No more ‘institutional silos’ on climate change, says The Geneva Association

This first report by  the Geneva Association Task Force on Climate Change Risk Assessment for the Insurance Industry comes at a crucial time. Regulators and central banks worldwide are beginning to look more closely at the prudential and investment risks of climate change to banks and large insurers. Public pressure and scrutiny from institutional investors are likewise increasing. If businesses do not come up with answers for managing these risks, they may be forced upon them.

As The Geneva Association report notes, the Financial Stability Board (FSB) Task Force on Climate-Related Financial Disclosures has identified a need for “decision-relevant, clear, consistent and comparable climate information”. It seeks to help insurers deliver this with a framework for climate risk assessment and scenario analysis for P&C and life re/insurers.

Maryam Golnaraghi is director of climate change and emerging environmental topics at The Geneva Association. A former adviser on climate change to the World Bank and chief of the Disaster Risk Reduction Programme of the World Meteorological Organization, she led the task force that developed the report. She spoke about her work in a discussion on Intelligent Insurer’s Re/insurance Lounge, the online, on-demand platform for weekly interviews and panel discussions with leading players in the market.

It’s not all about the numbers
As Golnaraghi explained, the focus on climate risks is not new for insurers, but the industry lacks a coherent response and approach. Her task force was charged with achieving that through an industry-wide collaboration of the 17 largest companies and 52 experts, bringing together both sides of the balance sheet. It seeks to define a credible approach to climate change risk assessment.

The report remains, she admits, a “starting point”.
“The core message is that producing a climate risk assessment and scenario analysis that would lead to meaningful and decision-useful information is a work in progress, and to get there, to converge on robust methodologies, we have some way ahead of us,” Golnaraghi said.

“We need to innovate, assess, and experiment a lot more, and collaborations will be absolutely fundamental to achieving that.”
The report sketches out some key principles.

First, climate risk assessment needs to consider the entire balance sheet, both assets and liabilities, and that “decision-relevant” information comes from first defining decision-relevant in that context.

Second, companies need to start conversations within themselves considering the subject in the round—both physical risks of losses from extreme weather events, for example, and transition risks, such as public policy risks and market behaviour—as well as different time horizons: the short term; 2020 to 2030; and a more strategic horizon to the middle of the century.

Finally, the report stresses that the industry needs to avoid getting hung up on quantitative analysis. Qualitative analysis will be equally, if not more important, Golnaraghi said.

“Qualitative risk assessment is less rigid and gives more insights into the companies’ thinking about the scenarios and what could be possible. Quantitative methods that have been the centre of many of these experiments are probably meaningful only when we think in the short term where we can capture the business and economic factors.”

A journey of a thousand miles
That’s well illustrated looking at underwriting. P&C insurers already have sophisticated natural catastrophe models for physical risks, and much of the focus has been in this area, but there remains work to be done.

“We need to think about new methodologies and tools, given some of the major uncertainties associated with exposure and vulnerability,” Golnaraghi said. On transition risks, for instance, the report explores some of the uncertainties around public policy and impacts on carbon-intensive economic sectors. But it’s not just risks; there are opportunities, too.

“Obviously the industry will lose business in those carbon-intensive sectors but that is going to be replaced with technological development and development of new business models in the same sectors,” she explained.

Good news could also bring challenges for life insurers. Potentially lower economic growth could have second-order effects on longevity, but what about reductions in air pollution and what that might mean for improving health and life?

“For life insurance, there’s still a lot of work to be done to try to better understand implications of climate change in long-term horizons,” said Golnaraghi.

Conversely, on the assets side, much of the focus has been on transition risks and, particularly, stranded assets. Consequently, insurers have developed significant expertise in credit risks. There is also a need to consider physical risks and what impact these may have on portfolios that could include, for example, investments in real estate and infrastructure, as well as indirect exposures through debt and equity in companies in these sectors—expertise on the underwriting side could be crucial here, she said.
“I can’t stress the importance of that cross-company collaboration enough,” she added. “I encourage businesses to break down what I call their ‘institutional silos’.”

Crucially, however, what businesses need to do is make a start, and this is, perhaps, the central theme of the report.

“We emphasise that companies should start simply, step by step, and build their expertise over time,” she explained.

It’s advice Golnaraghi and the task force are taking to heart: the report is the first of three planned and will shortly be followed by a review of recent regulatory exercises. The plan then is to develop a template of decisions P&C and life companies need to make and provide guidance on designing relevant scenarios. The implication is that the industry is, still, very much at the beginning and Golnaraghi’s advice is: “stay tuned”.

To view the full Re/insurance Lounge session click here