Quantifying Climate Change Risk: The Need for a Global Standards Framework
In November 2021, Nasdaq’s James Lay, Commercial Director for the Catastrophe Risk Modelling business, attended a panel session with Willis Towers Watson at the United Nations Climate Change Conference (COP26) alongside other leaders in the cat risk industry and beyond. The panel focused on how the use of data and model standards can increase access to transparent data sources to support strategic decisions aligned with a changing climate. They discussed why analytics matters when it comes to climate resilience, open-source data, risk modelling and management as a global public good.
When asked about how Nasdaq's Risk Modelling for Catastrophes solution will evolve to provide useful metrics for physical climate risk, Lay explained how the insurance industry has been using the technology for over three decades, proving its robust approach when it comes to quantifying the risk of extreme weather events. “An important consideration is that the insurance industry has used these models for over 30 years. We do not need to reinvent the wheel here; we have a lot of these technologies available now.”
Lay added that there is an opportunity to engage with the community that is building these catastrophe models to look at standard ways of approaching the challenges of applying modelling to climate risk. “That then enables the end users to be able to look at how the models were created in a uniform way which makes their life easier at the end of the day.”
In terms of evolution on Nasdaq's Risk Modeling for Catastrophes platform, Lay explained how the platform was born in the cloud, is delivered via software-as-a-service (SaaS) and is an independent platform for anybody to distribute catastrophe models.
“It is powered by an open-source software platform called the Oasis Loss Modelling Framework, which is an open standard. So, effectively, anyone that wants to build a model in an open format can do so and then we can publish it on our platform. This serves as a great demonstration of how open standards could be powerful in democratizing the use of these modelling technologies. These standards cannot be created in isolation and should not be proprietary in nature.”
Following the panel, Lay presented on the ability to build an open standards framework to condition future looking models. His thoughts on a reference framework for climate conditioning of catastrophe risk models surfaced from the urgent need for common approaches to quantifying physical climate risks.
In terms of risk evolution, Lay discussed how consistent ways to quantify and monitor physical risk, both present and future, are essential. He talked about how changes to the physical risks that have already occurred are likely to happen as climate change continues. “Consistency and transparency are key to confidently representing future climate impacts and making effective risk management and resilience decisions.”
Currently, the insurance industry provides a common approach to modelling present day physical extremes. Climate conditioned catastrophe models are starting to emerge, with some vendors that are either actively working on these or have produced something already. These catastrophe models combine science, engineering, and statistical modelling to quantify the financial impact of physical risk, including climate change.
“Open modelling platforms such as Oasis and the Nasdaq Risk Modelling for Catastrophe’s platform provide the ability to select models across different regions and hazards,” Lay explained. Since Nasdaq builds a modelling platform underpinned by the Oasis Loss Modelling framework, Nasdaq serves as a good example of a commercial provider leveraging an open-source technology platform.
Lay then discussed the future changes to physical climate and how they will add greater complexity and need for clarity. “The use of climate model outputs requires a deep knowledge and expertise in climate science, and a technical capability to make an appropriate use of the guidance they can provide.” It is important to note that different industries and users have different needs. From this comes different levels of sophistication as well as various end user needs and perspectives. “A suggestion for a reference framework is having a common approach to the generation of models that address the future states of climate risk and a standard approach to enabling comparison between models that would support multiple stakeholders.”
Since catastrophe models are based on historical data and climate models are projections of what will happen in the future, it is important to consider a framework that questions the output and building of climate models conditioning of catastrophe models. Lay provided a breakdown of the different areas, including model description, data, outputs, methods, and application. Although certain industries will put their importance on different areas, correct integration and comparison between the models will be made and understood.
As for next steps, Nasdaq is currently contributing to a report highlighting best practices for climate conditioned catastrophe models. “It is important to get those end user requirements, especially from markets like the financial services and corporate markets that are not so familiar with these types of technologies, and then we can build a workable framework that captures the most important model conditioning parameters and output metrics. With input from a broad industry and stakeholder groups, the whitepaper will describe different methods for climate conditioning catastrophe models as well as their strengths and weaknesses of each.”
To learn more about Nasdaq’s Risk Modelling for Catastrophe’s Platform, you can visit our website: https://www.nasdaq.com/solutions/nasdaq-risk-modelling-for-catastrophes
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