Tail Risk Metrics for Natural Catastrophe Assessment

This white paper discusses the significance of tail risk metrics in evaluating the financial impacts of natural catastrophes. It outlines how traditional risk metrics often focus on average losses, which can leave organizations vulnerable to extreme events that occur infrequently but can cause substantial damage. The paper defines tail risk metrics as tools that capture the likelihood of experiencing losses above certain thresholds, emphasizing their importance for risk management in banking and asset management. It explains the application of these metrics in stress testing and portfolio optimization, particularly in the context of extreme-year scenarios such as the 1-in-200-year events. The analysis presented includes a global portfolio of assets, examining location-level and portfolio-level impacts to identify high-risk areas and assets. The findings highlight the necessity of using tail risk metrics to uncover hidden vulnerabilities and guide resilience strategies for organizations facing increasing risks from climate-related disasters.