Inside the US Plan to Unlock Climate Data for Reinsurers

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Climate risks are getting scary for reinsurers. 

Extreme weather events are extracting ever-greater financial tolls from the industry, eating into firms’ capital buffers and eroding their profitability. Swiss Re estimated that insured natural catastrophe losses in 2023 would exceed US$100bn. Munich Re guessed US$95bn, and Aon US$118bn. 

Records were broken all over the map. One highlight (or, rather, lowlight) is that the high loss tally was not the result of just one or two major catastrophes. Instead, it was the combination of multiple thunderstorms, hailstorms, and windstorms that gave reinsurers a wallop they won’t soon forget. Put simply, extreme weather events once considered “secondary perils” are now incurring the kinds of losses typically associated with monster floods and hurricanes.

Top 10 Global Insured Loss Events in 2023

This trend is forcing reinsurers to reevaluate extreme weather risks, and try to work out how much worse they could get in a hotter climate. While many carriers are taking steps to enhance their risk modeling capabilities and add new, forward-looking data and analytics to their operations, the industry as a whole needs help.

Enter the Industry Proving Grounds (IPG) program, a US government initiative that aims to put cutting-edge climate data, services, and tools in the hands of the country’s reinsurers. Last month, it received US$85mn from the Inflation Reduction Act (IRA) — President Biden’s huge climate and jobs spending bill — to get to work.

Under the leadership of the National Oceanic and Atmospheric Administration’s (NOAA) National Centers for Environmental Information (NCEI), the IPG is engaging with three industries — finance and reinsurance, retail and architecture, and engineering — to develop sector-specific climate data tools and make climate data more user-friendly.

Part of this work involves modernizing existing data artifacts and packaging them up so that commercial entities can integrate them in their operations. Another part is creating new data products that bridge climate data gaps and help reinsurers level up their risk modeling. 

“We’re making some high-risk, high-reward investments in potential data structures that are hopefully adopted by the market,” says Deke Arndt, director of the NCEI. “There are opportunities to reexamine the way that NOAA data is served, and there may be a way we can share our information alongside that of the industry and inform some market solutions,” he adds.

Bridging Data Gaps

Building climate resilience means different things for the three industries targeted by the IPG program. For reinsurers, it means equipping carriers with the data and insights they need to more accurately price risks linked to storms, floods, and other wild weather events. James Waller, research meteorologist at reinsurance solutions provider Guy Carpenter, says this is important so that firms don’t go bust when these kinds of ‘nat cat’ (natural catastrophe) events hit.

“From a reinsurance perspective, resilience takes the form of: ‘can my business survive a cat event?' We’ve seen a significant increase in costs for building materials and labor. Couple that with inflation and the changing nature of the hazards we cover, there’s a multiplier effect that’s making extreme weather events costlier,” he explains.

The IPG aims to help reinsurers satisfy their data needs by providing “user-friendly climate data” that leverages NOAA’s existing data libraries, and by “co-creating tailored web interfaces” to help firms navigate the agency’s resources.

The IPG also intends to address certain climate hazard blind spots the industry has. Arndt says that on his group’s “punch list” are data products that enhance reinsurers’ understanding of hail storms, which cause around US$15bn of damage each year in the US. 

It’s a climate data gap Waller says is in dire need of closing. “For hail and straight-line wind, things only started to click in the 1990s. So we just don’t have as much data to work with. Our tech advances over the last 5-10 years have been remarkable, but we still don’t know much about the anatomy of hail — what determines its hardness, how often it occurs, and so on. These are important dimensions to understand,” he says.

Thunderstorms and tornadoes, which inflicted record insured losses last year, are also poorly understood. “There’s been a clear increase in the severity and intensity of convective storms over the past couple of years, and we need to improve information on these,” says Franklin Nutter, former president of the Reinsurance Association of America (RAA). According to Aon, severe thunderstorms accounted for seven of the top 10 insured loss events globally last year. Six of these occurred in the US.

Levelling Up Cat Models

Beyond aggregating and improving access to what NOAA already knows about these perils, the IPG may also be able to help enhance the ‘cat models’ used across the industry. These are computer-powered calculation tools that estimate potential financial losses from catastrophic events — like hurricanes, storms, and floods.

“Cat models are only as good at the science and technical knowledge that underpins them,” says Waller. “With hurricanes we have a good understanding; with sea-level rise we’re able to account for that. For severe storms and winter storms, the variability from year to year makes it difficult to analyze trends. With thunderstorms, we’re nowhere near the level we’re at with hurricanes.”

One possible application of the IPG is finding smarter ways to integrate information from climate models, which predict how the Earth’s systems may react to varying degrees of warming, into cat models. While there’s growing scientific understanding of how climate change is driving extreme weather events, the challenge is incorporating forward-looking data that explains how this relationship is changing with the existing suite of cat model tools.

“We’ve done a fantastic job over time of feeding historical data to the actuarial mindset. But I think now we’re going to be feeding historical data and future data to both the actuarial mindset and the catastrophe modelers as well. I think the economy’s capacity to exploit the kind of information that NOAA has has really grown,” says Arndt.

Climate Data Wants to be Free

The IPG’s efforts are not intended to be one-way, however. Arndt says the program wants to engage the reinsurance industry in a dialogue to understand its needs and tailor responses accordingly. “We have some long-held partnerships with the industry, but we’re locked into older methodologies. This is an opportunity to reexamine the way that we share, so that the data scientists these industries are hiring see something that looks 21st century and can take advantage of the advances in computing and technology,” he explains.

In line with its public mission, the NCEI wants the fruits of the IPG initiative to be widely accessible. While the primary purpose of the program is to empower private companies to optimize their use of NOAA tech and data, it is not about creating a walled garden for privileged industries. Certainly, private companies can take NOAA’s climate data and tools, add a layer of innovation, and use the outputs to gain an edge in pricing. But NOAA won’t be limiting its data for reinsurers’ exclusive use. This is all for the good, since as the RAA’s Nutter explains, local communities need weather and climate data too in order to build up their own resilience. The argument that climate data should be a public good has even graced the pages of the New York Times.

It’s an argument that NCEI’s Arndt is fully behind. “This is all public data for public use for the public good, and if we can improve service delivery of the explosively growing pile of data then we’re doing right by all of our fellow citizens,” he says.