Flooding is one of the main physical hazards that is projected to become more frequent and severe as the climate warms. Construction firms, financial institutions, the insurance industry, and regulators all look at ways to better project the impacts of and resilience to climate change. Fathom, a research-led flood risk modelling specialist providing risk models on Nasdaq’s multi-vendor catastrophe risk modelling service, recently released an updated version of its U.K. flood model, including various climate change scenarios.
We sat down with Andrew Smith, Chief Operations Officer at Fathom, to learn more about managing climate-related risks and how their updated model can help.
Firstly, why is it important to understand how climate change might impact flood risk?
Flood is one of several climate risks that our global communities need to understand. Research, and years of weather observations, indicate that perils such as hurricanes, drought and floods are becoming more extreme in many regions. To ensure that we are prepared for this change in weather patterns, we need to understand what is causing it, what available signals there are to enable us to predict when they are likely to occur and thereby identify which areas are most vulnerable.
When we have the correct data, we can make informed planning decisions, invest in things like defenses and grow capacity for aid and response. This is vital in our efforts to save lives and protect infrastructure in the long term.
The Bank of England aims to stress test the resilience of the U.K. financial system to climate-related risks within their 2021 Climate Biennial Exploratory Scenario (CBES) exercise. Is flood risk a factor in CBES, and if so, how are financial institutions impacted by it?
The Prudential Regulatory Authority has asked the financial sector to assess climate-related risk for physical risk (the physical threat posed to assets, liabilities and banking books by climate change) and transition risk (the impact that transition to a green economy may have on existing assets, and how this transition may impact investment decisions).
When we focus on physical risk, flood is one of the main perils covered by CBES. With current projections indicating that floods may increase in both frequency and severity, this is something that could affect all financial institutions. Even within areas that will become dryer (due to events such as drought), periods of extreme rainfall may become more frequent.
The financial sector will need to assess their portfolios against several different perils and provide estimations as to their risk. This is a huge undertaking, particularly as the Bank of England has asked for not only current risk but also how this will change under various climate scenarios and for multiple perils in different geographies.
Please tell us about your model – how can you project the impact of climate change on flooding, and how is it done with the Fathom model?
Fathom-U.K. CAT’s update will be the second iteration of our catastrophe model, having originally launched on Nasdaq in February. The model explicitly represents every river channel in the U.K., with over 170,000 synthetic flood events built into the model.
This covers pluvial, fluvial and coastal flood, enabling those working within insurance to quantify the financial impact of flooding as a whole. This includes not only the immediate damage caused but also longer-term effects such as alternative living expenses and unique vulnerability functions for direct and indirect damages.
The latest update incorporates coastal flood and future climate scenarios within the model, making it the first catastrophe model on the Nasdaq platform with such capabilities. With recent legislation calling for the financial sector to understand the risk for the present and future day, this update comes at a crucial time for banks and insurers.
In particular, we have produced five discrete climate-conditioned scenarios specifically supporting participants involved in CBES. These include flood risk for the present day, 2030 and 2050 for Early action, Late action and No Additional Action. More information about the model can be found on Nasdaq’s website.
What this means is that those looking to understand their portfolios’ risk under the outlined Bank of England climate requirements can run their portfolios through our model for each climate scenario and receive exact flood risk data for each scenario and time period. The whole process has been designed to make it as easy as possible for institutions to log in and access the data as and when they need it.
How does the modelling of future flood risk differ in the U.K. compared to elsewhere in the world?
Projections of future flood risk are ultimately based on our ability to simulate future climate scenarios and, in particular, the processes that produce flooding, such as extreme rainfall. However, capturing flood-driving rainfall within climate models is extremely difficult as the models have to be run at very high resolutions in order to represent these processes.
In the U.K., we have some of the best climate modelers in the world producing products such as the U.K. Climate Impacts Project. These models give us a much better chance of capturing flood-driving processes than other regions of the world, where we have to rely on much coarser global circulation models. There are still challenges, but the data richness of the U.K. both in terms of climate modelling and within the flood models means that we have a much better chance of understanding future change.
Who can use the model, and how can they access it?
Professionals working within the insurance and financial sectors will be the primary users. In addition to those mandated to complete the Bank of England’s stress tests within CBES, this update is also beneficial to anyone trying to understand their future flood risk. The inclusion of future climate scenarios enables investors to ‘future proof’ their investments and gives them the information they need to build resilience within areas at risk in their portfolios.
Understanding how hazard and risk will evolve in the future will also allow underwriters and reinsurers to more accurately understand portfolio exposure and better manage their capital. They can also create premiums over time that are climate-informed, accounting for the changing physicality of flooding.
Through platforms like Nasdaq Risk Modelling for Catastrophes, the model is easy to access and understand.
Learn more about Fathom’s new model and Nasdaq’s Risk Modelling for Catastrophes here.