Assessing the value of seasonal climate forecasts for risk management

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Innovate UK
Innovate UK
Innovate UK
Innovate UK
Innovate UK

£61,115

Jan. 1, 2022

March 31, 2022

Climate change poses an immediate risk to operations from extreme weather events. While the risk modelling industry understands how Shared Socioeconomic Pathways are likely to impact insured assets in a future climate (up to the year 2100), there is currently no attempt to manage financial volatility over the coming months. For example insurers faced expensive payouts from claims during the UK flooding events during autumn 2019-20, while farmers suffered from the severe cold during spring 2018 followed by one of the hottest and driest summers. Seasonal variability in extreme weather/ climate risk depends on many different climate indices, with business exposed to a variety of weather perils that can either be more (or less) likely within the upcoming months. Since insurance pricing is not currently flexible, settlements can sometime be much more costly when a specified weather hazard is more frequent and widespread within an operational period.

The economic benefit of seasonal climate forecasts is therefore substantial, yet they are largely unquantified. This project aims to formulate a credible and rigorous methodology for the validation of a more localised and detailed seasonal forecast product that we can share with our financial clients. The vision is that we can then supply this analysis with our prospective clients for their auditing and model evaluation process. For instance providing drought/ flood risk information to crop insurers at a farming spatial level. We expect that by performing a more complete validation assessment to meet the requirements of the wider industry, we can reach more customers much faster. Overcoming this assessment challenge would therefore enable business growth within a uniquely new and potentially disruptive market.

We aim to apply NPL's validation to our forecast products in other geographies as necessary using their transferable methodology. Since climate risk impacts most operations, solving this challenge would facilitate wider market opportunities in retail demand management, parametric crop insurance, renewable energy management, asset reinsurance and banking.