The Consumer Sector’s Approach to the Energy Transition - Transcript

Speaker 1:

Bringing you our latest series on navigating the energy transition. A podcast series where RBC Capital Markets experts and guest speakers share their insights on the latest trends and opportunities in energy transition.

Kamran Hossain:

Good afternoon, or good morning, depending on where you're based. My name is Kamran Hossain. And I'm from the insurance team in the European equity research team at RBC in London. Today, my colleague Mark Rudd from our US team are really pleased to be hosting the 10th session in the RBC navigating the energy transition series. Today, we will focus on insurance, climate change and the energy transition.

Kamran Hossain:

Today's session, which is the 10th one, as I mentioned, will be the last session ahead of a summer break. The series will then pick up in the autumn to let people enjoy a Zoom-free summer, hopefully, and a little bit of outdoors time.

Kamran Hossain:

Moving on to today's topic. Endurance is a key stakeholder in climate change. Recent results have been heavily impacted by weather-related losses, 2017 to this year included, but also in supporting the energy transition as one of the largest asset managers or owners of assets globally. Today, we are really thrilled to be joined by two esteemed speakers. Firstly, we have Maryam Golnaraghi, who is the director of climate change and emerging environmental topics for the Geneva Association, and Paul Nunn who is a senior advisor who focuses on many things, including ESG from school.

Kamran Hossain:

In terms of today's session, the initial discussion will last about 40 to 45 minutes before we move onto Q&A. If you'd like to submit a question, please use the portal where you can submit your questions.

Kamran Hossain:

Paul, I'm going to start the session off talking about climate change. How should we think about defining this? Climate change is something we talk about a lot. How do we define it, and what are the implications for insurers from these changes in the climate?

Paul Nunn:

Thank you Kamran, and hello everybody. Thank you very much to Kamran and Mark for inviting me, just to start. Well, that's a very big, wide question. There are, from focusing on the risks that climate change represents to the industry, there's a fairly standard classification that is emerging of different flavors of risk that is used generally in the industry. And we typically segment into physical risks, transition risks and sometimes people carve out of transition risks separately, litigation risks associated with the transition. Taking those in turn, the physical risks we are, you mentioned the results, and that's an obvious way that the industry is affected with climate-related weather events. Segmented into those acute risks where we see extreme weather directly affecting the built environment and all of the insurance that has been purchased and sold, protecting the built environment.

Paul Nunn:

But we also have chronic risks, which are much, much slower onset and of a chronic risk, which doesn't necessarily manifest itself in a sudden and accidental way, but it changes the risk profile over time. Transition risks, on the other hand, very much relate to the topic of your series, the energy transition. Global society needs to change dramatically if we are going to manage climate change effectively. Ideally we would have an orderly transition, but there will be a transition one way or another and we've got a pretty busy decade ahead of us scrambling because we are running out of time to have an orderly transition.

Paul Nunn:

There's going to be a lot of disruption in the world and in the economy and transition risks impact disruption. There are going to be organizations which are very, very proactive and on the front foot and managing the transition of their business model well, and there'll be others that struggle with that transition. We're going to see public policy, carbon pricing, carbon taxes, emission trading schemes. They're all going to have a major effect on businesses and individuals, and there are some attendant risks associated with that transition. For example, companies that are laggards in their particular sector may well end up with poor maintenance regimes and end up having more losses just because of the way that their plant machinery is maintained.

Paul Nunn:

From the manifestation, I think Maryam's probably got a really good insight on the litigation risk, so maybe Maryam you can pick up that side. But in terms of how it affects the business, clearly, as the physical risks are changing, there are potential implications on pricing adequacy, so we have earnings events and earnings impacts, but also, we need to keep an eye on the changing potential for severity of loss and it's difficult. The attribution of specific events to climate change is very, very difficult, particularly when we are focused as an industry on some of the extremes, the catastrophic events. And then the natural variability that we see in the data anyway in terms of managing hurricanes and major floods, is huge. So trying to isolate just how much of that is as a result of climate change is a real challenge.

Kamran Hossain:

That's a good start, Paul. I think it sets a little bit of a working framework. Maybe I can ask Maryam to talk through some of the liabilities, some of the investment aspects and what management teams are doing as they start to try to address some of these things?

Maryam Golnaraghi:

First of all, thank you very much for the invitation, it's a pleasure to be here. Good morning, good afternoon everybody. Just building on what Paul has said, building a little bit more around the liability side of the business. Paul talked to the physical risk, short term, long term, and the nature of how the characteristics of acute and chronic risks are changing and evolving. But one thing we have to bear in mind that particularly for P and C insurers on a long term horizon, it could be that climate change is not really the main driver, but what we are doing with exposures and vulnerabilities of the systems pertaining to assets, the way we are building, the way we are moving people and assets into high risk areas. So one of the things that I do want to point here is that assessing risk of the physical risk to the liability side of the insurance business, particularly in the long term horizons, would very much depend on what kind of adaptation and risk management measures, various stakeholders being governments, being homeowners, being businesses will take to keep the risk down.

Maryam Golnaraghi:

So let's make sure that we give it a full balance that it's climate change, but exposure and vulnerability is a big challenge moving ahead. Paul talked about the transition risk and you know that he mentioned about policy risk, litigation risk, market risk, how market will behave as we transition to a resilient, low carbon economy and technological risks. All of these will have implications both from a point of view of risk and opportunity for the liability side of P and C insurance. For example, from a policy risk, lack of clarity from the government on not only policies related to carbon pricing and transitioning, but also for example, policies around dealing with development in coastal areas in case of sea level rise. I mean, these are some of the uncertainties that the industry has to find its way through until the governments bring more clarity to the table.

Maryam Golnaraghi:

Another one that I want to talk about is for example, market forces and viability of certain industries that insurance business is underwriting, not just for its NatCap, but as a business and offering business solutions to those industry. This may change as this industry is particularly what I call carbon majors. And in this case, energy sector with oil and gas, maybe over time replace with alternatives. But then the good news is losing business on one side will be gaining business in another. I mean, this is the point that without insurance, we can't move on with the transitioning. And it really depends on the agility of the insurance industry to also adjust itself to the transition and align itself to the transition and innovate its products and services.

Maryam Golnaraghi:

Now, let's look at the investment side of this business as second largest investors. Obviously the industry can play a huge role with respect to not only dealing with this risk, but the transitioning. When you look at the investment side, actually the story is not any different from pension funds or other institutional investors, particularly I would say in this case, life insurers who are the long term investors. What you see is driven by some of the regulatory activities and exercises that have started to come to play. The focus of the investment side has mainly been managing the transition risk. Would I have stranded asset in case of changes in policies and so on? But I think increasingly now the focus is going on what about physical risk? What's the impact of extreme events and other things on my portfolio? For example, directly in terms of the buildings and infrastructure and other things that I have in my portfolio of investments, but also indirectly through investment in companies.

Maryam Golnaraghi:

What we see, which is very interesting among the P and C insurers, the two sides of the balance sheet is starting to collaborate with respect to expertise. So there is significant amount of knowledge and expertise in the underwriting and liability side and the investment side is trying to leverage that with respect to tools that the liability side is you as using for assessing physical risk on the investment side. There is now a movement again, like other institutional investors in mitigating action around the portfolio around exiting from high carbon intensive sectors, or if you are invested in it, maybe you don't underwrite it or vice versa, best in class, thematic investments, active ownership, due diligence. All in all, there is a lot of activity on the investment side in terms of really thinking about how to incorporate climate change consideration some as part of their ESG investing but others really are considering this as a core risk that needs to be managed and looking at it from that.

Maryam Golnaraghi:

But to your last point about how the C-suite of this industry is responding, we've done a survey and we have identified three types of behavior by boards and C-suite. First, are companies that are considering climate change as a core business issue that impacts their business on both sides of the balance sheet on short, medium and long term horizons. These kind of companies are developing corporate policies, strategies. They are incorporating this issuing their enterprise risk management and particularly linking both sides of the balance sheet. They have developed institutional teams and really looking at institutional level integration, leveraging expertise. They're investing heavily in data and tools and methodologies for climate risk assessment. Very importantly, these companies are engaged in shaping public policy and regulations by engaging with governments and regulators, and they're exploring new markets, business models, innovations, and incentives.

Maryam Golnaraghi:

Category two of companies. They are companies that traditionally put climate change in their sustainability ESG approach, generally managed by an office that was away from core business, but the C-suite is recognizing that they need to consider climate change as core business, and they're mobilizing the board and the organization. Essentially, these type of companies are still focused around just carbon footprint, they're recycling, but you see movement in the company in terms of similar actions. As I pointed out in the first category, these companies are still driven by regulations as opposed to try to shape it. And then the last category are companies that are still not realizing that this is core business and essentially maybe the much smaller companies obviously resource, the culture, lack of expertise and internal silos are leading to that. But certainly as a platform of COs we are trying to mobilize this within the P and C and life insurers to gear companies more towards category one. Thank you.

Kamran Hossain:

Thanks Maryam. It must be interesting in your conversations with the COs there, where I'm sure when you tell them they're in bucket three, they don't like to be told they're in bucket three. But I think that would be very interesting to see their responses. I think we were going to move onto what the industry is doing to address climate change and the transition issues here. So Paul, I'm going to want to ask another very broad question. Can you talk about what the industry is doing to address climate change specifically on the underwriting side, I'm very interested there. And looking into the future, do you think there'll be areas where some risks are uninsurable? A hundred years ago there was far less development in some parts of the world and now Florida is completely built up. Do you think that will be a concern in the future?

Paul Nunn:

In terms of what, in practical terms, is the industry doing? I think that the industry has had a lot of experience at trying to quantify risks to natural hazards and in many ways, understanding the way that climate change is influencing the natural hazards that we ensure and underwrite anyway, is really just part of an ongoing extension to work that we're already doing. It's not easy to incorporate climate change into our catastrophe risk models. Historically, those models have been constructed looking backwards. So we tried, we've built models that try to replicate the historical pattern of hurricanes and floods and earthquakes. And it's clear that we need to regularly adjust them as we see climate change happening, or even more progressively, flip it around so that they're forward looking so that we're anticipating climate change trends.

Paul Nunn:

But having said that, the industry still typically writes 12 months policies, and most of the climate science is telling us something about out what might happen in 2050 or 2100. So it's a huge heroic extrapolation interpolation at the moment to use climate models directly to inform catastrophe risk models. I think increasingly the industry is starting to grapple, to grasp that net and grapple with that challenge of how do you condition your catastrophe models to make sure that they stay current as we see sea levels rising, as we have more and more evidence of changing patterns of wildfires or increasing warmer world that allows for-?

Mark Rudd:

[crosstalk 00:18:16] Those are some good thoughts on the, go ahead. I'm sorry.

Kamran Hossain:

Sorry. Did I cut out then Mark, I apologize.

Mark Rudd:

You cut out for me. So go ahead and finish your thought. I didn't mean to jump on your line.

Paul Nunn:

No, that's fine. It was just to say that we are grappling that challenge now and it's really trying to embed our understanding of climate risk into business as usual decision making is what we are really trying to do now.

Paul Nunn:

In addition, what is clear is the climate change is going to have a really profound effect on many of the more vulnerable people in global society. So there's a lot of work trying to address protection gap challenges for developing countries, and the industry has had to be a strong collaborator with the public sector in an initiative called the insurance development forum, trying to specifically provide new risk transfer solutions in developing economies. But we also have major gaps coverage in advanced, in mature economies with highly developed insurance industries. Flood as a coverage is not generally a standard coverage in insurance policies. So we have some real gaps that will need to be addressed in mature insurance markets as well. Longer term, it's a real concern that [inaudible 00:20:07] failures, where there are certain parts of the world, for certain payrolls, which are just become inevitable that-

Mark Rudd:

I think we may have lost Paul maybe. We'll come back to him when he's able to reconnect.

Maryam Golnaraghi:

I can expand.

Mark Rudd:

Maybe we'll jump over to Maryam for a second. Paul was doing a pretty good job of explaining to us some of what the industry is doing from an underwriting and a risk management standpoint. Maybe you could talk a little bit about the asset side of the balance sheet, how people are addressing those exposures as well as maybe some of the regulatory hurdles that they encounter as they put it all together.

Maryam Golnaraghi:

Absolutely. If I can take a moment and build on what Paul was saying, because he was pointing to something very important and I don't want to lose the message on the liability side of the business. Would that be all right? I can build a bit on that.

Mark Rudd:

Sure, definitely.

Maryam Golnaraghi:

Great. Paul was alluding to addressing the protection gap, not only in vulnerable nations, but in mature economies. And this is a very important point. We've just recently looked at floods in five mature economies, US, Canada, UK, Germany, and Australia. And one of the important things that we are seeing is the role of insurance, not only just in terms of providing protection, but in terms of what is offering the society by way of providing more information about risk awareness, risk communication that goes into the policy holders as well as the government, has been crucial. And what we are seeing is significantly strengthened collaboration between the insurance industry and governments in mature economies to rethink flood risk management in general, to try to mobilize more towards prevention and risk reduction, and to really start thinking about the role that insurance can play.

Maryam Golnaraghi:

I want to very much highlight for example, what has happened in UK with respect to floodery, what has happened in Australia, in some of the states in terms of [inaudible 00:22:28] insurance in a conditional way of government also investing in risk mitigation and risk reduction, and now reforms that are shaping up in Canada. So I want to point out that we can't just say, this is the risk for insurance in the future, but what insurers are doing by way of working with governments, with the banking systems and other to rethink risk management, and really try to work on risk reduction and prevention to enable insurability and affordability. I again want to go back and say, this is also an issue about dealing with exposures and vulnerability.

Maryam Golnaraghi:

Now, getting on the investment side of this, obviously the industry would want to play a huge role in investing in transitioning to net zero. But the question is how? And there has been a number of approaches, as I said before, as to how you go about that. But the hurdles to investing at scale are several folds. They are market-based hurdles, linked to availability of investible, great projects. They are also issues related to, for example, taxonomy standards for investing. Another issue that has been highlighted is around regulatory requirements about capital allocation for long term investing. And then two other things, one I pointed out is lack of clarity and massive uncertainty associated with national policies around, for example, energy transitioning, makes investors a little bit insecure and a lot of time that goes with diverging policies.

Maryam Golnaraghi:

In other words, for example, subsidies towards oil and gas, that does not alludes to government's interest in investing towards the transitioning world. Technology is another one. Volatility of new technology markets for transitioning is an issue. I think one of the areas that we are undertaking is to the point that Paul made in the first question, we don't have much time. If we want to reduce the greenhouse gas emissions to the levels, to the targets of Paris agreements, we don't have much time. So we really need to think about a transitioning period where we have carbon sequestration type of technologies. And beyond that, we really need to think in a more of a revolutionary way around technologies that we need, to enable a smooth and reliable and resilient transitioning of sectors such and energy.

Maryam Golnaraghi:

So where the role of insurers come in is what are the risks of these technologies as we build them at scale? These could be operational risk, technological risks, environmental risk, disposal risk. So this offers a whole, not just managing the risk, but a whole range of opportunities for industry to consider as it considers underwriting that transitioning. So I maybe pass on. Paul, do you have anything else to add? You were disconnected. I tried to pick up from the point you left.

Paul Nunn:

So I was going to, I think I was talking about the more vulnerable people in the world in developing economies, have less resilience to climate change effects and therefore the industry's got lots of opportunity to work on solving risk transfer and micros insurers, and ways of providing protection to those more vulnerable in society. But in the developed world, we also have lots of opportunities in areas like flood which are not standard perils. So yeah, there's a lot to aim for in terms of providing new insurance products that directly support society be better prepared and able to bounce back from climate related events when they happen. So it's not all doom and gloom in the sense that even though we are seeing a generally slow and inexorable increase in risk, it does mean that with a growing awareness ... risk is our DNA, right? So it's our product that there are opportunities to develop new products and develop new markets.

Kamran Hossain:

Should we move onto, we always spend a lot of time, and I think investors do as well, we spend a lot of time just thinking about the downside from these things, but clearly there are opportunities. So Maryam, I think you've touched on this a little bit already, but maybe could you talk about the opportunities that you think will come from the energy transition? I'm sure that there's lots that we can talk about on this area.

Maryam Golnaraghi:

Absolutely. And I want to pick up from the last words that Paul ended, that risk in the DNA is the reason for being of the insurance industry. As we think about the transitioning to net zero, first of all, I just wanted to highlight that the industry is mobilizing together with the financial sector. I would say in the absence of clear policies and so on, there are several concrete movements to really systemically change the system to enable that transitioning, to enable investing in that transitioning. And those are around, I would say the financial stability boards task force for climate related financial disclosure, was the first element of that, was the first tipping point, really pointing to the fact that we need clear, reliable climate risk and opportunity information to be able to feed that into the investment decisions for a well planned transitioning. Subsequently, a lot of initiatives, such as sustainable finance frameworks, what financial and insurance regulatory bodies are doing, international rating agencies, et cetera, to really enable this, to enable this transitioning, to help investors put their money into these long term investments.

Maryam Golnaraghi:

So what does that mean for insurers? So, first of all, insurers and many insurers are mobilizing through platforms to start thinking about what would transitioning to a net zero look like? These are, for example, alliances on net zero, the asset owner alliance, asset management alliance, and a new alliance that will come to bear at COP26 this November on the insurance alliance around net zero. The idea is, how do we come together? What does that transitioning look like? And how do we need to innovate our products and services and our investments to support that transitioning forward? I would like to highlight two particular areas where there are great opportunities. One is around new technologies and new processes to alternatives, efficiency, and then for carbon capture and storage. The area here that we are working with insurance industry is products and services to underwrite these kind of large scale projects. And by way of that, looking at the type of risks that are involved in implementing these projects and availing insurance around that area.

Maryam Golnaraghi:

The second one is around infrastructure. So as you see, as part of the post pandemic, a lot of governments are now starting to invest in infrastructure as a critical element for the society, but then many are really focusing on how to make the infrastructure green, clean and resilient. And obviously this is an area where, with the insurance industry, particularly P and C, we are looking at how insurance industry could work with governments particularly around public assets and public infrastructure to help with risk analysis, risk allocation, and better risk management so that these projects could become more investible. Traditionally, public assets and infrastructure are partially insured or not insured, are self insured. Governments, when there is an impact on an infrastructure, for example, like what happened in Texas, if that infrastructure is owned publicly, it's the taxpayer money through the post-disaster program that's used to fix this infrastructure.

Maryam Golnaraghi:

Now, governments are realizing that this kind of spending is not sustainable. And there is a whole discussion around reform of post-disaster to try to incentivize and mobilize. Municipal governments and others in buying their own insurance for their assets and for infrastructure. So I would say this is an area that is in discussion through various platforms, G7, G20, APEC, with the ministers of finance, but also it's starting to materialize in some countries.

Maryam Golnaraghi:

Last point, I'm sorry I'm being long. But I think the other area of opportunity is around use of technology for what I call preventive management and maintenance. You see that emergence of satellite information, drones, cloud computing, real-time risk analysis, use of control systems is offering new opportunities for example, asset owners and infrastructure operators to monitor these risks and work with the insurance industry around risk management solutions and by way of that, also, hopefully we will get into a world where we will have more and more of preventive maintenance and risk management. So there is a lot of good stuff that are on the horizon that we can leverage.

Mark Rudd:

That's a natural segue. Paul, where can technology play a role? What information would you like to see driven down into the underwriting and the product design process? How can that information transition be part of the broader energy transition?

Paul Nunn:

Thanks, Mark. I think Maryam's absolutely right. Technology is going to play a strong role in terms of helping us all to use energy more efficiently and there's obvious examples for individuals in the home around having sensors instead of light switches so that lights don't stay on and having more energy efficient white goods that we have in our kitchens. But the technology and machine learning can also play a role in making industrial processes much, much, more energy efficient so that you need less inputs in terms of energy or feed stocks to produce the same amount of products.

Paul Nunn:

I think efficiency is going to be a frontier that we are constantly trying to push because it's not just about ... the energy transition is going to require an increasing demand in electricity rather than a reduction, as we try to electrify everything. Coupled with that, growing population on earth and a growing middle class population on earth so the demands for energy are going to increase and we have to use energy more and more efficiently if we're going to be able to match that demand with low carbon energy production otherwise we're going to have to keep pumping oil and gas in order to produce that energy and we won't be able to transition faster.

Paul Nunn:

Efficiency is really, really important. The technology has got a good role to play in that. And technology can really help from an insurance product perspective as well. If you look at motor insurance, motor premium, because it's a mandatory class of business, motor premium is a huge part of global insurance premium, right? And technology like the paper mile usage based car insurance, not only encourages people to drive more responsibly by having the box in the car which tells your insurer if you're speeding and driving recklessly, but it also encourages you to drive less because you get charged premium based upon how much you drive. There are ways of constructing insurance products that are going to incentivize policy holder behavior that will help to reduce risk in time and reduce emissions as well, in terms of the way that people behave.

Paul Nunn:

As far as other technology, Maryam mentioned carbon capture. I think that's an important technology which needs to scale. And it also needs the investment to be able to scale up carbon capture, because when we talk about the net zero it's not zero emissions. It just means that we're offsetting or trying to capture the emissions that are still happening and along so there's carbon capture. But there's also carbon capture and usage, as well as carbon capture storage. There are increasing innovative ways that the CO2 that is captured can be used in other areas like CO2 is being captured from one industrial process and then piped into industrial greenhouses to increase the yield on food production.

Paul Nunn:

We're going to a thousand small, innovative areas where, as the problem kind of crystallizes, COP26 is going to be a real rallying call later this year around climate change, like we saw for Paris and I think increasingly we're going to see government policy matching some of the rhetoric that we've been hearing leading up COP26. And I think that some of those policy incentives are going to start to be more and more clear allowing for the rewards of really investing in those in innovative solutions to come to the fore.

Paul Nunn:

Direct air capture is prototype technology, which again, it's just sucking carbon dioxide directly out of the air. That's an area which is clearly ripe for expanding. And I think that there's going to be a bit of a revolution in the agri-business industry. There's a big role for agriculture to play in adapting to more regenerative farming practices and sustainable farming practices. Food security is going to become an increasing global problem. So I think that there'll be opportunities in the agricultural insurance area for new agricultural insurance product, a lot of that insurance is subsidized by governments and I think that climate change is going to increase the number of opportunities that we see around the world to develop agricultural business opportunities. So there's a few examples.

Mark Rudd:

Those are some excellent examples. I was thinking earlier, Maryam, you were talking about some of the investment assets and the green assets that companies could invest in and it really brought to mind, an insurer might choose to invest in a limited partnership developing a solar farm. And right now, the incentives are to own an ordinary corporate bond. On the one hand you've got activists encouraging greener investments. And on the other hand, you've got regulatory pushback making that the path of most resistance rather than the path of least resistance. What are some of the challenges in implementing? Where are the key areas where there needs to be collaboration to smooth out some of those rough bits?

Maryam Golnaraghi:

Excellent question. Well, I think we do have a pile of stuff that we need to do. I would say I would start, as far as the insurance industry is concerned, in the area of risk assessment and risk pricing. Paul talked about the limit of NatCap models, for example, in terms of pricing extreme risk. But as you have heard from this entire conversation, that's not the only risk that the industry needs to worry about by way of managing its own risk and realizing opportunities in this net zero, and those are transition risks.

Maryam Golnaraghi:

The first area, I would say extensive industry collaboration, not only within what with scientific committee and others in innovating forward looking climate risk assessment modeling and scenario analysis, which is already is underway at scale internationally engaging largest insurance. So hopefully in the next year or two or three, there will be pretty concrete approaches to such methodologies that is evolving out of this pretty extensive collaboration. And I think once we know how to quantify and price risk better with a forward looking approach, a lot of opportunities will present themselves.

Maryam Golnaraghi:

The second one is building on these net zero alliances and really creating scale in the industry and working with other stakeholders in identifying, what are the pathways? You know, we talk about these terms generically, but at the end of the day, we need to bring it to what is the timeline, what are the milestones and what does it mean for me in providing and innovating products and services? I think from identifying targets, we still have a long way to go to really defining what these pathways may look like. And this is not something that industry can do alone. I mean, this is something that very strongly depends on national policy strategies, and also engaging with other critical sectors, such as finance to help the economic sectors. In this case, for example, energy companies and others make their transitioning.

Maryam Golnaraghi:

The third one is around proactive engagement with regulatory bodies. Regulation, and good regulation plays a huge role. Already the industry is working actively to shape the regulations as opposed to just react to it. So I think this is a cultural change since the 2008 financial crisis to get the regulatory bodies to work closely with the industry. But I think we also need, given that climate change is a global issue and actions taken in one country will impact the other, we also very much encourage that there needs to be collaboration and coordination on the regulatory front, across different jurisdictions.

Maryam Golnaraghi:

Fourth one is I think in general, we need to move from silo thinking to more integrated thinking. My feeling is that as we innovate and we think about how we transition the industry itself need to rethink its products and services and really be mindful of what is needed in the transitioning and innovate around that front. Very importantly, proactive engagement with the public sector and other stakeholders.

Maryam Golnaraghi:

Just going back, for example, to the flood case, insurance industry cannot develop this market on its own, nor it can manage the risks of this market. There are many players involved in enabling a viable insurance market, and that is role of governments in how they invest in risk reduction and adaptation, mitigation, measures, finance, and banking and lending industry, the real estate industry when it comes to asset valuation. I think we need to move towards, as a society, to think about this in a much more integrated way and that is where governments, industry can innovate a lot as we are seeing in a number of area.

Maryam Golnaraghi:

And finally, I cannot express more that obviously, while many companies are working on a lot of innovation, we are realizing that initiatives that brings the industry together to innovate and think through these things in a very strategic way are really bearing fruit in opening up the opportunities. For example, Geneva Association does that with AD COs of the industry to really think about how as an industry, we can impact the society and how we can manage the risk, insurance development firm that Paul alluded to is trying to bring practical insurance solutions on the ground in developing countries and open up a whole new set of markets there. So I think these are some of the examples maybe I will pass on to you. Maybe Paul has more points to add.

Mark Rudd:

Yeah, Paul, from the corporate angle, without speaking specifically about school, what are the challenges implementing lots of these things? And then to finish up the session before we move into Q&A, what are the next steps we should look out for, or specific areas of collaboration?

Paul Nunn:

We've seen the shift from the corporate social responsibility of which was a voluntary endeavor of two decades ago, has morphed into ESG, which is a very, very structured, mandatory framework that everyone has to operate to and climate change is very strongly part of the E. And there are lots of considerations that we need to be alive to in the way that we comport ourselves, in the way that we do business and respond to climate change. That's a significant one. Let's be clear, it's a reputational minefield that we're having to pick our way through. We have this challenge, double materiality challenge where yes, climate change affects us, but yes, we are as an industry, still ensuring the economy as it stands today and that includes some heavy emitting sectors. So there are reputational challenges that we need to be really careful about how we navigate and you see companies tripping up along the way.

Paul Nunn:

Some of that is about balancing the various different stakeholder requirements or demands that we have. It's clear, you see activists and campaigning investment groups, but there's also a lot of investors that just want the return, right? And the challenge is, how do you balance those competing demands within a single stakeholder group? Because it shouldn't necessarily just be about who's shouting the loudest, but there's a real balancing task to do that. Practical challenge that we have as we all start thinking about making net zero commitments on the insurance side, as well as on the investment side is, is how do you do carbon footprinting for complex portfolios of reinsurance business, right?

Paul Nunn:

This is a non-trivial problem. There's all sorts of opportunities for double counting and getting it wrong along the way. There's some technical, methodological problems that we need to work out around carbon footprinting. And then Maryam's talked about net zero initiatives. The insurance alliance is a key area of collaboration which I think that ... there are seven founding companies working on getting that alliance up and running. The insurance alliance is a bit further behind than the asset owners' alliance, which has got a couple of years headstart. But I think that with COP26, coming up in November, we're going to see a flurry of activity in that direction and I think that the industry ... the direction of travel is clear for us as an industry.

Paul Nunn:

Then, on the protection gap, we talked about insurance development forum. I think one of the interesting projects that is coming out of the insurance development forum is the global risk modeling alliance, which is trying to work with the private sector, public sector together to build the capacity in the finance ministries of emerging economies to share the insights that we have as an industry on the problems and the hazards that they face, and to help equip them to make those risk-based decisions around risk transfer. That's a really positive initiative supported by another innovation, which is open source cap models, which provide transparency to the risk modeling process for all of the different stakeholder groups that need to understand the basis upon how you structure a sovereign risk transfer deal. So I think that's a few good examples there.

Mark Rudd:

Yeah, no, that's helpful. I'm going to remind everybody, I will go to the Q&A, we've got time for one or two questions, maybe. I'm going to remind everybody on the line that if you've got a question, just to type it into the Q&A box on your screen there. We'll see those and we'll get them asked to the group. We got one here to talk about first. The question relates to, what are some of the key regulations, areas both in the US and in the EU, where regulators can work together with insurers to facilitate the process. Maybe Maryam, you can start. And Paul, if you have anything you want to add, jump in afterwards.

Maryam Golnaraghi:

This is actually spot on. When you think about climate change and financial and insurance, regulatory bodies, the action on the regulators part have been first around disclosure of climate risk information by the financial and insurance sector. And increasingly regulators are starting to look at how climate change actually impacts the financial and insurance sector. There are a number of different objectives depending on the regulatory body and their jurisdiction. But in fact, as an industry, we've identified this collaboration to be foundational, particularly around the core issue of how do you develop, on the methodologies that produce decision, useful information on climate risk that could be the underpinning foundation of a company's decision making in the business and strategic time horizons, but also provide feedback into the regulatory community pertaining to issues that they have related to development of markets, financial stability, and others.

Maryam Golnaraghi:

So that is to us, one of the biggest areas of collaboration that needs to happen at several levels, we actually have enabled international collaboration, engaging life, and non-life insurers through the Geneva Association platform to develop together these decision useful methodologies. The second level of collaboration is industry with regulatory bodies. Generally, that collaboration in the last years has been through consultations, but increasingly regulatory bodies are setting up working groups to engage industry experts in design and development of their approaches. So we want that to be further strengthened. And then the third level of collaboration is across regulatory bodies globally. You talked about United States, that there is a big movement through, for example, SEC, through the treasury and the federal insurance office, as well as through NAIC and various state regulators. Obviously, some states have their own priorities, but this whole issue of disclosure and reporting it's something that could be common to everyone.

Maryam Golnaraghi:

Europe has made some strides from a regulatory body in these areas, but we have come back as an industry and looked at these regulatory approaches and have challenged them and saying that some of these may need to be rethought in terms of what type of tools and methodologies you need. And I'm very happy to say that we have launched a collaboration between this international task force on climate risk assessment and regulatory bodies and we will come together in a meeting in July to really bring some of these issues out and engage.

Maryam Golnaraghi:

One of the things you may have seen that the network for greening of finance, which is a platform of central banks have brought this global engagement of regulators for the financial sector together. We are encouraging that this kind of collaboration among regulators need to be further enhanced to also include regulators that are regulating insurance industry and we are also promoting that NAIC, and the International Association on Insurance Commissioners should also come together and think through this because we need ultimately to have alignment and certain standards for disclosure of climate information that's underpinned by decision useful information produced from good methodology. So this is where I think you will see extensive deliberations and engagement in the years to come.

Mark Rudd:

Thank you for that. I always like the disclosure angle too. I always find it ... disclosure begets action, right? Nobody wants to be the guy who doesn't have a good disclosure to put in their report, and that makes things happen. Paul, anything to add? We're a little short on time, but if you got any final thoughts, you'd like to add on that, happy to go with it.

Paul Nunn:

Just a quick point on that, the fragmentation of regulatory action and particularly in questionnaires and surveys on climate change, is a real challenge for global groups. We have a lot of regulators and a lot of jurisdictions to interact with. And I think Maryam hit on the term, decision useful. And I think part of the challenge is that as regulators learn themselves in terms of what questions they think are interesting, sometimes they're asking question on the behalf of their supervised entity, but actually don't give anything useful at the end of the day. So there's some frustrations there that we need to work with regulators to hone in on the really interesting and important question.

Mark Rudd:

Okay, well, I see that we're at the half hour. Thanks to both Maryam and Paul for their time today and their excellent insights on the topic. Thanks to all the listeners who made the time to hear the thoughts. Sorry, if we didn't get to all the questions, we'll circle back around and we'll help out with those where necessary. But with that, on behalf of Kamran and myself and RBC, thank you for joining us today. And you're free to disconnect and enjoy your day.

Maryam Golnaraghi:

Thank you.

Mark Rudd:

Thanks everyone.

Speaker 1:

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