without the groundwork laid out by this year’s Nobel prize winners. I am grateful for their ground-breaking contributions to this field, and I hope that many more decision makers now and in the future will listen to the scientists. We are doing our best to translate that knowledge so it can be applied to our business. A 
Dr Sibylle Steimen is managing director, advisory and services with Allianz Re.

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