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Des Moines Climate Risk and the Insurance Industry


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Speech given by Maryam Golnaraghi, Ph.D. at the 2017 Global Insurance Symposium.

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Des Moines Climate Risk and the Insurance Industry

  1. 1. Maryam Golnaraghi, Ph.D. Director of Extreme Events & Climate Risks Program Global Insurance Symposium(GIS) Des Moines, Iowa 25-26 April 2017 Latest developments and trends related to climate change: What does it mean for the insurance industry?
  2. 2. Agenda 2 1 The Geneva Association at a glance 2 Defining Climate Risk 3 Latest Policy, Regulatory, Financial and Market Developments related to Climate Change 4 What does it mean for the insurance industry? 5 Geneva Associations’ Strategy and Policy Research 6 Key take-aways
  3. 3. Founded in 1973 with CEO membership only (primary insurers and reinsurers) Leading international think tank in insurance, risk management and economics Conducts policy-based research and facilitates high-level dialogue on key strategic issues engaging the industry, broader finance sector, governments and regulators Direct interaction with a broad spectrum of stakeholders: Governments, central banks, relevant international organisations such as IAIS, FSB, G7 and G20, World Bank, OECD and the UN Unique peer group forums for C-Suite executives in insurance: General Assembly (CEOs only) and annual meetings for CFOs, CROs, CIOs and Chief Economists 3 1. GA AT A GLANCE: A GLOBAL ORGANISATION EXCLUSIVELY FOR INSURERS Source: GA
  4. 4. 4 1. GA At A GLANCE: A GLOBAL MEMBERSHIP OF (RE)INSURANCE CEOS Growing membership in USA and Asia Europe and the Middle East 50% Asia and Australia 20% Latin America and Bermuda 10% USA and Canada 20% Source: GA
  5. 5. 5 1. GA AT A GLANCE: BOARD OF DIRECTORS Chairman Vice-Chairmen Board members Mr Mike McGAVICK XL Group Mr Oliver BÄTE Allianz Mr Shuzo SUMI Tokio Marine Holdings Inc. Mr John STRANGFELD Prudential Financial Inc. Ms Inga BEALE Lloyd’s Dr Mario GRECO Zurich Insurance Group Dr Nikolaus VON BOMHARD Munich Re Prof Denis KESSLER SCOR SE Mr Mark WILSON Aviva plc Mr Patrick DE LARRAGOITI SulAmerica Dr Yan WU PICC Mr Alexander WYNAENDTS Aegon N.V. Mr Donald GULOIEN Manulife Financial Corporation Mr Peter HANCOCK AIG, Inc. Mr Christian MUMENTHALER Swiss Re Treasurer Mr Philippe DONNET Assicurazioni Generali SpA Mr Charles BRINDAMOUR Intact Financial Corporation Mr Thomas BUBERL AXA
  6. 6. 19 November 2015 The Geneva Association issued its Climate Risk Statement, a commitment to progress on climate resilience and adaptation signed by 68 chief executive officers of the global (re)insurance industry. Unprecedented consensus but need for clear industry-level messages, priorities, initiatives Some Highlights: 6 1. GA AT A GLANCE: THE GENEVA ASSOCIATION CLIMATE RISK STATEMENT Investment in research and Knowledge Sharing: Risk Modeling, Risk Pricing, Prevention, etc. Product innovation, market development, claims settlement to build resilience and to encourage transitioning to low carbon economy. Adaptation and mitigation strategies and their cost/benefits and building partnerships with the public sector. Insurance products , investment strategies to support low-carbon energy encourages mitigation and adaptation efforts, such as investing in low-carbon energy projects. Link to the GA Climate Risk Statement:
  7. 7. Geneva Association’s Approach: 7 1. GA At A GLANCE: Extreme Events and Climate Risks Program Approach Insights: Policy-related research • C-level and Expert engagement • Cooperation with other sectors Strategic priorities & themes Influencing: High-level dialogues and facilitation of PPPs for action High-level stakeholder consultations • Govt., regulators, IGOs, etc. CEO-Level engagement & consultations Underpinning research: Evidenced-based Recommendations Link to the GA Climate Risk Statement: Institutional and Expert Support: Extreme Events and Climate Risk Working Group and Thematic Experts Task Teams engaging leading experts from GA members and external experts
  8. 8. Physical risks: Impacts of climate- and weather-related events, such as floods and storms on property, infrastructure, supply chains and trade Liability risks: Impacts arising if parties who have suffered loss or damage from the effects of climate change seek compensation from those they hold responsible.  Such claims could come decades in the future, but have the potential to hit carbon extractors and emitters – and, if they have liability cover, their insurers – the hardest” Transition risks: Impacts and financial risks arising from the process of adjustment towards a lower-carbon economy.  Changes in policy, technology and physical risks could prompt a reassessment of the value of a large range of assets as costs and opportunities become apparent (stranded assets) Reputation risks: Companies exposed to any of the above risks may suffer reputational risk if brand names are associated with climate-related damages or perceived mismanagement of the above risks (Zurich and Ceres Report 2010). and Zurich Report 2011) 8 2. Defining Climate Risk - Linkage to Financial and Economic Risks Source: Speech by: Mark Carney, Breaking the tragedy of the horizon - climate change and financial stability (29 September 2015, at Lloyd’s of London) and Ceres and Zurich Report 2011) MarkCarney,Sept.2015,TragedyofHorizonSpeech
  9. 9. 9 2. DEFINING CLIMATE RISKS: PHYSICAL RISKS – A GLOBAL VIEW TREND OF RISING WEATHER-RELATED ECONOMIC LOSSES AND UNINSURED LOSSES Natural disaster losses worldwide (1980-2015) On average, insurance protection gap in high-, middle- and low-income nations, has been estimated to be around 70 per cent for weather-related and 75 per cent for all natural hazards. Link for the report:
  10. 10. 10 2. Defining Climate Risks - Physical Risks – Key drivers of increasing economic impacts Changing characteristics of weather-and climate related-hazards (IPCC 2012) Increasing exposures and vulnerabilities such as:  Growing population, development patterns: Concentration of people and assets in high risk regions, fast urbanization in coastlines  Complex interdependencies of supply chains and trade patterns  Cascading failure effects of infrastructure  Inter-linkages of natural and man-made catastrophes  Destruction of natural infrastructure (buffers) Link for the report:
  11. 11. 11 Promotinganintegrated&comprehensiveapproachtodisaster andclimateriskmanagementandtheimportanceofinsurance Sustainable Development Climate Change Disaster Risk Reduction 1950 1970 1990 2005 SENDAI FRAMEWORK FOR DRR PARIS AGREEMENT (COP21) SUSTAINABLE DEVELOPMENT GOALS (SDGs) (2015-2030) Paradigm shift from a humanitarian to a development issue: ex ante prevention and preparedness to reduce risks; risk financing & transfer: multi-sectoral A sequence of major disasters, governments requested the UN for coordinated humanitarian support Climate change dialogue deeply rooted in the science and environmental communities. Since 1960s major international climate research and monitoring programs established) UN brings sustainable development to the forefront of international policy dialogue to focuse funding from international donors, NGOs and philanthropic foundations. A variety of initiatives between 1992 and 2012: UNEP-FI; UNDG, UN Global Impact; UNEP-FI (PRI); UNEP-FI (PSI); WBCSD, etc. Negotiations focus on mitigation. UN stresses prevention and preventive measures and establishes UNISDR. A humanitarian issue engaging civil protection agencies Negotiations also include adaptation; 1994: Yokohama 2005: HFA (2005-2015) 1994: UNFCCC 1997: Kyoto 2010: Cancun Adaptation 1994: UN Rio Summit 2000: MDGs UN highlights linkages of development, population growth, environmental degradation, ozone depletion, health, clean water and energy. SDG consultations engages climate change and disaster risk reduction issues. 1 2 3 3. Latest developments – Three UN Framework agreements have profoundly have impacted how governments have responded to climate change and extreme events risk management! Link for the GA report: 2015
  12. 12. 12 1. Paradigm shift in national and sub-national planning, policy and regulatory developments related to resilience and climate risk management (Adaptation side) BUILD CAPACITIES TO ASSESS AND PRICE RISKS RISK FINANCING & RISK TRANSFER (insurance) Enhance financial resilience of society PREVENTION Reduce risks through ex-ante preventative measures and avoid creating new risks EARLY WARNING & PREPAREDNESS Improved capacity to manage emergencies through warnings and emergency preparedness RESILIENCE THROUGH RECOVERY & RECONSTRUCTION Realise opportunities to recover quicker and further reduce risks through recovery and reconstruction planning and implementation Governments are central to building capacities in disaster and climate risk management and adaptation. There is a slow paradigm shift towards a more comprehensive risk-based approach. The global insurance industry is actively engaging to support building resilience to extreme events and climate risk. Link for GA report: 3. Latest Developments
  13. 13. 2. International Policy: COP21 Paris Climate Agreements (December 2015 – UN Framework Convention on Climate Change – Came into force on 4 Nov 2016)  An international diplomatic success – voluntary!  Timelines and priorities of action related to mitigation of GHGs (i.e. limiting the increase in average global temperature to 2 degree C)  2020: nations obligated to undertake and maintain GHG emission reduction plans (with updates every five years)  2050: Target for net-zero emission target - countries are submitting 2050 de-carbonization plans Q: Are these in consultation with sub-national governments and the private sector? 13 3. Latest Developments Link to GA Repot: Each country is responsible for national/sub-national sectoral (energy, transport, etc.) and policy and regulatory directions (climate change mitigation/adaptation with potentially risks of highly fragmented policies and reporting requirements (Intra- and Inter-jurisdiction).
  14. 14. 3. National and sub-national policy, regulatory and reporting developments related to low carbon economy (Mitigation) (some examples)  National budgeting and economic planning: e.g., Canada (2017 National Budget and Pan-Canadian Framework for Clean Growth and Climate Change)  Carbon pricing/trading mechanisms: e.g., Canada, Ireland, Australia, Chile, Scandinavia, and Washington State  Various reporting mechanisms at national and sub-national levels with different origins: French Energy Transition law Article 173, Germany, Switzerland, Netherland, EU level, UK, Australia, California  Mandatory regulations impacting banks: Bangladesh, Brazil, China, EU, Nigeria, Peru, Vietnam  Variety of other initiatives at sub-national levels 14 3. Latest Developments Source: GA research Transitioning to a low carbon economy is starting to reflect in the national and sub-national sectoral planning, climate policies (carbon pricing or taxing) and related regulatory and reporting mechanisms. High risk of fragmentation (inter- and intra- jurisdictional)!
  15. 15. 4. Sustainability and social responsibility issue along with related associated fragmented reporting methodologies (NGOs and IGOs)  ESG and other methodologies  OECD Investment Survey  UN – UNEP FI Principles of Sustainable Insurance  NGOs: Principle of Responsible Investing; Asset Owner Discloser Project, CERES, Carbon Disclosure Project, 2 Degree C Investment Initiative, etc.  All voluntary 15 3. Latest Developments Source: GA research Climate mitigation and transition risks for years have considered a sustainability and social responsibility issue, by NGOs and IGOs, leading to fragmentation in the reporting approaches, inconsistencies and reporting fatigue. But this discussion is now shifting to an economic risk and core business issue (WEF 2016, FSB 2017).
  16. 16. 16 Strategy – the actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning Risk Management – the processes used by the organization to identify, assess, and manage climate-related risks Metrics and Targets – the metrics and targets used to assess and manage relevant climate-related risks and opportunities Governance – the organization’s governance around climate-related risks and opportunities Governance Strategy Risk Management Metrics and Targets 5. Financial - G20 Financial Stability Board‘s (FSB) – Task Force on Climate-Related Financial Disclosures (FSB-TCFD) (Launched by Carney and Bloomberg in 2015):  Objectives: (i) Increased transparencies for assessing climate-related financial risks; (ii) Development of standard climate risk reporting framework in the annual reports (voluntary)  Industry-led (Co-chaired by Bloomberg) - Two-phase process with extensive consultations Governance 3. Latest Developments Source: Report II – FSB – TCFD : 16
  17. 17. 17 5. FSB-TCFD Continued:  The four main recommendations are supported by specific disclosures for financial filings to provide decision-useful information about their climate-related risks and opportunities.  A challenge in the need for standard approaches and methodologies to scenario testing methodologies and expertise  Supplemental guidance to highlight important sector-specific considerations and specific reporting requirements in their annual reports have also been provided. 3. Latest Developments Source: Report II – FSB – TCFD : This initiative points to a shift from a sustainability and corporate social responsibility issue to a core business issue, with implications for the governance, strategy, risk management and financial aspects. While intended as a voluntary reporting, this could potentially replace the highly fragmented approach to reporting and provide a more consistent framework for companies to incorporate these risks into core business. Scenario testing methodologies and expertise may pose challenges!
  18. 18. 6. Rating agencies (Standard and Poor’s, Moody’s and Bloomberg) are building their climate risk research and assessment capacities:  ~ Companies and Sovereign risk Credit ratings 7. Increasing shareholder awareness and changing sentiment towards carbon- intensive industries 8. Increasing investor interest and alignment towards low-carbon investing  Blackrock, Goldman Sachs, various investor coalitions are forming  But many challenges for institutional investors with fiduciary responsibilities to shift their investment portfolios 18 3. Latest Developments Source: GA Research The climate change discussion has shifted from “whether anthropogenic climate change is real or not” to “determining pathways towards a low carbon economy and institutionalizing climate risks into core business”!
  19. 19. Climate Adaptation and Resilience Agenda: Value chain of the insurance industry as underwriter (GA Report 2016) Share risk knowledge and risk pricing expertise Share research and knowledge in preventative measures Innovation in risk transfer products and services  To build financial protection for governments, businesses, communities, individuals (incentives to change behavior  Regional facilities, parametric insurance, etc. Faster and more efficient claims settlements  Management and payouts Support for development of sound risk transfer programs through close cooperation with the government  Multi-stakeholder cooperation and public-private partnerships 19 4. What does it mean for the Insurance industry? Need for more coordinated and effective public-private partnerships, that leverage the strengths of market-based insurance industry, avoid redundancies and align priorities. Link for GA report:
  20. 20. 4. What does it mean for the Insurance industry? High-income countries Also experience Mid- and low-income coun- tries also have additional challenges• Fluctuating capacity and Market appetite Risk-pricing difficulties Public policy & political motivation Overall challenges Difficulties in risk assessment due to lack of data Asymmetrical information & adverse selection Limited take up Moral hazard unless insurance is incentivizing risk-reducing behavior • Lack of: • • • • • Data Riks modelling tools Technical expertise Sclae Developed domestic finance sector Scale • • • • • • • • Regulatory constraints Need for global (re)insurance capacity and expertise High distribution and claims settlement costs • • 20 There remain a number of challenges and hurdles with expansion of risk transfer solutions to address physical risks leading to large and in some cases a growing insurance protection gap! Link for GA report:
  21. 21. 21 Global insurance industry is engaging in the dialogue with other key stakeholders to address the insurance protection gap in extreme events and climate risk management. 4. SOCIO-ECONOMIC GROUPINGS 5. INSURANCE INDUSTRY AND ITS AFFILIATES 1. GOVERNMENTS 2. UNITED NATIONS3. INTERNATIONAL DEVELOPMENT COMMUNITY 7. SCIENTIFIC COMMUNITY, ACADEMIA AND CENTRES OF EXCELLENCE 6. NGOs, CIVIL SOCIETIES, NON- PROFITS 8. Regulatory Bodies  National to local levels, various ministries and public-sector institutions  Primary insurers, reinsurers, brokers  Cat Risk Modelling  Think tanks and associations Link for the GA report:
  22. 22. 22 Highlights of major developments in disaster risk financing and risk transfer over the last 2 decades. FONDEN Parametric concepts being explored for various applications Turkish Catastrophe Insurance Pool (TCIP) Taiwan Residential Earthquake; India’s weather index; MAIPARK The Munich Climate Insurance Initiative (MCII) established CCRIF; India's large-scale weather indexed crop insurance; PSNP in Ethiopia ARC sells first policies drought risk; Kenya crop and livestock insurance; South East Europe and Caucasus Catastrophe Risk Insurance Facility; PRISM 1996 1999 2000 2001 - 2003 2005 2007 2008 2009 - 2010 2011 2012 – 2013 2014 2015 WBG Cat DDO; Weather Derivative in Malawi; PCRAFI; RomanianCat Insurance Scheme; OASIS GIIF launched; Indonesia's flood microinsurance; Manizales, Colombia's Earthquake Property Insurance; HARITApilot in Ethiopia; Kenya and Ethiopia: index-based livestock insurance. Mexico's indemnity-based excess of loss insurance for public assets; Vietnam's agriculture insurance pilot; India's Modified Area Yield Crop; MICRO established; Philippines' CLIMBS; ASEAN Roadmap DRFI Sendai dialogue on DRR launched; G20 adopt DRFI; PCRIP; JICA; SECURE; weather derivatives with Uruguay; Political Champion Group for Resilience insurance initiative established Nicaragua joins CCRIF,Sendai Frameworkfor Disaster Risk Reduction (2015–2030); G7 InsuResilience; APEC finance ministers CAP for DRFI; 2030 Agenda for Sustainable Development adopted; Climate Change Paris Agreementadopted; ARDIS SINCE 2005, GROWING NUMBER OF INITIATIVES Link for the report:
  23. 23. Investing in the transitioning to low carbon economy - Challenges and opportunities for insurance industry as institutional investor: Challenges – For example: Fiduciary responsibilities: Drivers of investment strategies (ALM) and capital regimes Political risks associated with fragmented (sub)national sectoral and climate policies, related regulations and reporting requirements (governments’ de-carbonizatin strategies and plans) Lack of sufficient green investment opportunities: that meet industry’s investment criteria and requirements (Limited Cat Bonds and Project Financing) Lack of reliable data and transparency: Analysis, methodologies, stress testing tools, standardization of reporting requirements Capital and regulators requirements: Need for adequate regulations that allow (provide incentives) for longer-term investments associated with climate change Opportunities - Innovation in product development (Liability side): Could encourage behavioral change towards low carbon and support resilience 23 4. What does it mean for the Insurance industry? Source: GA Research underway To address these issues the GA is conducting a study to identify and raise awareness of key challenges, hurdles and opportunities for the insurance industry on both asset and liability side of the business.
  24. 24. 24Source: GA 5. Geneva Associations’ Strategy and Policy Research Four priority themes under two pillars (2016-2018 Work Plan): Pillar 1: Transitioning to Low Carbon Economy Theme 1: Role of insurance industry in transitioning to a low carbon economy? (Forthcoming Nov. 2017) - Industry perspectives  Based on interviews with CIOs, CROs and Chief Underwriter of the global insurance industry Pillar 2: Resilience to Extreme Events and Climate Risk Theme 2: How Can Risk Modelling shape the Future of Disaster and Climate Risk Management? Innovation in Risk Transfer and Beyond  How can innovation and experiences from industry be transferred to the public sector?  Priorities for innovating risk modelling using latest scientific and technological developments (system’s based) Theme 3: Pathways to more effective PPPs  Case study of Australia, UK, Germany, Canada, and Japan flood risk management Theme 4: Insurance industry’s opportunities for investing and resilience of critical infrastructure
  25. 25. 25 5. Geneva Associations’ Strategy and Policy Research - Resources 1) The Geneva Association issued its Climate Risk Statement, signed by 68 chief executive officers of the global (re)insurance industry. Link for the statement: 2) COP 21 Paris Agreement: What Does it Mean for the (Re)insurance Sector? Authors: Maryam Golnaraghi with contributions from: David Bresch, Peter Höppe, Karsten Löffler, Masaaki Nagamura, Ernst Rauch Link for the report: 3) An Integrated Approach to Managing Extreme Events and Climate Risks - Towards a Concerted Public-Private Approach With recommendations to harness potential contributions of the insurance industry Authors: Maryam Golnaraghi, Swenja Surminski, and Kai-Uwe Schanz Link for the report: 4) The “Global” Stakeholder Landscape in Extreme Events and Climate Risk Management - PPPs Authors: Maryam Golnaraghi and Patrick Khalil Link for the report: 5) How Can Risk Modelling Shape the Future of Extreme Events and Climate Risk Management? Innovation in Risk Transfer and Beyond (Forthcoming Sept 2017) Engaging leading experts in risk modelling (from industry, risk modeling, science and technology and governments and addressed two key issues: (i) How can innovation in CAT risk modelling be transferred to the public sector to support risk-information resilience and adaptation decision making (ii) Priorities for innovating risk modelling using latest scientific and technological developments 6) Role of insurance industry in transitioning to a low carbon economy? (Forthcoming November 2017) Industry perspectives from asset and liability sides of insurance business – (Based on interviews with CIOs, CROs and Chief Underwriter of the global insurance industry)
  26. 26. (1) Four different types of climate-related risks could lead to financial and economic impacts: Physical, liability, transition and reputational risks (2) A number of policy, regulatory, financial and market-based developments are pointing to:  The transitioning to a low carbon economy but need for clarity on the national strategies, pathways and approaches (Sectoral and climate policies, regulations, etc)  The importance of integrating climate risks as an integral part of core business in all sectors (spanning governance, strategy, financial, operational and risk management practices) (3) Role of Insurance industry as risk underwriters and institutional investors (with fiduciary responsibility) BUT:  A number of challenges linked to policy, regulatory, capital requirements and other market-based issues, transparency, standardization, etc. need to be addressed  Industry-level common vision and prioritization, multi-stakeholder engagement and PPPs are critical! (4) The Geneva Association through its strategic/policy research and influencing activities is working with the global insurance industry to address these issues. 26Source: GA 6. Take-away Messages
  27. 27. Follow us on: For more information please contact: Maryam Golnaraghi Director of Extreme Events and Climate Risks Program Cell: +1 (604) 376.1886