Turbulent times ahead in Europe - Climate change will lead to more frequent winter storms

Global warming and winter storms in Europe, repercussions for reinsurance and what Swiss Re is doing to address the problem (pricing storm risk and building resilience)

Climate change will lead not only to more frequent but also to more violent winter storms in Europe, especially Northern Europe, over the long term. The result will be higher economic losses. Along the North Sea coast, average annual losses from surge events are expected to more than quadruple from 0.6 billion to 2.6 billion EUR toward the end of this century. At least part of this loss burden will be borne by the (re)insurance industry, according to a study conducted by Swiss Re in cooperation with the Swiss Federal Institute of Technology (ETH) in Zurich. The findings underscore the benefit of transparent in-house models developed by reinsurers such as Swiss Re when it comes to pricing storm risk and managing expected losses from future storm events.

(Re)insurers use probabilistic models to quantify the impact of storms: these models allow us to determine premiums and loss expectations for events where historical data are scarce. The use of our models combined with climate models helps us understand how the changing climate will influence the financial impact of similar events in the future, giving us the basis to adjust pricing if necessary.

Swiss Re started modelling winter storm risk about 20 years ago and we have been improving our models ever since. Our winter storm model can run thousands of probabilistic storms, storm scenarios that are artificial but based on historical data and climatology, across a client’s insurance portfolio and quantify the amount and the frequency of the losses incurred.

The study of Swiss Re and ETH showed a clear trend: in addition to intensifying storms, the storm paths will shift further northwards, resulting in a higher storm frequency and higher losses in the regions affected. For the period 1975-2085, for instance, we expect losses from winter storms to increase in real terms by 16 to 68 percent, depending on the region.

We have been continually adapting rates for wind damage coverage in Europe and in the Group steering model since 2004 to bring them in line with the changing storm risk and anticipated loss development.

How does a loss model work? The reinsurer simulates loss events using the model; the simulations are based on economic studies so the projected losses are tenable from a climate perspective. The model results are then applied to existing insurance portfolios, generating loss expectations which are in turn used to determine the prices for insurance coverage.

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