Billion-Dollar Decisions Held up by Poor Use of Climate Data, Insurers Say

Photographer: Balint Porneczi/Bloomberg

European Union corn imports jumped last year after drought struck U.S. crops. Insurers say that companies have poor tools to assess climate data. Pictured: Cereal grains pour from a delivery truck in a warehouse in Nogent-sur-Seine, France, on Dec. 4, 2012. Close

European Union corn imports jumped last year after drought struck U.S. crops.... Read More

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Photographer: Balint Porneczi/Bloomberg

European Union corn imports jumped last year after drought struck U.S. crops. Insurers say that companies have poor tools to assess climate data. Pictured: Cereal grains pour from a delivery truck in a warehouse in Nogent-sur-Seine, France, on Dec. 4, 2012.

Bloomberg BNA — Companies need better tools to analyze climate change data in order to use that information to make business decisions, scientists and insurance industry representatives said June 3.

Approximately 15 petabytes of climate data, or 15 million gigabytes, now exist worldwide, primarily from government agencies and academic institutions, said Sharon Hays, vice president of science and engineering at Computer Sciences Corp. The volume of climate data is expected to grow to 350 petabytes by 2030, she said. Hays was speaking at a workshop on climate information needs for financial decision-making held by the American Meteorological Society.

In the United States, this information is free and publicly available, and mostly consists of satellite data and climate modeling data from the National Oceanic and Atmospheric Administration and the National Aeronautics and Space Administration. But the data is largely unused except by scientists, Hays said.

Billion-Dollar Decisions

The information has the potential to drive billion-dollar decisions in commodities trading, insurance, infrastructure, manufacturing, construction, and other industries, Hays said. For example, more than $2.5 million worth of corn contracts are traded daily in the United States, and approximately $1 trillion a year in sugar futures contracts are traded annually, she said.

Climate change has the potential to affect these commodities, in the form of higher incidence of severe weather events such as droughts. And corn and sugar are significant components in supply chains of major companies, such as beverage companies like Coca-Cola, Hays said. “Early analysis [of climate change impacts on commodities] is very important,” she said, pointing to analysis of projected drought in 2012 before corn prices spiked.

Climate change may also disrupt the $15 trillion manufacturing sector, or the $872 billion construction sector, she said. The energy sector is highly sensitive to climate and weather impacts as well, Hays said.

Traders, analysts, government agencies, infrastructure and supply chain professionals, and others will benefit from better tools for analyzing climate data, Hays said. But this data analysis industry largely does not exist yet, she said.

Certain industries—including farming, insurance, and reinsurance—are starting to assess climate change impacts, but it is not at a tipping point, Hays said. “There has to be collective groundswell to make it safe and comfortable to talk about these things,” she said. Computer Sciences Corp. is working to develop tools to analyze climate data, and she said there is significantly more opportunity in this space.

Insurance Companies Want More Data

Insurance companies are actively looking for more detailed weather and climate data to help make decisions, said Kyle Beatty, senior vice president for business solutions at Atmospheric and Environmental Research (AER). Property and casualty insurance companies have asked AER and 11 other companies to conduct research on tornado and hail frequency in Canada and the United States, Beatty said.

Since the 1980s, there are fewer days annually on which tornadoes occur, but on the days that tornadoes do occur, they are “explosive and catastrophic,” Beatty said. The group is finding that the risk is changing, he said. “Large tornado outbreaks are becoming the norm,” he said. The roundtable is documenting these changing risks for the property and casualty insurance market, he said.

The research will be used to develop risk assessment tools to help insurance companies set premiums and make other decisions, Beatty said.

Insurers Not Fully Pricing Risk

Lindene Patton, chief climate product officer for Zurich Financial Services, said, “The science is there, but the data on the economic impact is not.”

As a result, the property insurance industry is not yet adequately pricing for climate change risk. The insurance industry can reprice every year, so it is not necessarily taking into account long-term risks posed by climate change, she said. Most property insurance policies are single-year, renewable policies, but climate change is a problem that will manifest itself over several decades, she said.

Current property insurance premiums in places such as low-lying coastlines do not adequately reflect risk, Patton said. “Our industry hasn't figured out the trick to get people to stop building in really risky places,” she said. The current insurance system essentially encourages people to continue building in vulnerable places, she said. More data on the economic impacts of climate change might bring behavioral change, she said.

But even without considering climate change impacts, infrastructure, buildings, and cities are not resilient enough, Patton said. “In the absence of climate change, we have a problem to be addressed in terms of asset resilience,” she said. Addressing the gap in resilience in general can help open up a dialogue about how climate change can aggravate that problem and talk about adapting to climate change, she said.

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