Identifying Tipping Points in Climate-Related Insurance Modeling

As global temperature increases surpass 1.5°C above pre-industrial levels, tipping points can become a growing concern for insurers. Insurers may need new techniques to identify tipping points that may result in significant insured losses. This presentation provides actuaries and other professionals working on climate-related risk modeling with a methodology to help identify climate tipping points, or regime shifts, in different climate scenarios that could represent a new steady state for the insurance industry.

We aim to provide methodology that can be leveraged by insurers and identify tipping points that could impact the insurance industry. While climate tipping points are usually understood to take place over geologic time scales and have worldwide impacts, we evaluate narrower physical regimes or systems for significant and rapid change and refer to them as “regime shifts”. We focus on two systems that are meaningful to insurers in North America and regime shifts that occur on near-term (business-relevant) time scales: wildfires in California and heat stress in the Pacific Northwest. We propose a set of analytical statistical methods to help detect regime shifts that may be relevant to the insurance industry using output from climate model projections under multiple scenarios. Our methods illustrate the complexity of identifying regime shifts with tangible impacts to the insurance industry in the near future but can still provide insurers guidance to help extract relevant climate signals. By incorporating these methods into existing risk management, underwriting, pricing and investment management processes, insurers can prepare and adapt to a changing climate.

This presentation first outlines the above concepts of tipping points and regime shifts. We then present a statistical methodology to help evaluate physical regime shifts which actuaries may apply to understand where systems have entered a new steady state. We follow this with a qualitative discussion of possible climate-related impacts to insurers in the event of regime shifts, and where insurers may need to reevaluate and adapt current business practices.