RESPONDING TO THE CLIMATE CHANGE CHALLENGE 2021 - ADGO.CO
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RESPONDING TO THE CLIMATE CHANGE CHALLENGE 2021 ADGO.CO
RESPONDING TO THE 2
CLIMATE CHANGE CHALLENGE
2021
RESPONDING TO
THE CLIMATE CHANGE
CHALLENGE
ADRIAN MORGAN Although the report revealed that global
GLOBAL HEAD OF natural disaster events during H1 2021 caused
ADVANTAGEGO total economic losses estimated at $93
billion – 32 percent lower compared to the
10-year average ($136 billion), insured losses
were estimated at $42 billion – two percent
higher than the 10-year average ($41 billion).
Perhaps more pertinently, looking to the
longer term, insured losses were 39 percent
higher than the 21st century average ($30
Experts may continue to debate on the extent billion) and 101 percent higher compared to
to which climate change is attributable to the average since 1980 ($21 billion), while
human intervention, or indeed on the degree economic losses were 16 percent lower ($110
to which we can expect continued global billion) and nine percent higher ($85 billion)
warming as the century progresses. However, for the same periods respectively.
from the (re)insurance industry’s perspective,
what is absolutely undeniable is the growing
frequency and severity of natural catastrophe-
related losses this century.
Just look at the latest analysis: the insured
cost of global natural catastrophes hit the
ten year high for the first half of the year
and over 100% higher than the average for
the past 30 years, according to figures from
broker Aon in its Global Catastrophe Recap:
First Half of 2021 report.
3 RESPONDING TO THE
CLIMATE CHANGE CHALLENGE
2021
EXTREME HEAT
The recent experience has continued to be According to the World Weather Attribution
challenging for many geographies. At the end (WWA) – an international research
of June, Pacific Northwest areas of the US institute supported by Oxford University’s
and Canada experienced temperatures never Environmental Change Institute; the Royal
previously observed, with records broken Netherlands Meteorological Institute (RNMI);
by several degrees Celsius in many places. and the Red Cross Crescent Climate Centre
Multiple cities in the US states of Oregon – although an event such as the Pacific
and Washington and the western provinces Northwest 2021 heatwave is still rare or
of Canada recorded temperatures far above extremely rare in today’s climate, it would be
40ºC (104 ºF), including setting a new all-time virtually impossible without human-caused
Canadian temperature record of 49.6ºC in the climate change.
village of Lytton.
Indeed, in a stark warning following the
From a risk perspective, the consequences weather, the WWA suggested that such an
were severe: shortly after setting the record, event will become increasingly common:
Lytton was largely destroyed in a wildfire, “Our results provide a strong warning: our
for example, while the exceptionally high rapidly warming climate is bringing us into
temperatures led to spikes in sudden deaths, uncharted territory that has significant
and sharp increases in hospital visits for consequences for health, well-being, and
heat-related illnesses and emergency calls. livelihoods.”
It added that the future will be characterized
by more frequent, more severe, and longer
heatwaves, highlighting the importance of
significantly reducing our greenhouse gas
emissions to reduce the amount of additional
warming.
RESPONDING TO THE 4
CLIMATE CHANGE CHALLENGE
2021
EUROPEAN FLOODS
Of course, climate change gives rise to an From an insurance perspective, losses are
extensive range of weather phenomena expected to be severe: the German Insurance
beyond just extreme heat. Extensive and, Association has estimated the floods to have
in many instances, unprecedented flooding caused damages amounting to EUR 4bn to
across vast swathes of Northern Europe EUR 5bn, which would make the event one
in July was described as a “wake-up call” of the costliest ever insured losses for the
with regard to climate change by Katrin country, on a par with the 2002 floods when
Goering-Eckardt, the parliamentary leader of the River Elbe in eastern Germany burst its
Germany’s Green party. banks, leading to insured losses of some
EUR 4.65 billion.
“This is already the impact of the climate
catastrophe and this is another wake-up call to
make us realize: this is already here,” she said.
A slow-moving weather system released
two months’ worth of rain in two days over
western Germany and wide swathes of
Northern Europe, causing rivers to burst their
banks, sweeping away homes and inundating
cellars. The floods causing some 200 deaths,
with another 764 people and 155 people
missing.
5 RESPONDING TO THE
CLIMATE CHANGE CHALLENGE
2021
EVIDENT INCREASE
“We’ve certainly seen an increase in natural He says that severity is even more difficult to
catastrophe events at PCS over the past few address: “Climate change may increase the
years, with records for frequency set in both frequency and intensity of weather events,
2019 and 2020,” says Tom Johansmeyer, head but event severity – as measured in insurance
of PCS. terms – also requires a geographical
component. A major hurricane that hits an
“Canada has been at or near record levels, underpopulated or underinsured region
as well,” he adds, “Since beginning to report could be indicative of climate change, but
events in Japan, PCS has seen several major it may not have the severity needed to
events since 2018. Although it’s still early for make the insurance industry take note. As
us there, we do see a recent concentration the protection gap is closed, for example,
relative to the historical record. As an we may see more manifestation of a link
organization focused on retrospective between climate change and industry loss
activity (we estimate what happened, severity. The same could be true for exposure
rather than what will), we’re cautious about inflation.”
attributing such changes in catastrophe
activity to climate change or any other
drivers. It’s just not our sweet spot. However,
we do encourage further research into the
links between climate change and PCS-
designated catastrophe activity.”
RESPONDING TO THE 6
CLIMATE CHANGE CHALLENGE
2021
RISING IMPACT
Others also confirm an increase. “Total “In practice, for several companies, that is
losses from natural catastrophe events reflected in reduced exposures in property
have been increasing in a sustained way nat-cat risks, with a shift toward higher
for several decades,” Carlos Wong-Fupuy, protection layers. Retention levels have
senior director, AM Best. “The impact from increased and limits reduced. Pricing has
secondary perils (convective storms, wildfires, improved but is not yet considered sufficient
floods) as a proportion of total nat cat losses or as attractive as for other lines of business
is steeply on the rise. Volatility of losses is (e.g. E&S). After several years of fluctuating
becoming more of an issue. Last year, for results, removing volatility is a priority.”
example, was characterized by the high
frequency of medium-sized losses, without a Use of retro capacity from ILS markets is
dominant exceptionally big event.” resurging, in particular cat bonds, he adds.
“There are still long-term investors prepared
He adds that there seems to be a growing to accept volatility at the highest levels of the
consensus that although climate change is reinsurance tower in exchange for the higher
a key contributing factor, it is not the only coupon to expected loss multiples seen
one. Also, while the variability of losses in the market. A broadening of alternative
seems to have increased, given the relatively opportunities in a recovery economy may,
short time history, it is difficult to distinguish however, affect investor appetite.”
between random fluctuations, short-term
factors, and long-term trends.
However, what is clear, he suggests, is that
in the short term, traditional reinsurers
are focused on improving and stabilizing
underwriting margins:
7 RESPONDING TO THE
CLIMATE CHANGE CHALLENGE
2021
MARINE & ENERGY
EXPOSURES
One area of the market that is particularly Given such large exposures and increasingly
exposed to the possible effects of climate large loss events for the market, it would be
change is the marine & energy sector, somewhat surprising to discover that the (re)
especially for those writing onshore and insurance market is burying its head in the
offshore risks in the Southern US and sand. Yet, according to Hoare, the dominant
Gulf of Mexico. dynamic continues to be commercial
considerations:
Dominick Hoare, group chief underwriter
for Munich Re Syndicate and a veteran of “I think underwriters are looking at their
the marine & energy sector, says that he is exposures, and they are all talking about
observing an increase in the frequency and climate change and a specific problem
severity of property catastrophe losses for around the corner. But I’m not sure how
both risks that they write and across the much the market is doing, to be honest. The
wider market: insurance and reinsurance market is driven
by looking in the rear-view mirror; we look
“From my view as an underwriter, with at what has happened for the last 25–30
hurricanes being close to my heart... if you years. The models we rely on for property
look at hurricane activity last year, and this and property reinsurance are all based on
year we’re already seeing some activity with empirical data. We know that things are
fairly active storms. But then we can also changing, but there is a reluctance to price
revert back to the data – and we’re very that in, and also perhaps an inability to price
lucky at Munich Re because we have a nat that in. We are commercial animals, and if
cat service which has a fantastic dataset – we price it in and others don’t, then we lose
that actually shows an increased frequency our portfolio.”
of loss events since 1980, so I think both the
gut underwriting feel and also the data point
to more activity.”
It’s not just hurricanes, he adds. “They are the
obvious ones, but we had winter storm Uri at
the beginning of the year. Was that climate
change? It was a pretty odd storm. These
European floods, which have been tragic
recently, particularly in Germany, look odd
to me… and I would have thought an expert
could probably link that back to climate
change as well.”
8 RESPONDING TO THE
CLIMATE CHANGE CHALLENGE
2021
MODELING
THE FUTURE
Despite the inherent difficulties faced by However, to what extent this holistic
climate change to the property catastrophe approach will be one adopted on a company-
sector, in some regards, it is well positioned by-company basis, or one that is more of
to meet the challenge head-on, however. a collaborative approach, remains a key
Yes, finding a balance between ensuring conundrum.
affordability and availability on the one
hand, and managing financial stability on As AM Best’s Wong-Fupuy suggests,
the other, may get tougher for insurers if modeling and pricing risk has become
extreme weather conditions continue to more challenging, as prior experience is
escalate. Yet as Kristen Sullivan, partner and not sufficient to project future trends: “A
Americas Region Sustainability Services proprietary view of risk, availability and
leader at Deloitte & Touche suggests, insurers granularity of company-specific data are
should focus on fortifying their assessment likely to be essential going forward. Only
of climate-related risks while taking long- companies with these capabilities will be able
term actions to alleviate and mitigate such to feel comfortable with the risk they assume
exposures, as well as using a holistic approach and differentiate themselves from the rest.”
toward managing climate-related risks.
LOW SULFUR
Aside from weather events themselves, “While we are generally supportive of the
the marine market faces a series of other move to greener energy, it’s important to
challenges in relation to climate change on bear in mind that ‘alternative’ fuels may also
the regulatory front, not least of which is a bring with them an element of risk,” he says.
recent European Union directive that requires “So what the market is really saying is there
member states to implement legislation that is a need for a review of the risks associated
restricts the amount of Sulfur in fuels burnt with the new fuels and propulsion methods.”
by ships while in an EU port. According to
one experienced market player at a marine
agency, such moves do not come without
their own potential downsides.
RESPONDING TO THE 9
CLIMATE CHANGE CHALLENGE
2021
COLLECTIVE
EFFORT?
Perhaps the market is still some way off from According to Hoare, Lloyd’s is beginning
a truly collaborative approach to tackling to respond, “but it’s evident from their
climate change. As Dominick Hoare says, the statements that they want to be in the
insurance industry is looking to tackle climate peloton; they don’t want to be leading the
change, and statements have been made with race. The statements are strong, but are not
regard to oil sands and the like, but it is not as strong as a lot of insurers or reinsurers.
really looking collectively at how to address There is an acceptance that Lloyd’s always
the risk to its business: “They support net has difficulty mandating a behavior amongst
zero in their statements, yes, but what are we the managing agents. This is one of the few
actually doing in our business to price it more occasions in which they have, but I think
effectively and make sure that we are on top that they have done it in a reasonably soft
of this?” manner to allow managing agents to review
and determine their own tactics.”
Nonetheless, he adds, Lloyd’s is making a
statement as it is the largest insurer of oil and
gas worldwide, it’s about 10% of the book,
and it’s the most profitable 10% of the book.
“Like all these things, you have business on
one side, what society wants on the other,
and then you have our own livelihood and
what’s going to happen to the risk itself, and
it’s trying to balance all these things out,”
he adds. “But Lloyd’s is not, in its oversight
of underwriting, asking the question ‘have
you factored in a price for climate change?’.
We’re not there yet; they leave it up to our
own discretion.”
10 RESPONDING TO THE
CLIMATE CHANGE CHALLENGE
2021
A SUFFICIENT
RESPONSE?
All of which begs the question as to what Of course, he adds, further climate change
would happen if the (re)insurance market could have consequences for the insurability
does not adequately respond to the risks of personal and commercial property.
posed by climate change? Would other Insureds located in key risk areas, over time,
markets and/or governments step in to could conceivably become uninsurable,
assume risk? which would offer a top-line impact, he
suggests. Also, he adds, “the possibility of
According to Tom Johansmeyer at PCS, innovative start-ups coming into the space to
there are two problems here: “One is the find ways to insure coastal risk remains but is
problem of climate change itself, and the dulled by the worst-case scenarios that can
other is modeling, pricing, and developing be conceived.
processes to adjust for the implications of
climate change. As to the former, the simple Ultimately, any population shifts
answer is that nature will respond. If (re) geographically could result in profound
insurers and other sectors don’t respond industry changes beyond the insurability of
to climate change risk, then we can expect risks in regions traditionally seen as prone to
sea surface temperatures to rise and all catastrophes.”
the consequences that come with it. As to
the latter, there are narrow issues, such as
dislocation of price relative to expected
loss, that could leave re/insurers exposed to
financial performance issues. And there’s the
possibility that they could be rendered less
competitive than their peers.”RESPONDING TO THE 11
CLIMATE CHANGE CHALLENGE
2021
TWO-WAY STREET
As of today, climate change would appear Yes, this can be done through pricing as
to present a considerable risk for the wider well as underwriting strategy, but carriers
market. Already this year we have seen can also intervene in many ways before
weather extremes: the extraordinary damage and after extreme events, it suggests.
caused by extreme cold weather of Storm Such intervention can take the place of
Uri, while in recent weeks, large parts of prevention and awareness campaigns
North America, Scandinavia and Siberia have among policyholders to prevent damage
witnessed record high temperatures. And of from occurring, or to limit the damage once
course, more recently still, we have had the it occurred; models and studies to improve
Northern Europe floods along the Rhine and the knowledge of the risks for both their
Meuse rivers. policyholders and public authorities; and
the raising of public awareness of new
Alongside the challenge, however, comes construction standards and techniques that
opportunity. As a recent report by the contribute to the resilience of buildings. It
European Insurance and Occupational is clear that the potential contribution the
Pensions Authority points out, (re)insurers market can make in response to climate
can contribute to both climate change change is considerable.
mitigation and adaptation.TO REVOLUTIONISE THE WAY YOUR BUSINESS MANAGES RISK, VISIT ADGO.CO
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