Navigating Climate-Related Regulatory Requirements: A Focus on Tropical Cyclone Risk

Climate-related regulatory requirements continue to increase with no signs of slowing down. The US Securities and Exchange Commission has proposed a requirement for publicly listed companies to disclose climate-related risks and their plans for mitigating them. Quantifying risk associated with these hazards requires a detailed understanding of the hazard in question, including climate change effects, and the exposure and vulnerability details at the asset level. Tropical Cyclones (TC) bring some of the biggest natural disaster risks to life and property, accounting for the most overall damage and highest average cost per event for natural hazards in the United States from 1980 to 2021¹. Due to the rarity of these events, the observed historical record does not provide enough adequate data to accurately assess TC risk. However, recent modeling advances have led to significant improvements in our abilities to do so.

Here, we present two models that can help identify these types of potential risks when combined. A TC hazard model ingests data from a subset of CMIP6 models and uses a statistical-dynamical model to generate an ensemble of synthetic storm tracks that capture the statistical distribution of TCs for a given time period and warming scenario. Wind and precipitation fields are then added to each track to capture approximate impacts over time.

Event distributions are extracted for each location within the asset portfolio to plug into a probabilistic TC loss model. Building characteristics are identified and used to help extract wind-driven damage curves for each structure and are combined with the hazard data to help simulate the financial impacts.

Probabilistic TC losses are important for companies with a physical asset portfolio. Beyond understanding their exposure to TC risk, a business can make actionable decisions in prioritizing buildings that should be refitted and determining the optimal regions for expansion which would mitigate risk. Efforts to quantify, and understand, the possible impacts of different climate change scenarios provide an impetus for businesses to promote actions towards mitigation.

¹NOAA National Centers for Environmental Information (NCEI) U.S. Billion-Dollar Weather and Climate Disasters (2023). https://www.ncei.noaa.gov/access/billions/, DOI: 10.25921/stkw-7w73