Spatial dependence and diversification of climate extremes for global (re)insurance

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Insurance is a typical risk transfer mechanism where one pays a predetermined premium in exchange for risk protection. "The contribution of the many to the misfortune of the few" was Lloyd's of London's motto upon its foundation in 1668. This old saying illustrates that insurance works on diversification, either among policyholders or lines of business, which in turn guarantees financial stability and long-term viability. Climate extremes such as floods and hurricanes, however put a significant strain on the financial stability of insurers. This is because of the systemic nature (or wide spatial extent) of these disasters that generate rare but tremendous losses. Losses from climate extremes are typically shared with governments and homeowners or in large part transferred to the international reinsurance industry. Reinsurance is also a risk transfer mechanism but insurers (and other organizations) pay premiums for protection instead. Global by nature, reinsurance counts on international portfolios to stabilize large claims from risks such as climate extremes. But at such level, international (re)insurance portfolios may be affected by global climate phenomena such as El Niño / Southern Oscillation (ENSO) or other regional climate influences. For example, it is well-known in climate science that ENSO affects flood and hurricane occurrences simultaneously around the world, even if such locations are thousands of kilometers apart. The aim of the research proposal is to provide mathematical representations of how climate extremes may occur at various locations globally (spatial dependence) and their effects on a large (inter)national (re)insurance portfolio (spatial diversification). The study of global diversification of climate extremes, which is at the boundary of actuarial and climate sciences, is challenging because it requires an understanding of local and global dynamics of these events. Being high-dimensional by nature, I thus seek to exploit our physical understanding of these natural phenomena, to create more realistic models and financial risk management approaches that in turn advance both actuarial and climate sciences. Insurance, either private and/or public, is a key component of the disaster recovery process. Access to affordable insurance is essential to reduce protection gaps and mitigate climate inequalities generally affecting vulnerable populations more severely. International reinsurance provides an easy mean to benefit from global diversification which in turn assures the long-term viability of the Canadian insurance industry while also reducing the needs for taxpayers to constantly compensate for losses from disaster financial assistance programs. This research proposal thus provides the mathematical tools for actuaries, economists and financial analysts to design public and/or private (re)insurance programs for climate extremes that are sustainable in the future in the face of climate change.