19 August 2010

Reinsurance Innumeracy

I was intrigued to see the following in a Swiss Re press release a reader sent to me this morning (thanks FN):
Climate change could significantly increase the risk of hurricanes and storms in the Caribbean and threaten future development in the region, concludes a new study released by the Caribbean Catastrophe Risk Insurance Facility (CCRIF). Damage from wind, storm surge and inland flooding already amounts to 6% of GDP per year in some countries, according to the study’s preliminary results. Under a high climate change scenario, annual expected losses could rise by another 1 to 3% of GDP by 2030.
The statement is interesting because of the very large increase in projected hurricane losses to 2030, even under the most extreme scenario. So I took a look at the underlying report, which was produced by the intergovernmental CCRIF supported by reinsurance companies including Swiss Re. And like a lot that you find in the grey literature related to climate change, it does not hold up so well.  Here are two reasons why, and they have nothing to do with the report's cherry picking of extreme scenarios or even the validity of those scenarios.  My critique below takes the climate part of the methodology as given (I didn't even look at the climate part of the methodology, which has its own obvious problems).

First, the report (here in PDF) combines projected future damage resulting from GDP growth and projected climate change and calls the total "climate change."  Not good.  You can see this in the figure below from the report. I have placed a red circle around the report's breakdown of the sources of future increases in damage, and you can see that a significant part is due solely to an "increase due to asset growth."

Then in the left panel you can see the total increase reported (in the green oval that I added), with a 50% increase in losses as a proportion of GDP (from 6% to 9%, and the difference of 3% is 50% of 6%).  By the time this makes its way to the press release it is characterized as
Findings from the study indicate that annual expected losses from wind, storm surge and inland flooding already amount to up to 6% of GDP in some countries and that, in a worst case scenario, climate change has the potential to increase these expected losses by 1 to 3 percentage points of GDP by 2030.
That is just wrong and misleading. Not good.

The second problem with the report is that while it takes an extreme scenario for climate change, it takes a single apparently conservative scenario for GDP growth.  For instance, the report assumes a 1.2% per year GDP growth for Jamaica, as compared to a 1.8%per year increase in damages due solely to climate change.  If the report were to instead assume a 2% per year annual growth rate (as the Jamaican government does for 2001/12) then hurricane damage would decrease as a proportion of GDP by 2030, because economic growth would outstrip the independent effects of climate change.

A better conclusion from this report would be that climate change -- even under the most extreme scenarios -- might increase or decrease future Caribbean hurricane damage relative to GDP, or even have no discernible effect, but the policy options that make sense in this region are insensitive to these uncertainties.

I see that some in the media have already uncritically repeated the misleading conclusions from the report.  Let's see if anyone else does.

[UPDATE 8/20: Climate Progress fell for it.]