Grappling with climate change: understanding RMS’s new models

A suite of new RMS Climate Change Models will help customers assess the near and long-term impacts of climate change on physical assets and their businesses, in order to make the best possible risk and financial decisions—but it is not a case of one size fitting all, and much nuance will be needed as clients use the models.

This was one of the main points from an interview with Joss Matthewman, senior director, product management, at risk modelling firm RMS. The interview took place on Intelligent Insurer’s Re/insurance Lounge, an online platform where interviews and panel discussions are available on demand.

Matthewman added that the models would potentially help clients improve efficiency, achieve a higher return on equity, meet regulatory requirements, and even help protect their credit rating.

“Climate change risk is accelerating. Although it has been a growing issue for society and the insurance industry for quite some time, climate change risk is difficult to quantify and there has been a lack of effective tools to do so,” he said.

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Most RMS models, including all major peril models, already incorporate the impact of climate change—but after extensive client engagement RMS believes more is required to meet the evolving and significant market needs.

The company said the new models empower its economic modelling framework with the best climate science consensus, including from the Intergovernmental Panel on Climate Change.

A long process
“This is the culmination of a lengthy process where we have been working with our clients as well as regulators for quite some time to try and understand where the pain points are, and what the needs of the industry are so we can provide some guidance,” Matthewman explained.

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He stressed that climate change insights need to be incorporated into financial decisions today, in parallel with long-term strategic planning and meeting increasing regulatory, environmental, social and corporate governance factors and the Financial Stability Board’s Task Force on Climate-related Financial Disclosures reporting requirements, and investor and customer demands.

In the context of increasing stakeholder scrutiny, and regulatory pressure, it was determined that clients needed to operationalise climate change analytics to make better decisions and enable improved transparency.

“These are catastrophe models that we wanted to be able to satisfy the needs of our clients but also the scientific community. The RMS Climate Change Models help you understand, evaluate, and manage your current and future climate change risk in multiple regions using a probabilistic modelling approach,” said Matthewman.

The new RMS Climate Change Models take existing capabilities further with predictive insights and analysis, he said.
“They are intrinsically linked to the to the existing catastrophe models in a couple of ways. The catastrophe models do not replace our reference view of risk but we expect this to be an extension,” he added.

“We expect our clients to use them in the same way they are using catastrophe models and to fit them into existing workflows. The new models can respond to the evolving regulations and stakeholder communications and do so in a language that is consistent with how they are currently communicating catastrophe risk.”

New features
Matthewman explained that the models go far beyond the insurance sector, with a much broader application for any physical asset, including real estate portfolio management as well as construction, agriculture, and industrial sectors.
The new models include an extensive list of new features.

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“You must first understand your current climate risk before you can understand your future climate risk,” he said. “What you are looking at is how your climate change risk will vary in this future climate based on the existing metrics. It is important to note that one size does not fit all, and future climate risk will vary within different geographies.”

The new models will be generally available in June for major peril models North Atlantic Hurricane, Europe Inland Flood and Europe Windstorm. Further models and geographies will follow this initial model suite launch.

“Ultimately the models provide clients with a tool that demonstrates that risk is understood. We have seen a very enthusiastic reception from our clients, particularly for some of the new features, including the ones that differentiate within geographies.

“This is just one step towards being able to provide a fully integrated view of climate change. With the release of this first wave of models we look forward to working with our clients and expanding these models in future,” he concluded.

To view the full Re/insurance Lounge session click here.