Assessing future climate risks in a forward-looking approach.

Climate change is increasingly recognized as a top global threat impacting human, environmental, and economic systems.

When it comes to property & casualty insurance risk, AXA considers every aspect of the risk equation.  As far as natural catastrophes risks are concerned, climate risk is a function of (i) the physical hazard (the severity and frequency of events); (ii) the exposure (the monetary value of insured asset(s)) and (iii) the vulnerability (the susceptibility or damageability of the insured asset(s) to a given hazard intensity). Each of these elements plays a unique role in driving climate risk both now and into the future. The changes AXA see in its year-on-year losses from climate-linked hazards are a function of all risks components and not just the hazard, which is a common misconception.

AXA is developing internally Natural Hazard models (or Natural Catastrophe models) to estimate the climate risk damages and losses to individual risks or (re)insured portfolios.

To perform forward looking analysis, AXA identified different complementary approaches that could be envisaged to assess the future of natural hazards risks according to both the peril and region combinations AXA has exposure to as the availability and quality of data for the three drivers of the risk. Those approaches have been notably used for several regulatory climate stress tests AXA was involved in.

One of them is a global proportional approach simple to implement to consider at a large scale the evolution of hazard, exposure, vulnerability impacts on climate risk for long term time horizons and several warming scenarios. The model is built on current science knowledge related to climate change.

A more sophisticated approach for local-scale assessment is currently being developed. It consists in integrating in the Natural Hazard models a modified view of hazard (stochastic events catalogue) / exposure / vulnerability capturing forward-looking scenarios. AXA is currently upgrading all its Natural Hazard models in that direction. AXA Europe Flood risk model is for instance assessing future of fluvial and pluvial risks from modified precipitation datasets representative of future warming scenarios. Future precipitation are made of baseline current precipitation from which a “delta” precipitation is added, based on CMIP6 temperature anomalies and Clausius-Clapeyron scaling. Hydrological and hydraulic models are then run using this new future precipitation datasets to generate stochastic flood events catalogue for future warming scenarios risks assessment.