short-term insurance strategic risk forum: climate change and its relevance to the south african...
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Short-term Insurance Strategic Risk Forum: Climate Change and its Relevance to the South African Market – 10th June 3013
Understanding Insurer Responses
Greg Lowe, Head of Sustainability, AON EMEA
Why should insurers care about climate risk?A) Changing Risk Patterns
1970
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0.0
20,000.0
40,000.0
60,000.0
80,000.0
100,000.0
120,000.0
Earthquakes/tsunamis Man-made disastersWeather-related natural catastrophes
1992: Hurricane Andrew
1994: Northridge EQ
1999: Winter Storm
Lothar
2001: 9/11 attacks
2004: Hurricanes Ivan, Charley, Frances
2005: Hurricanes Katrina, Rita,
Wilma
2008: Hurricanes Ike,
Gustav
USD bn, at 2011 prices
2011: Japan , NZ EQs,
Thailand flood
2010: Chile, NZ EQs
•Source: Swiss Re, sigma No 2/2012
Multiple Stresses
“Instability is likely to be greatest in areas of multiple environmental stress” Source: The DCDC Global Strategic Trends Programme 2007-2036- UK Government Ministry of Defence
b) Public Opinion
Need to shape public policy, manage reputation and respond to customer expectations.
An international IPSOS Survey demonstrated that: 61% of those polled think that insurers have a role to play in limiting
risks related to climate change 57% that they can help people adapt to the consequences of
climate change. 17% of those surveyed, claimed climate change is “already”
affecting the type of insurance they buy - 39% believe that this will happen in the short term and 31%, in the longer term.
Governments and public institutions are also increasingly looking to insurers to play a role in signalling climate risk effectively.
c) Regulation
Source: International Energy Authority
Action Together: ClimateWise
• 2006 – 2007: DESIGN
Industry leaders agree and launch ClimateWise Principles
• 2008 – 2009: EMBEDDING
Members use Principles as framework for action with the reporting commitment serving as an accountability mechanism for independent review
• 2010 – 2011: BUILDING COLLABORATION
Step-change towards pro-active collaborations
• NOW 2013- 2014: ACHIEVING IMPACT
Focus on integration into business strategies and the development of partnerships to achieve greater impact
ClimateWise exists to be the global insurance industry’s leadership group to drive action on climate change risk.
ClimateWise Principles
1. Lead in risk analysis...
2. Inform public policy making...
3. Support climate awareness amongst customers...
4. Incorporate climate change into investment strategies...
5. Reduce environmental impact of business…
6. Report and be accountable...
ClimateWise Membership
Strategic Partnerships:
Risk Analysis – Strategic Considerations
Uninsurable risk: - As the severity and frequency of risk increases insurers will need to think
differently if they are to provide risk solutions.Typically insurers have focused on low frequency, high severity events. What is their role in addressing climate change ‘tipping points’ i.e. melting sea ice, sea level rise?
Uninsured risk:- In advanced economies the insurance recovery on large weather events is
50% of economic loss. In emerging economies it is 7%.
Interconnectedness of risk
- Human-induced changes to land cover and the buffering capacity of ecosystems are of equal or greater importance in driving increasing risks, when compared to climate change.
Risk Analysis – Aon Response
Research Partnerships are Key - Aon Benfield Research is a collaboration with
19 leading research institutions globally, to enable re/insurers, their clients, governments and non-governmental organizations (NGOs) to protect and grow their organizations in the face of natural hazards and socio-economic risks.
Scenario Planning Helps Identify Needs - To gauge our own challenges, we use scenario
planning to look at what areas of our business and the wider industry are prepared for future changes in climate, and what areas need future proofing.
Risk Analysis – Collaboration - Health
Challenge What does climate change mean for insurance health and protection provision?
Worked with
leading environmental epidemiologists and public health practitioners
Key outputs
- Recommendations for coding and collecting data- Opportunities for cross-sector health partnerships- Consideration of links between life and non-life cover
Customer relations – Strategic Considerations
• Information: Costs for some risk causes will trend upwards; insurers should aim to make “customers” aware of this so they can plan for it.
• Products: New products to meet emerging risk challenges e.g.– Weather derivatives– New technologies e.g. for energy production.
• New Customers: possible new classes of customer for most affected risk areas– State or municipal government– Communities in areas vulnerable to foreseeable increases in risk
exposure– Micro-insurance communities.
Customer relations – Aon Response
Make it Easy - Customers want to do the right thing, but they want it included as part of a
standard product/service. Our UK TRIO product makes sustainable reinstatement clauses standard in the policy at no extra cost. We need more insurers supporting brokers in this capacity.
Understand Your Customer Base - How green is your customer? When dealing with corporate clients,
understanding where they stand on climate change and sustainability is useful for building relationships and developing new products. We are in the early stages of building this into the sales process and it allows us to flex our innovation better by understanding customer needs in this space.
Customer relations – Collaboration Energy
Challenge What are the opportunities for insurers to facilitate and profit from low carbon technologies?
Worked with Energy companies Carbon Capture and Storage Association
Key outputs Report identifying insurance products that could contribute to managing liabilities associated with Carbon Capture and Storage and therefore contribute to its commercial viability
Investment – Strategic Considerations
At $25 trillion insurers control more than 11% of global financial assets and together with pension funds, another industry which makes long term promises to pay, need to understand both the risks and opportunities faced by these assets due to climate change
Assets:• Increased risk
to some long term asset classes of premature obsolescence
• New asset classes
Investment – Collaboration
Challenge What does excellence in incorporating low carbon decision making in insurance and reinsurance investment strategies look like?
Key outputs A framework for decision making across asset classes considering strategic asset allocation and asset liability management; thematic allocations and portfolio mandates.
Policy & Partnerships – Strategic Considerations
Communicating consistently- Are insurers giving consistent messages to stakeholders in terms of
promoting an economy that is resilient to climate risk?
Taking leadership- What is the role of insurers in promoting actions by other stakeholders?
Policy & Partnerships – Aon response
We Can’t Do It Alone - The best results come from
collaboration. While we have relationships with policymakers, our best engagements come with groups such as ClimateWise, research bodies, or insurance trade bodies. An industry voice is always strongest.
• Impact Forecasting
• Academic &
Industry
Partners
• Relationships
based on key
deliverables
• Working with IF – “Hands
on” cooperati
on
• Individual compone
nt Developm
ent
• Owners of the
models
• Understanding all
assumptions taken
by partners
• Driving the
Development
Policy & Partnerships – Collaboration – Urban Resilience
Challenge: How can city authorities, long term fixed asset owners and insurers contribute to city resilience (focussed on the US)
Working with:
From Managing Disasters to Managing Risks
Katharine Thoday
ClimateWise Secretariat
Climate Risk Management
Documenting existing initiatives
Majority of schemes are agricultural (both index and indemnity based) followed by: - sovereign disaster risk
- micro-insurance
- property catastrophe
Majority of schemes in South America and Caribbean, followed by Asia, Pacific and finally Africa
Majority of schemes insure individuals, Governments or meso-level organisations. SME’s rarely considered
The role of risk reduction
The full potential of utilizing risk transfer for adaptation is far from exhausted
Making the transition
Creating shared value
Moving from business continuity to comprehensive climate risk management
Customer relationsTurning climate risk into business opportunity
Policies & PartnershipsBuilding public-private risk governance
Risk analysisDisclosing climate risk on the balance sheet
Integrating climate risk into investment
International frameworks
Priority Actions:
1. Ensure that disaster risk reduction is a national and a local priority with a strong institutional basis for implementation.
2. Identify, assess and monitor disaster risks
3. Use knowledge, innovation and education to build a culture of safety and resilience at all levels.
4. Reduce the underlying risk factors.
5. Strengthen disaster preparedness for effective response at all levels.
International frameworks
http://www.preventionweb.net/
The business case for disaster risk reduction
- Definition of clear responsibilities across public and private actors- Standardisation risk assessment approaches- Targets and indicators i.e.
- reducing risk in building stock by a determined factor- No. increase in absolute poverty levels in a year of disaster- No. of measures introduced at community level
International frameworks
Cancun Adaptation Framework
Assessing Addressing Enhancing implementation – National Adaptation Plans
- Possible development of a climate risk insurance facility to address - Options for risk management and reduction, risk sharing and transfer
mechanisms such as insurance, including options for micro-insurance, and resilience building, including through economic diversification;
Influencing change – collective influence
CHALLENGE: How can insurers reduce the environmentalimpact of the claims process so as to contribute cost-effectively to mitigating risk?
ASSESSING KNOWLEDGE
December 2010: Report with recommendations for sustainable supply chain management
COMMUNICATING AS A SECTOR
UK Industry-wide guidance on Sustainable Claims Management based on carbon foot-printing of domestic property claims Influencing Building Damage Management Specialists
Influencing change – benchmarking & integration
Climate change issues are no longer considered a ‘separate’ issue to be dealt with by a sustainability or corporate responsibility team
Gold rating characteristics:
1. Strong strategic statement on the importance of climate risk, specifically referencing core functions impacted
2. Well articulated plan to address the risks/opportunities arising
3. Evidence of action to address the challenges, referencing core functions above
Influencing change – Networked knowledge
Role for Southern African Insurers
ClimateWise members want to be able to:• Reflect issues and experiences relevant to SAIA members and the
Southern African Insurance market in ClimateWise activities and materials
• Support action to address climate risk in the Southern African market
Challenges and opportunities
– How we miss what we can’t currently measure. – How to build internal capacity. – The balance between making decisions based on
avoiding risk as opposed to taken advantage of opportunities.
– Valuing the long term.– The role of insurers in challenging the short termism
of Governments and macroeconomic frameworks that also don’t account for ‘externalities’.