Dominic Christian talks to Chris Seekings and Ruolin Wang about how the insurance industry must come together to develop innovative solutions to the climate crisis
As society’s risk manager, the insurance industry has a critical role to play in mitigating and adapting to climate change, from modelling natural catastrophes and their impacts to underwriting and investing in green projects and technologies.
This was brought into sharp focus recently when the UN warned that global temperatures are set to hit 1.5°C above pre-industrial levels within 20 years – a decade earlier than previously forecast – and that some climate changes, such as rising sea levels, may now be irreversible for hundreds or even thousands of years.
ClimateWise was launched in 2007 to help insurers communicate, disclose and respond to the risks and opportunities associated with the growing climate-related insurance protection gap. This year, it published a report (bit.ly/ClimateWise_report) that explores how innovative insurance solutions could help to tackle the crisis. The group’s chair, Dominic Christian, hopes the report will foster greater collaboration within the insurance industry as we look to decarbonise the world economy and prevent total environmental breakdown.
A natural progression
With decades of experience in property and casualty reinsurance, Christian was well acquainted with climate change’s significance when he was made ClimateWise chair in 2018. “I’ve always had an interest in the subject because I’ve been a reinsurance broker,” he says. “Over 40% of reinsurance premium is generated from property-related business globally, and a good 25% of this is generated by catastrophe reinsurance. When I started, there was a hurricane in 1987 in the UK, and this was going to be a one-in-300-year event. Then, three years later, there was another. I felt we needed to develop more data, analysis and ability to interpret risk.”
Christian is also the global chairman for Aon Reinsurance Solutions, which was involved with ClimateWise when it was launched. Over the years, he has seen a growing need for all actors in the insurance value chain to work more closely together when tackling climate change, from brokers, underwriters, governments and regulators to data scientists and large industrial or commercial clients. “This subject touches every audience we know and serve, and all of these groups need to be linked,” he says.
“I think you can only do that through constant interaction, so each group begins to understand the others. Insurance companies are showing that they have the data and ability to interpret risk, which can be useful for the whole value chain. Once we show our value, we’ll be better embraced, our voice will be louder, our contribution greater and our collective understanding of risk more actionable.”
COVID-19 has shown how stakeholders and countries can come together to pool individual expertise for a common purpose. Christian believes that a similar co-ordinated international approach is needed from the insurance industry in response to climate change. “There are some subjects that you can deal with locally, but you can’t deal with things like rising sea levels nationally,” he says. “If you’re talking to a risk manager at a large corporation about climate change risk, they are probably more knowledgeable about it than a farmer near where I live in Norfolk – but they won’t necessarily understand quite the impact that climate change might be having in that area. COVID-19 has shown the need for international collaboration, and we are trying to bring together members of our industry with different talents to broaden our knowledge.”
When it comes to insurance and reinsurance companies themselves, this may involve putting rivalries aside for a common good. This could be, for example, through data sharing. “We have to respect that we’re doing our job for our clients sensitively, but there are subjects where we can bring more knowledge together in the interests of our clients and of society,” he says. “In the motor insurance industry, index data has been used by rivals, but it doesn’t interfere with competition. If we can bring together all the climate data we have in a sensitive and client-friendly way, respecting competition rules, we will all be better for it.”
Perhaps there are some risks that should live in the public sector and some in the private sector
The insurance industry has a far greater understanding of catastrophe risk than it did 20 years ago, and access to data will help to attract insurers to certain regions. Christian illustrates this using the industry’s response – or lack thereof – to the 2018 flooding in Mozambique, which caused losses of around US$3bn, or 25% of GDP, with insured recoveries of less than 1%. In comparison, New Zealand’s GDP was hit by 25% in 2011 because of earthquakes, equating to losses around US$45bn –but the claims met by the insurance and reinsurance industry were greater than 60%.
“Why was the insurance industry involved in New Zealand and not Mozambique?” Christian queries. “Political stability might be one factor, but another is that the risk in New Zealand was better understood. This was due to continuing developments in data science and work done by the Earthquake Commission of New Zealand. Reinsurers had access to a substantive amount of data, and there was a belief that money could be made because the risk was understood. If we want to persuade a company to underwrite business in Mozambique, where there is not that level of access to data, that’s a challenge.”
There is also less understanding of insurance demand in the Global South; Swiss Re estimates that catastrophe risk coverage stands at 35% in advanced economies, versus 6% in emerging economies. “If you build an earthquake model for Nepal, what’s the take-up rate of that insurance?” Christian asks. “We are trying to work out how far we want to be the purveyors of change and investors in other nations and help them develop the data, knowing that this is a long-term game. Perhaps there are some risks that should live in the public sector and some in the private sector. The point is again about collaboration, to understand where there is greater value for the government, not just insurance companies, to hold risk.”
If we can bring together all the climate data we have in a sensitive and client-friendly way , we will all be better
Collaboration with stakeholders outside the insurance industry could also unlock an array of opportunities for insurers looking to support the development of green infrastructure. Some of these opportunities may not be obvious at first. “If you look at the solar industry, it’s only a US$400m market in the US – but one of the principal risks to solar is hailstorm,” Christian says. “How do we work with engineers to physically improve solar panel strength and protection mechanisms, to make them less risky and more insurable? Insurance companies can help build the solar cell and wind turbine industries through further collaboration and by harnessing engineering expertise.”
The recent ClimateWise report also cites examples of insurers developing risk advisory services for clients to help them understand the climate risks they could be exposed or contributing to, and to incentivise climate mitigation. “We need to get insurers’ expertise much closer to the original customer,” Christian says. “Take a municipal authority in Florida that might be exposed to climate risk. Historically, it might have been the insurance or reinsurance company that assessed the risk for itself. What we need to do is pass this advice back to the municipal authority – or the insured – and explain how it can affect them and wider society. To illustrate this another way, if I changed my water system, I would want to know what effect it might have on the environment. There are organisations that can tell me about my personal footprint. This needs to be played out in the insurance community as well.”
And when it comes to working with climate-conscious and climate-savvy parties, insurers could be missing a key partner. “Venture capitalists are extremely interested in how they measure risk,” says Christian. “If we can provide insurance that assists their interest in the business so they are more confident about what that risk is, fantastic. It links to the capital markets and what the industry-linked securities markets do. We’ve been doing catastrophe securities for 25 years. We know how we can raise other forms of capital. We can do it again.”
Aiding the transition
Although his ClimateWise role normally comes with a three-year tenure, Christian agreed to continue for another year through 2021, ahead of the Glasgow COP26 climate summit in November. This event will bring together heads of state, climate experts and campaigners to agree co-ordinated action in response to climate change, and it’s clear that the eyes of the world will be focused on the actions of countries such as China and the US. Although China is the largest producer of renewable energy worldwide, it is also the largest producer of new coal-fired plants, and many environmental campaigners are urging the West to put more pressure on the country to cut its ties with fossil fuels.
“I think it is too blanket an argument to say, ‘we just won’t trade with a country’, or ‘we won’t deal with a certain type of risk’,” Christian says. “You might need to walk away from time to time, but if we look at aluminium and lithium, these are massively important minerals in making renewable energy successful, and Chinese investment is huge. If you are trying to aid the low-carbon transition, what’s the most effective way of helping from an insurance perspective? Is it to walk away, or is it actually to aid change?”
He is, however, aware that the climate crisis requires insurers to act now, “in a very urgent, immediate and powerful way”. Unprecedented recent flooding in Germany and Belgium has shattered any illusion that climate change is not an immediate threat to the West. “This is an issue for all of us. It isn’t just about drought in the sub-Sahara – it’s local. It’s us. We should think more about public-private sector partnerships, and be aware that there is plenty more capital in insurance to supply to climate risk. There really is.”
This constant theme of collaboration and partnerships between stakeholders in the insurance value chain could also be key to changing the image of the industry. “But insurance alone won’t be able to sell the urgency of climate change to clients, as it could be seen that insurers are trying to over-monetise the issue,” Christian adds. “As I often say, if the name of insurance were changed to risk, then we would be much better regarded. We have an extraordinary depth of knowledge around risks like health, and increasingly areas like climate and cyber, and we need to sell our story much more effectively regarding our value to society in a way that hasn’t been possible in generations past.”
Insurance product innovation examples
Encouraging ‘repair over replace’
RSA’s ‘repair over replace’ approach to claims servicing for motor insurance repaired 40,000 windscreens in 2019, saving 1,500 tonnes of carbon emissions and 540 tonnes of glass waste from going to landfill.
Double trigger warranty insurance
Munich Re has developed a warranty insolvency protection to lower the cost of capital for solar PV. In the event of a manufacturer’s insolvency, the policy can be passed on to the registered buyer, giving investors confidence over the coverage of future warranty claims.
Supporting low-carbon choices
Zurich provides carbon offsetting optionality for travel insurance, while The Hartford incentivises electric vehicle usage over petrol or diesel cars through premium discounts to motor policies.
Providing risk solutions
Willis Towers Watson helps the finance industry, corporates and governments navigate the transition to net zero using its suite of climate data and analytical tools for portfolio analysis and financial hedging.
Packaged insurance programmes
Tokio Marine & Nichido Fire combines insurance across property, liability and warranty for renewable technology, providing confidence throughout development, testing, commissioning, construction, distribution and operation to support scaling.
Index-based insurance products
Swiss Re has developed customised, index-triggered protection products for wind and solar energy, which safeguard against loss of income due to adverse high or low wind conditions, lack of solar irradiation or variations in water levels.
AXA has developed solutions for insuring natural assets, including mangrove insurance using blue carbon credits – tradable credits that value the combined carbon sequestration and coastal protection resilience benefits of coastal wetlands.
Decommissioning fossil fuel assets
Aviva’s surety business provides guarantee for the reclamation work to remove oil pipelines and restore land. Aviva holds corporate guarantees or collateral as security, guaranteeing completion of reclamation work.
Author: Chris Seekings, senior reporter for The Actuary magazine