Research & Engagement

In the current Planning Phase, we are working with prospective CIRCAD members to understand their unique needs, challenges, and aspirations. This will allow us to organize our subsequent plans and proposals to address the concerns and opportunities important to them. In September, 2014, we will host a two-day Planning Workshop for prospective members, external collaborators, and site researchers. The goals of the Planning Workshop are to establish CIRCAD’s focus, value propositions, and potential research projects, with the output being a research agenda and a specific portfolio of proposed projects that appeal to our prospective members. These will provide the intellectual foundation for our full proposal, due in mid December, 2014.

While the specific research to be conducted by CIRCAD will be determined by a member advisory board, following is a representative set of prospective projects that we anticipate aligning industry’s research needs concerning climate risk management.

1. Analytical and governance strategies for climate-related financial risk management at the firm- and system-levels

Coordinators: Mercy Berman DeMenno (Duke) & Rob Hoyt (UGA) 

Climate change poses financial risks and opportunities for insurers and the systems in which they operate. Inattention to system-level dynamics can impede the effectiveness of insurers’ climate-related financial risk management strategies and the efficiency of the transition to a sustainable, resilient, and equitable economy more broadly. This project addresses the analytical and governance barriers to more holistic insurance sector climate-related financial risk management and resilience investment. This project’s specific aims are to: (i) map the policy, regulatory, and market dynamics shaping insurers’ integration of climate risk and resilience into underwriting and investment; (ii) develop a participatory complex systems model to analyze interactions within and across insurers’ climate risk management strategies as well as interdependencies with the broader financial and real economies; (iii) design a multi-objective climate risk management framework that incorporates model insights regarding systemwide feedbacks and that can inform scenario-based identification of optimal strategies; and (iv) convene a multi-stakeholder forum to build capacity and discuss climate risk management and resilience investment strategies across insurers, regulators, and communities. The resulting simulation model, multi-objective framework, and multi-stakeholder forum will enable more effective insurer climate-related financial risk management and efficiently leverage the sector’s analytical capacity and investment capital to catalyze economic and environmental resilience.

2. Piloting integrated wildfire risk management for high-risk communities

Coordinators: Marc Ragin (UGA) & Lydia Olander (Duke)

Homeowners in areas at high risk for wildfire currently face an insurance availability crisis, as private insurers exit high-risk states. Physical mitigation can reduce wildfire risk, but incentives for such investments – both at the individual level and the community level – are lacking. One potential solution is community-based catastrophe insurance (CBCI), in which local leaders organize a single-peril catastrophe insurance pool at the community level to substitute for individual-level insurance coverage. CBCI aligns incentives to invest in mitigation, as the benefits of risk reduction directly lower costs to the community risk pool. The broader appetite for, and feasibility of, CBCI programs – and related mitigation – are currently not well understood. The specific aims of this project are to: (i) model the economic tradeoffs of shifting wildfire risk from private insurers to community pools, (ii) evaluate the characteristics of ideal communities for CBCI programs, (iii) engage with residents to understand their appetite for various CBCI frameworks, and (iv) conduct formal feasibility studies of integrated CBCI-mitigation plans. Ultimately, we aim to provide a road map for communities to engage with insurers, reinsurers, and related parties to launch holistic wildfire risk management plans which incorporate both CBCI and mitigation projects.

3. Accounting for nature (and nature-based solutions) in risk models 

Coordinators: Matthew Bilskie (UGA), Todd Bridges (UGA) & Lydia Olander (Duke)

Nature is not fully accounted for in insurance models, thus neither the risk of poorly managed nature, nor the benefits of improved use of nature for building climate resilience are fully accounted for in estimating risk and informing insurance rates. The natural environment significantly affects disaster risk – both negatively and positively. In fact, nature-based solutions (NbS) have gained traction as a sustainable risk mitigation tool. Existing models may account for some degree of increased risk associated with nature, but have struggled to quantify the riskreducing benefits of nature. This project will support advancement in risk models to incorporate natural lands management and NbS into evaluation of climate-related perils. The project’s specific aims are to: (i) identify what model elements are needed to better evaluate the impacts of natural lands management and nature-based solutions on various climate related perils (e.g., fire, flood, drought, erosion, coastal storms, wind, extreme heat); (ii) develop the necessary functional relationships that can practically be incorporated into risk models (considering requirements for data, expertise, and accuracy); (iii) incorporate the developed functional relationships into an open-source risk model to test and demonstrate their impact for relevant hazard and mitigation scenarios; and (iv) use updated/improved modeling capability to support NbS investment decisions, public-private risk mitigation partnerships, risk pricing, and development of new insurance products.

4. Evaluating CBCI as a tool for incentivizing large-scale resilience, including nature-based solutions

Coordinators: Lydia Olander (Duke) & Marc Ragin (UGA)

Recent insurance market challenges and trends in disaster losses highlight that insurance alone cannot address today’s - and tomorrow’s - climate challenges. Risk reduction is absolutely necessary to protect individuals, communities, and infrastructure - and to ensure functioning insurance markets. The nature of disaster risk requires both individual-level and large-scale resilience investment, but incentivizing large scale investment is particularly challenging. One possibility is Community Based Catastrophe Insurance (CBCI) which arranges insurance coverage - and risk reduction - at the community level. CBCI gets the community “rowing in the same direction” with respect to managing risk. The goal of this project is to evaluate the applicability of CBCI as a tool to incentivize and reduce risk with large-scale (watershed/ landscape/community level) climate resilience investments, including nature-based solutions. Our specific project aims are to: (i) identify the characteristics of communities, perils, risk reduction measures, and CBCI policies that generate benefits for both communities and insurers (e.g., where benefits of reduced risk are sufficient to justify the costs of the CBCI program); (ii) identify likely regulatory, program, or legal constraints and solutions at the state and federal levels; and (iii) evaluate the interest of communities, governments, and their partners in utilizing CBCI to support large scale resilience building investments (e.g., explore acceptable costs and benefits).

5. Optimal design of parametric extreme heat insurance

Coordinators: Jordan Clark (Duke) & David Eckles (UGA)

The increasing frequency and intensity of extreme heat events presents a significant opportunity for the insurance industry to develop targeted solutions for mitigating heat-related risks. For example, extreme heat events can lead to significant loss of wages for outdoor workers and productivity for their employers, illustrating just one aspect of this complex issue. Our project aims to address this gap by developing novel parametric heat insurance solutions with wide-ranging applications. Leveraging high-resolution climate data with robust heat indicators, we will generate detailed heat exposure maps and link them to real-world impacts across various sectors. We will conduct new research that evaluates the feasibility, pricing strategies, and market demand for parametric heat insurance products that could protect against a spectrum of heat-related risks. By integrating advanced machine learning techniques, socioeconomic data, and comprehensive climate information, we aim to deliver actionable insights and cutting-edge products. Our tools will be relevant for developing and assessing parametric insurance models for various heat-related impacts across sectors, such as occupational health, business disruptions, and municipal infrastructure stress. The project's outcomes will equip insurers with practical tools to address the multifaceted challenges of extreme heat, potentially unlocking significant untapped revenue streams while positioning the industry at the forefront of climate adaptation. Ultimately, this project aims to foster resilience in vulnerable communities and businesses facing a hotter future. 

6. Flood risk rating changes and their effect on home values, insurance demand, mitigation investment, and adaptation

Coordinators: Craig Landry (UGA) & Celine Robinson (Duke)

The increasing variability in flood risk due to climate change poses a significant threat to properties nationwide. Despite this, flood insurance market penetration remains low, with many homeowners in flood-prone areas opting out of coverage, potentially exposing themselves to substantial losses. This low uptake is often due to a lack of awareness about the risks, the absence of affordable, accessible flood insurance products, and distortions created by disaster assistance. Expanding the private flood insurance market requires effective risk communication in communities with low uptake and developing targeted products for those in low to moderate risk areas. This project will build upon public and private flood risk assessment efforts to explore how new information and programmatic provisions can influence homeowners’ interest and willingness to purchase public and private flood insurance. We will also assess the influence of risk assessments on property values and community mitigation efforts (e.g. Community Rating System). Our approach will involve compiling property market, flood insurance, and hazard mitigation data for a number of relevant communities and pairing these data with surveys designed to evaluate homeowners' risk perceptions and the factors influencing their insurance purchasing decisions. This information will be used to characterize relationships and feedback among housing, mitigation, and insurance, and simulate introduction of new insurance projects.

7. Activating Community Disaster Resilience Zones (CDRZ) to build resilience and insurance markets in communities most impacted by climate change

Coordinators: Lydia Olander (Duke) & Don Nelson (UGA)

Moderating community-level climate risk in a manner that will keep communities insurable will require planning, action and investment. The Community Disaster Resilience Zones (CDRZ) set up by FEMA following legislation led by the Reinsurance Association of America is a great start. There is significant federal funding available in the near term, presenting a great opportunity to develop an effective resilience building system for communities. However, there will not be enough funding to meet widespread adaptation needs that will only continue to grow. Additional elements are needed to operationalize CDRZ. This project will: (i) Develop recommendations for legislative action that could incentivize private investment in resilience projects for these communities; (ii) Develop a plan for a community data and modeling roadmap/toolkit to support planning and technical assistance programs; and (iii) Host a workshop to develop recommendations for what institutional infrastructure is needed from states and non-governmental organizations to provide technical assistance, help build projects at the right scale, and harness financing.

8. Enhancing climate data accessibility and integration for industry stakeholders 

Coordinators: Celine Robinson (Duke) & Francis Bouchard (Duke)

Climate change is reshaping property risk profiles nationwide, making it challenging for insurers to price and underwrite policies accurately based on historical data alone. To address this challenge, there is a pressing need for insurers to integrate advanced climate research and data into risk evaluation and decision-making processes. However, existing climate research falls short of answering the most pressing questions, due to a misalignment between academic research and industry needs. Further, the accessibility of climate data products is limited due to a focus on academic dissemination, disparate models and data sharing platforms, a range of data and model formats and standards, and limited utilization of FAIR principles. This project aims to bridge this gap by developing new climate research and data products based on the needs of insurers that translate climate science into actionable insights. Through a series of workshops involving atmospheric scientists, applied researchers, and industry partners, we will explore how insurers currently use climate data, identify barriers to integrating existing climate research, and explore key research areas that address industry needs. Additionally, we will establish standardized data practices and industry-focused platforms to enhance the dissemination and application of climate data produced by scientists and other researchers.

9. Applying modern decision theory to the application of climate risk models

Coordinators: Mark Borsuk (Duke) & Marshall Shepherd (UGA) 

Insurers and reinsurers rely on the outputs of scientific climate models to assess the future frequency and magnitude of extreme climate-related losses. However, there are many different climate models available, and the industry needs to know which models they can rely on and how best to use the model outputs. As model outputs are often expressed as forecasts, this translates to the questions, “Are climate model forecasts accurate?” and “ Are climate model forecasts useful?” Answers to these questions would lead to better understanding of key uncertainties and to targeted approaches for overcoming these uncertainties in decisionmaking. The overarching goal of this project, therefore, is to develop a decision theoretic framework for climate model evaluation, selection, and application relevant to the needs of the insurance and reinsurance industry. The projects specific aims are to: (i) translate information on the decision relevance of climate forecasts for various insurance needs to a Model Aptitude Score (MAS) representing model accuracy and usefulness; (ii) compare the forecasts of multiple models under various scenarios with respect to the MAS and identify key factors affecting the MAS values; and (iii) simulate how use of the MAS for model selection and application will affect pricing and risk management decisions and develop approaches for reducing or overcoming uncertainty.

10. Next-generation vulnerability assessment: Mapping climate extremes, compound disasters, and socio-economic impact

Coordinators: Marshall Shepherd (UGA) & Brian McAdoo (Duke)

Extreme weather costs nearly $143 billion per year and challenges the insurance industry. Concurrently, certain populations are insufficiently insured for climate-related risks. By simultaneously addressing weather-climate and insurance gaps, we propose to refine vulnerability analyses based on the needs of current insurance stakeholders (e.g., new parametric insurance products) and uninsured/underinsured populations. Our goal is to “flip the paradigm” and use vulnerability mapping to reveal opportunities for insurers rather than places to avoid. The specific aims for this project are to: (i) assess historical changes in extreme weather events alongside downscaled climate model projections to examine a range of future extreme weather scenarios; (ii) use decision analysis to integrate our findings into emerging risk-vulnerability frameworks; and (iii) co-produce an assessment of risk impacts, risk perception, and insurance products through community and industry engagement.