Measuring and Pricing Cyclone-Related Physical Risk Under Changing Climate

43 Pages Posted: 3 Jun 2021 Last revised: 19 Oct 2021

See all articles by Théo Le Guenedal

Théo Le Guenedal

CREST-ENSAE; Amundi Institute

Philippe Drobinski

Ecole Polytechnique, Palaiseau

Peter Tankov

ENSAE, Institut Polytechnique de Paris

Date Written: May 21, 2021


We propose a statistical methodology to quantify the financial implications of tropical cyclone-related physical risks implied by climate change. To address the sensitivity of disaster intensity to climate change, we provide a Monte Carlo methodology to generate synthetic cyclones consistent with climate scenarios of the Couple Model Intercomparison Project (CMIP5). Sovereign exposure and vulnerability assessments in principal tropical cyclone basins are based on projections of population densities in shared socioeconomic pathways coupled with downscaled physical asset values constructed using mixed data along with locally calibrated damage functions. Finally, we compute the direct climate impact on emerging countries’ bond spreads using the spread sensitivity to the debt to GDP ratio, assuming that damage costs are financed by issuing new government debt. We find that the ‘business as usual’ RCP8.5 concentration scenario coupled with the ‘middle road’ shared socioeconomic pathway (SSP2) leads to global average annual damages 142% larger than in the concentration scenario RCP2.6 allowing to remain under 2°C warming. In terms of emerging market impact, we estimate that in 2070-2100, the impact of extreme cyclones on the bond spread of most vulnerable countries will up to 200 bps higher in the RCP8.5 pathway than in the 2°C baseline. In every step of our assessment, we quantify the impact of model uncertainty on our results using 7 different climate models from the CMIP5 database.

Keywords: Climate change, physical risk, cyclone, sovereign risk, Monte Carlo simulation, damage modeling

JEL Classification: Q54, C63, H63, G12

Suggested Citation

Le Guenedal, Théo and Drobinski, Philippe and Tankov, Peter, Measuring and Pricing Cyclone-Related Physical Risk Under Changing Climate (May 21, 2021). Proceedings of Paris December 2021 Finance Meeting EUROFIDAI - ESSEC, Available at SSRN: or

Théo Le Guenedal (Contact Author)

CREST-ENSAE ( email )


Amundi Institute ( email )

90 Boulevard Pasteur
Paris, 75015

Philippe Drobinski

Ecole Polytechnique, Palaiseau ( email )

Route de Saclay
Palaiseau, 91128

Peter Tankov

ENSAE, Institut Polytechnique de Paris ( email )


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