Taking cover: How NOAA’s climate and weather data supports the US reinsurance sector

Image: Aerial views during an Army search and rescue mission show damage from Hurricane Sandy to the New Jersey coast, Oct. 30, 2012. The soldiers are assigned to the 1-150 Assault Helicopter Battalion, New Jersey Army National Guard. U.S. Air Force photo by Master Sgt. Mark C. Olsen (public domain).

By Amanda Rycerz of Acclimatise

NOAA’s National Centers for Environmental Information, the largest archive of climate and weather data in the world, has released their latest success story which focuses on how the reinsurance sector uses NCEI’s climate and weather data. The detailed report informed by interviews with leading reinsurance companies, infographic and video describe how reinsurers use NCEI’s data to develop catastrophe models and set rates for reinsurance premiums.

Reinsurance, or simply put insurance for insurance companies, provides a little known but very important service for communities and businesses. In the aftermath of natural disasters, such as a major hurricanes or flood events, insurance companies are overwhelmed by claims and do not have money on hand for payouts. In scenarios such as this, reinsurers back up insurance companies, channeling billions of dollars into communities that have been impacted by catastrophes, and helping them get back on their feet faster.

Weather data ‘black boxes’

To provide this service, reinsurers need to understand the probability of risk. They need to understand what the likelihood of a hurricane, tornado or flood is in a given area. To do this, they develop peril-specific catastrophe or ‘CAT’ models, highly sophisticated computer-generated models that estimate economic losses from extreme events. These models have been described as ‘black boxes’ and contain highly proprietary information drawing from meteorology, actuarial sciences, engineering and seismology.

NCEI provides meteorological information such as global historical tropical cyclone track data, severe convective storm data (for tornado and hail), as well as temperature and precipitation data that is used for modeling perils and understanding their probability. These data can also be used to test how well the CAT models performed, in other words testing what the CAT model projected against what happened.

Data worth “billions of dollars” to the industry

Once they understand the probability of these natural disasters, reinsurers can sell premiums to insurance companies in exchange for coverage. NCEI’s data provides insurers with the data they need to run their businesses and protects the insurance sector from economic collapse.

“NCEI data is invaluable to the reinsurance industry, and it would be really hard to put a tangible price tag on it,” says Mark Bove of MunichRe America in the NCEI video. “Everything that is being compiled and maintained is the foundation for so many transactions in the financial sector that, without it, we would lose literally billions of dollars of economic activity in the United States”.

________________________

Acclimatise is proud to have led this engagement effort on behalf of NCEI. Read their article about this report on their website.

Learn more by downloading the report from Acclimatise resources library. And check out the infographic and video in the original article in the Acclimatise web site.