Published November 29, 2021 | 3 min watch
Key Points
- How significant has the impact of climate change been on the insurance industry?
- Are some risks set to be uninsurable?
- How is climate change and the energy transition being integrated into underwriting decisions? What are the key risks?
- Should we expect more climate change litigation cases to emerge?
- How can the industry support the transition to a lower carbon society? What are the actions that have taken place so far?
- What are the opportunities for the industry as we move towards a lower carbon society?
What is the impact of climate change on insurance and how can the sector support the energy transition? RBC Capital Markets invited Maryam Golnaraghi, Director, Climate Change and Emerging Environmental Topics, at Geneva Association and Paul Nunn, Senior Advisor at SCOR to find out.
Climate Change is forcing a re-think of risk model
The underwriting industry spends a lot of time analyzing hazards linked to climate change. It can be difficult to incorporate climate change into existing catastrophes’ models as previous climate models were replicating past events, whereas they now have to be forward looking and take more unpredictability into account for better price adequacy, says Scor’s Paul Nunn. “How do you ensure the models remain relevant? We are trying to embed our understanding of climate change, trying to address the protection gap challenges in developing economies and other types of gaps, such as flooding coverage, for instance, which is not standard in insurance policy.” There is a standard classification emerging to assess risk in the industry that is segmented into physical risks, transitional risks, and litigation risk linked to the transition itself, he explained. “Ideally, we would have an orderly transition, but we’ll have a busy decade ahead of us as we’re running out of time, so we can expect some disruption ahead.”
Insurance: a key stakeholder in the transition
For Maryam Golnaraghi, focus is indeed on managing transition risk but increasingly also on assessing the physical risk – the impact of extreme weather events on portfolios and through investments in companies. “We have done a survey that showed three types of behavior. First, companies that consider climate change as a core issue and look at the impact on the short, medium and long term, incorporating those issues in risk management and in the balance sheet.
These companies developed institutional teams and invested in data tools and strategies for climate change assessment, are engaged in shaping public policies and regulations, business models and incentives. The second type of companies include climate change in their sustainability or ESG approach, but it is managed as part of an office.
They have models that the C-suite recognizes they need to incorporate in their strategy and are mobilizing the board, but they tend to focus just on carbon footprint and recycling. These companies are still driven by regulations. Thirdly, there are companies that have not realized yet that this is a core business issue.” Maryam Golnaraghi believes alliances with businesses are key to rethink risk management.
“The industry is mobilizing with the financial sector in the absence of clear policies, there are several concrete movements to systemically change the system.” The insurance industry also works with governments around public assets and infrastructure to help better assess risks and make them more investable, she says.
Climate change: risks and opportunities for the insurance sector
The financial results of the insurance industry have been directly impacted by climate related losses in recent years. However, there are opportunities amid all the disruption. “Assessing the physical risk on the long-term horizon depends on adaptation and risk management - and the steps taken the governments, businesses, home-owners to mitigate the impact of climate change,” remarks Maryam Golnaraghi.
“There is also the technological risk, which represents both a risk and opportunities for P&C insurance.” Climate change means losing business on one side, but it may also mean new business the other, she stated.
“It depends on the ability of the insurance industry to innovate and be agile, it has a huge role to play.” Paul Nunn agrees that opportunities to develop new products and new markets exist. “Technology and Machine Learning can help make industrial processes more energy efficient - efficiency is a frontier we constantly try to push.”
