2002 Annual

Monday, 14 January 2002: 11:45 AM
Weather Risk Assessment at the Dawn of Ensemble Numerical Weather Prediction
John L. Keller, Applied Insurance Research, Inc., Boston, MA
Poster PDF (1.4 MB)
Opportunities in the field of weather risk assessment continue to grow. For property risk assessment in particular, automated computer-based systems integrate meteorological hazard models with impact models to produce vulnerability profiles. These tools are used to mitigate the potential financial impact of extreme weather events, where they play a particularly important role in risk transfer for the insurance industry. In addition to the insurance industry, both the investment community and rating agencies have embraced computer-based systems as tools for pricing financial instruments used for risk transfer, such as "catastrophe bonds". Analogous tools are now available to support the `"weather derivatives" market.

To a large part, these weather risk assessment tools exist because of the increasing cost-effectiveness of computer hardware. This development, along with the availability of high-speed networks, has also opened the door to the practical technology transfer of Numerical Weather Prediction (NWP) models into the weather risk assessment industry.

A number of the issues associated with weather risk assessment for the insurance and financial industries can be addressed as applications of NWP modeling technology. One issue that is of special interest is quantifying uncertainty. The advent of ensemble NWP modeling, now possible thanks to increasingly cost-effective computing power, provides opportunity to quantifying uncertainty. This presentation will discuss why quantifying uncertainty is important for characterizing vulnerability to extreme events and in valuing weather derivatives. Examples of how information about uncertainty, based on ensemble NWP model output, can be graphically visualized to aid in assessing weather risk will also be presented.

Supplementary URL: