Today’s phrase: Risk Appetite. How much risk is a community willing to absorb?

With hurricane Earl approaching the U.S. eastern coastline, it seemed an appropriate afternoon to learn about how the insurance sector assesses natural hazard risks. Our lecturer was Marc Wuest of Swiss Re, an internationally-renowned reinsurance company. Reinsurance companies insure insurance companies, stepping in when the accumulated losses are too great for a single firm to cover alone. Their advantage is their access to a large, distributed pool of money from different geographic regions.

Determining how much risk we’re willing to accept will become ever more relevant as climate changes. For one, natural catastrophe losses are on the rise, Wuest explained, and climate variability is a possible factor.

More certain causal factors include the rapid development and concentration of infrastructure, as well as greater insurance penetration (read: more insured objects). For example, Wuest pointed out that U.S. population growth between 1960 and 2000 was 57 percent. Yet Florida’s population growth exceeded 220 percent during that same time period. Miami’s Ocean Drive, still undeveloped in the 1920s, is now a main strip and tourist attraction. It’s this sort of intense development that exacerbates the risk of catastrophic loss due to hurricane-force winds and flooding.

Notably, the more we concentrate development in hazard-prone areas, the more risk we may incur with future climate (if climate change drives up the intensity of hurricanes or raises sea level, say). What’s more, there’s the question of whether natural hazards will look and behave similarly in the future, possibly compounding vulnerabilities by reducing predictability.

Wuest explained that tropical storm models today assume hurricanes are likely to stay within a certain swath of historical tracks. What if their wandering tendency expands in the future? We would need to substantially re-evaluate storm damage statistics.

I’ve actually heard something similar described by water-climate experts in the American West, where water resource strategies are largely based on the region’s climatology. What do you do when future climate no longer looks like what we’re used to? How do you prepare for the uncertain?