Re/insurers can help regulators thwart climate change: Conduit Re

“The world isn’t taking climate action quickly enough, and insurance is just a part of that. Insurance is a tool in a wider fight,” said Andrew Smith, chief risk and sustainability officer at Conduit Re.

His comments came as he spoke to Intelligent Insurer during the roasting European heatwaves of July 2022, when record-breaking temperatures and wildfires across France, Greece, Portugal, Spain and the UK were a major topic of conversation.
Smith said that climate change “threatens” economic activity and economic prosperity, which makes dealing with the issue essential for the re/insurance community.

Climate change is important for everyone, he said. “It has an impact on all of our stakeholders—whether that’s our cedants and their underlying customers, or our investors, our staff, our families, and our communities here in Bermuda and internationally.

“Everyone should be interested in climate change and the factors across environmental, social and corporate governance (ESG) issues because all of them are very relevant to the fight around climate change.”

Hard-nosed business reasons are very much part of this view. “From the re/insurance sector’s self-interest perspective, we re/insure economic activity and economic prosperity—they’re the drivers of our industry. Climate change threatens both of those.”

Regulatory climate wins

In the re/insurance industry, when people talk about compliance they often think of financial regulations. Smith agrees that this is crucial in terms of ensuring claims are paid correctly. But, he said: “Now there’s a second role that financial services regulators play around transparency, making sure the consumers of products understand who they are dealing with and that those companies have values that are in line with their own.”

From that perspective, introducing a framework of transparency around climate-related matters is “helpful and very much valid”, he said.

Smith would like to see consistency in how regulators bring in these frameworks and, as far as possible, for this to be global. Greater global consistency would minimise the duplication of similar compliance work across jurisdictions, he said.

“We’re quite fortunate—we have a single balance sheet in Bermuda, so it’s more straightforward for us. But we are still very much interested in how we compare to peers overseas. Therefore it’s important that comparability is there for us.”

For Smith, regulatory impacts are not just about insurance and financial services regulators.

“It’s about other regulators: in energy, farming, transportation, land development, and building standards. These regulators could use the power that insurance brings and requirements around insurance alongside other tools such as high quality carbon offset requirements to drive investment into sustainable activities.

“This is a tool that will help economic activity and help that economic activity take precautions to be ready to pay for the uncertainty in environmental impacts that it may have.”

He said this approach is “no different” from what is already required around employee protections, public liability and so on.

“It’s thinking about how regulators can help use insurance as one of the tools in their arsenal to help with some of those issues and then for us as re/insurers to think about how we design the right products to support that in a way that’s consistent with the risk appetites, and so on, that our investors would expect,” he said.

ESG at Conduit Re

For Conduit Re, ESG has been part of its story from day one, Smith said.

As a relatively new company, it completed its initial public offering (IPO) on the London Stock Exchange in December 2020, led by founders Neil Eckert and Trevor Carvey. It has grown from eight people at the start of 2021 to 48 people today.

“We’re growing rapidly, but we are small. We’re a pure play reinsurer—we don’t write any direct insurance and that influences how we can best respond to certain matters on the topic of climate,” he added.

Another part of the reinsurer’s IPO story is that it has a very low risk investment strategy and is supported by outsourced investment managers, Smith explained.

In this context, he said, the area where the “startup” can have the fastest ESG impact is its operations and its local community in Bermuda.

“From a corporate perspective, thinking about our underwriting and investments, a lot of what we can do is about encouraging transparency,” he said.

The company participates in the University of Cambridge Institute for Sustainability Leadership’s (CISL) ClimateWise reporting, which provides a good framework to explain what the business does and how it does it, and how that will progress over time.

“Transparency is something we’re very keen on,” Smith emphasised.

Eckert, the firm’s chairman, has already played a key role in communicating externally about what the company is doing as well as sharing information with suppliers and customers—brokers, other cedants and other parts of the industry—about how to reduce a company’s environmental impact and support the transition to a more sustainable economy.

Smith acknowledged that the company will “clearly produce some carbon”, so as a business it has projected its estimated carbon emissions for the next five years and has bought carbon offsets in response.

For its community work, the reinsurer has set up the Conduit Foundation, which supports local causes and initiatives in Bermuda around environmental and social issues.

The company also takes part in research at the CISL’s Centre for Sustainable Finance.

“We are a reinsurer, so the focus is less on what we won’t do and more about what we will do and how we will think about things that come to us,” Smith said.

“In many cases we’re part of a subscription market, a subscription process. We embedded ESG principles in our underwriting guidelines from day one. Over time that refines and becomes more focused, and with Greg Roberts taking over as chief underwriter recently, we’re refreshing our underwriting guidelines at the moment,” he explained.

“We’re making sure that anything in certain sectors gets special consideration by him as chief underwriter before moving ahead—topics such as transition and so on.”

Smith said ESG was a key consideration when the company selected its asset managers. “Our asset portfolio seeks to outperform ESG benchmarks but we are very much a low risk investment portfolio so there’s nothing particularly surprising in our portfolio at this stage.”

To bundle or not to bundle

In light of July’s record-breaking heatwaves in Europe, Smith agreed that collectively, we are experiencing more volatile weather.

Commenting on the industry’s response, he said: “What we’re seeing, not just in the recent past, is that there’s been a tendency for our industry to find that when they are not being paid the right amount of premium for the risk they’re taking on, they look first to exclude some coverage.

“That has a role to play and maybe you do encourage some better risk mitigation through setting out some conditions.

“But in the longer term, if risk is not being transferred to the insurance markets, to re/insurers, then either that risk sits with individuals and businesses or it sits with governments. That does not demonstrate an effective insurance market.”

He said that as reinsurers what the sector wants is to match premium to risk and what Conduit Re, and the wider industry, are starting to see is the concept of “reverse bundling”.

“Rather than bundling things together, how do we pull apart some of the coverage and look at how we make sure we’re getting the right premium for the right risk?

“If you’re charging the right premium, it might not be palatable but having an unpalatable premium maybe helps with risk mitigation and risk avoidance,” he concluded.

To see the full video click here