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Evaluating the Economics of Climate Risks and Opportunities in the Insurance Sector

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Evaluating the Economics of Climate Risks and Opportunities in the Insurance Sector Centre for Climate Change Economics and Policy Evaluating the Economics of Climate Risks and Opportunities in the Insurance Sector Progress and Insights from the LSE “Munich Re Programme” “The Sponsor and LSE now wish to establish the Munich Re Programme ‘Evaluating the Economics of Climate Risks and Opportunities in the Insurance Sector’ within LSE providing research targeting weak links in the chain running from basic climate science to industrial decision- making.This Programme will include wide-scale communication and high-profile discussion contrasting user needs across government and industry with both economic theory and climate science, the aims being to increase effective communication and quantification of risks, define data requirements of the economics side in the context of the current state of climate science, and seek avenues for more effective communication and advancement of relevant climate science.” LSE-Munich Re Agreement relating to the Munich Re Programme, 2008 Preface In 2008, Munich Re approached the The Programme created an enormous intellectual challenge for the researchers to understand the issue of climate London School of Economics and change from the perspective of reinsurance companies. Political Science with the innovative Munich Re assisted their efforts not just through its financial and far-sighted idea of funding a support, but also through its staff, led by Peter Höppe, who gave freely of their time and expertise, and by supplying major research programme on how invaluable data and information. climate change would affect the As a result, the researchers on the programme were able insurance sector. It was an idea to apply the latest knowledge and techniques from the natural and social sciences to a broad range of business- that was entirely in keeping with the relevant issues and problems. Through the publication reinsurance company’s leadership of more than 20 technical papers and industry briefs, the research programme yielded valuable insights for the role, having been one of the first insurance sector as a whole. to recognise that the impact of The partnership between LSE and Munich Re has been climate change on the frequency and unique and innovative, and provides an example of severity of extreme weather events how universities and businesses can work together to further knowledge and understanding of the risks and could have profound implications for opportunities posed by climate change. the insurance industry. Nicholas Stern, May 2015. The result was the establishment of the five-year Munich Professor Lord Stern of Brentford is Chair of the ESRC Re research programme on “Evaluating the economics of Centre for Climate Change Economics and Policy and climate risks and opportunities in the insurance sector”, President of the British Academy. which was undertaken by the Centre for Climate Change Economics and Policy, a joint venture by LSE and the University of Leeds that was established through a major grant from the UK Economic and Social Research Council. Nicholas Stern speaking at the inaugural lecture: A Global Deal for Climate Change. LSE, 6 October 2008 3 Contents Preface by Nicholas Stern 3 Foreword by Leonard Smith 5 Munich Re Programme Technical Papers List 6 About the Programme 7 Synopsis of the research streams 9 Work conducted by the Programme Visiting Professors 38 Afterword 41 Appendix 1: Papers and posters 42 Appendix 2: Insurance industry briefs 74 Appendix 3: Theses 76 Appendix 4: Press releases 79 Appendix 5: Events and dissemination 83 Appendix 6: Awards and prizes 96 Appendix 7: Programme personnel 98 References 105 “The increased importance and recognition of the changes in weather-related risks that arise from climate change could bring opportunities for new markets and products for the industry” Ranger and Ward (2010) Aiming for a 2oC goal: What does it mean for the insurance Industry? 4 Foreword Early in 2007 Judith Rees, Nick Stern and I met in Nick’s office to discuss potential futures of what was then called the “LSE Climate Programme”. We had three opportunities to fund academic research: a call from the Economic and Social Research Council (ESRC), an interest expressed by the Grantham Foundation, and an interest expressed by Munich Re. Success rates in academia being what they are, we pursued all three. This led to the establishment of the LSE Grantham Research Institute and the ESRC Centre for Climate Change Economics and Policy, the latter jointly with the University of Leeds. The Centre combined five Programmes, four funded by the ESRC and the fifth, the Munich Re Programme, funded by Munich Re. I had the privilege of leading that Programme, and this report provides an overview of the work done, insights accomplished and a hint of the ongoing impacts of that programme. The only deliverables under contract consisted of understanding of the risks and opportunities posed by Technical Papers and industry briefs. It is unusual to climate change. As academics we learned a great deal find a commercial entity thinking deeply enough to fund from professionals, including scientists and philosophers, a multimillion pound project with limited immediate within Munich Re. Perhaps my favourite recollection operational relevance, rather targeting strategic long- was a knock-down drag-out dispute over a pub table term importance. A total of 20 Munich Re Technical in the Leadenhall Market after one of our joint meetings. Papers were envisaged, as listed in the table below. The The dispute was over the meaning and interpretation Programme produces much more, of course. At present of what constituted a “trend”; no clear sides could be 26 academic (peer reviewed) papers directly supported drawn between those in academia and those in industry; by the Munich Re Programme have appeared in print, it was as insightful, inspired and honest a discussion as the latest in early 2015. The differences in academic any I have witnessed in academia. There was no clear timescales and industrial timescales are what they are: “winner”, but importantly the discussion helped me to the Munich Re Programme will continue to have impact better understand an important difference in current on timescales long even compared to those of terminology. Teasing apart the strong feelings that led academic institutions. to that discussion took time, and a clarification which Within LSE, the research view of dozens of people, broadens our understanding beyond any of the views physical scientists and social scientists, graduate stated at the table that evening will soon become a students, postdocs and tenured faculty, have been chapter in an LSE statistics PhD thesis later this year. widened by the Munich Re Programme. Most senior academics in the Programme remain at LSE, although The Munich Re Programme made possible these Nicola Ranger is now seconded to DIFD. Postdocs and intense interactions, and personal relationships of trust students supported by the Programme have dispersed and understanding developed through true interactions around the world, and are now employed at institutions between academics and their counterparts in industry. including ETH, University of Chicago, University of These enduring relationships are the true legacy of the Oxford, and companies including Risk Munich Re Programme. I am proud to have been a Management Solutions. part of it. It is through this broadening of the background and Leonard Smith, May 2015 experiences of these individuals that the Munich Re Director, Centre for the Analysis of Time Series at LSE. Programme will continue to significantly impact our PI, LSE-Munich Re Programme 5 Munich Re Programme Technical Papers Abstracts of the Technical Papers can be found in Appendix 1 TP Date Title Authors Barrieu (with Sinclair- 1 Jul 2009 Economic policy when models disagree Desgagné) High impact, low probability? An empirical analysis of risk in 2 Sep 2009 Dietz the economics of climate change 3 Nov 2009 Properly designed emissions trading schemes do work! Fehr (with Carmona & Hinz) 4 Aug 2010 Ambiguity and climate policy Millner and Dietz (with Heal) A trend analysis of normalized insured economic damage 5 Nov 2010 Neumayer and Barthel from natural disasters Normalizing economic loss from natural disasters: 6 Nov 2010 Neumayer and Barthel A global analysis Integrated EUA and CER price modelling and application for Barrieu and Fehr 7 Mar 2011 spread option pricing Deep uncertainty in long-term hurricane risk: Scenario Ranger and Niehoerster 8 Jul 2011 generation and implications for future climate experiments 9 Aug 2011 Scientific Uncertainty: A User’s Guide Bradley 10 Sep 2011 A representation result for choice under conscious unawareness Walker and Dietz Forecasting non-life insurance demand in the BRICS Ranger and Williamson 11 Sep 2011 economies: a preliminary evaluation of the impacts of income and climate change A preliminary assessment of the impact of climate change on 12 Sep 2011 Ranger and Surminski non-life insurance demand in the BRICS economies Pattern scaled climate change scenarios: are these 13 Dec 2011 Smith, Lopez and Suckling useful for adaptation? Policy indexes – what do they tell us and what are their 14 Sep 2012 applications? The case of climate policy and business Surminski and Williamson planning in emerging markets The roles of public and private actors in the governance of 15 Sep 2012 Fisher and Surminski adaptation: the case of agricultural insurance in India Ambiguity and insurance: Robust capital requirements Walker and Dietz 16
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