Climate Dependencies and Risk Management: Microcorrelations and Tail Dependence

This report describes how actions can be incorporated into adaptation plans to reduce losses from climate related extreme weather events. The correlations between weather patterns and the climate system itself, as well as dependencies between socioeconomic variables, such as insurance policies, and climate variables are explained.

Two specific types of dependencies are described - microcorrelations and tail dependence. With a focus on insurers, the report suggests that insurance companies and other risk managers will need to investigate where microcorrelations exist that could be harmful to risk management.  Tail dependence can be seen in loss data by ranking two variables and comparing them.  Presented using insurance examples, with tail dependence, insurance companies could face very large losses during an extreme event.

This brief concludes that improved understanding of microcorrelations and tail dependence should be a part of adaptation planning.

This issue brief is one in a series that results from the second phase of a domestic adaptation research project conducted by Resources for the Future.

 

Publication Date: May 2010

Authors or Affiliated Users:

  • Roger Cooke
  • Carolyn Kousky

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Resource Types:

  • Scenario planning

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