For as long as weather and natural catastrophe models have existed, insurers and reinsurers have been responsible for the commercial assessment of natural disasters, primarily through underwriting and reserves management. Today, amid increasingly devastating consequences and rapidly rising costs of climate-related perils, (re)insurers are expected to play a larger role in helping society mitigate the effects of climate change, build resilience to its effects and support the transition to a low-carbon economy.
(Re)insurers have an opportunity to lead on these issues, building on their deep knowledge of physical risk, and strengthen their position in the marketplace by taking an enterprise-wide approach to climate change. Climate change is going to impact different parts of the business and hence it is important to take a holistic view of the business.
By understanding and managing climate risks on the assets and liabilities sides of the balance sheet and advancing climate-awareness in their own organizations, insurers can effectively navigate climate change. The increasing volatility of loss-causing climate-related events along with growing financial risks to assets in investment portfolios present a dual threat. However, climate uncertainty and the wide range of outcomes associated with climate change also present opportunities to develop a sustainable, progressive and commercially successful strategy for the business.
The journey to net zero: an insurer's guide to navigating climate risks and opportunities seeks to reinforce that climate risk is an enterprise risk for insurers, and is divided into eight short sections plus an introduction, that provide practical and pragmatic insights into the challenges of defining, quantifying and managing climate risks – without forgetting the opportunities that climate transition will present.
This section looks to build insurers’ working knowledge of climate-related risks and opportunities, including their potential impacts on invested assets and underwritten liabilities, that will provide the foundation of a climate action plan.
The property and casualty (P&C) side of the industry has long modeled physical climate risk to portfolios based on past and projected events. In establishing a strategic approach to climate risk management and resilience, insurers will need to understand how to develop and integrate climate scenarios into their risk modeling.
After determining a framework for the application of a set of climate scenarios, insurers can then begin to integrate climate research and insights into their financial analyses, stress testing assets for climate exposure.
Intrinsically, climate change creates uncertainties around insurers’ liabilities in the coming decades and has implications for individual insurers’ portfolios in the long, medium and short term. How do (re)insurers adapt liability management and extend risk assessment for factors such as changing frequency and severity of climate-related perils, shifting consumer behaviour and evolving regulatory and rating agency approaches?
Investment planning must evolve to account for and capture the range of outcomes — positive and negative —related to the effects of climate change. Insurers needn’t disregard the time-tested strategic asset allocation processes that have served them well; rather, they can make certain climate-specific modifications that supplement and enhance those approaches.
The systemic and long-tailed nature of climate-related physical, transition and liability risks make a compelling, and we would say, indisputable, case for addressing those effects holistically and with a common approach to quantification and analysis. Cohesive, integrated asset and liabilities strategies, with consistent oversight, will be the way forward.
Climate risk will require an approach that not only better identifies and quantifies physical, transition and legal risks, and that brings a holistic climate lens to liability and asset management, but one also where people are the advocates and enablers of the strategy. Climate is no different from any other driver of significant organizational change – insurers have to bring their people with them.
Improving understanding of climate risks and opportunities is an essential part of the journey to net zero, but how do (re)insurers turn that into an integrated, forward-looking climate strategy? Exploring answers to these questions – ranging from issues of accountability and culture to disclosure and underwriting strategy – should help.
|The journey to net zero - an insurer's guide to navigating climate risks and opportunities