Hazardous simulations: Pricing climate risk in US coastal insurance markets

Abstract

After suffering heavy losses from a string of natural disasters in the early 1990s, the US (re)insurance sector embraced a new technology called catastrophe, or ‘cat’, models to help solve pervasive underestimations of risk. These first models succeeded in crafting consensus about how risks for future disasters should be spread via (re)insurance, but as extreme weather begins to diverge from historical records, cat-modelling firms have struggled to integrate new information about climate change and climate variability into their forecasts. Initial attempts to upgrade models have generated contentious reactions from homeowners and regulators, casting doubt on modellers’ position as privileged arbiters of risk. As a result, this case shows how efforts to incorporate knowledge about climate impacts into routine economic processes, such as insurance pricing, trigger broader political disputes about how these risks should be socially distributed. These disputes are decoupled, to an extent, from the epistemological validity of how risks are actually calculated.