Although this year’s Rendez-Vous was once again cancelled as a physical event as a result of the pandemic, a number of key events were held online, including a fascinating debate on the (re)insurance market’s response to climate change. Emerging Risks decided to listen in to part of the conversation…
> John Neal, CEO, Lloyd’s
> Kirsten Mitchell-Wallace, Head of Portfolio Risk Management, Lloyd’s
> Patrick Tiernan, Chief of Markets, Lloyd’s
KM-W: If we think of our typical catastrophe modelling in the industry, we’ve been doing that a long time, we know the limitations of the models… but we need to combine actuarial science with the more typical work we do in this industry. We’re starting from a really good base though, because since the 90s we have spent a lot of effort on ever better catastrophe models, and ever better understanding of extreme events. So we’re starting from a really good place… and we have climate condition catastrophe models now, which are going to really help us in understanding.
JN: That’s great news, that we have greater confidence in the models over time. But what leaves you scratching your head most, so that when we are trying to understand the subject, what leaves you most worried about what we can and what we can’t understand?
KM-W: There’s a fundamental issue about the suitability of different climate models for the different kinds of events, and particularly for the kinds of events which are really important in driving loss in the insurance industry.
Climate models are in general pretty bad at resolving extreme events. So, the resolution of the models is always improving, and has improved massively over the last 20 years, but essentially the models are solving atmospheric equations in horizontal and vertical boxes, and the size of the boxes relative to the peril is really important. Many climate models still don’t simulate strong tropical cyclones, so we don’t really have enough granularity in the model output we’re getting to make really solid deductions about the things that are of most interest to us in the industry.
On top of that, there is understanding what is natural variability… but what is natural and what is anthropogenic climate change? Then we have the difference between what drives losses for us, and what’s done in terms of the studies. So from an industry perspective, we are really interested in land falling hurricanes and the increasing severity of land falling hurricanes, whereas the studies are more on a basin-wide basis.
JN: If we look at the opportunity as well as the threat… climate presents perhaps the single biggest opportunity in our insurance careers to stand up for customers, both in terms of the asset side of the balance sheet and what we can bring to bear there, as well as the products and services we can provide. What do you think we can do? It is important that we insure the transition, and what does that mean?
PT: The really striking thing in terms of the opportunity for our industry is the need for general insurers as an enabler for governments, and for the trillions of dollars, pounds and euros of capital that is sitting with pension funds or other investors to put into this industry. Our expertise is needed to put a lot of their plans in place. With that in mind, the opportunity is enormous. I think it’s an opportunity that fits well with our industry because we’re very good at being at the vanguard of what’s difficult. Our reputation as a bastion for risk taking as an industry means we can thrive on that going forward.
What we’re going to have to do is to work very hard together. We’re going to have to work hand in hand with customers, brokers and risk managers across the piece in order to solve these complex problems. But the desire is there from our customers to help them on their decarbonisation journey. And one of the great aspects of Lloyd’s and of the Rendez-Vous is the coalescing of talent, of ideas and of problem solvers, of people who are focused on solutions. That’s what’s needed in the current space.
There’s an opportunity not to be too preachy about this, but to get into the mix and to work with folks on the transition of their businesses as they move to decarbonisation for their own investors. I think this will mean meeting sensible timelines of transition and from my perspective, as we work with the managing agents, we will be setting out targets in terms of measurement and transition. Lloyd’s has put out its ESG report recently, and that will be part of our climate action plan.
In terms of the size of the opportunity, the outer bound is the ambition that we show in meeting the needs of our customers, improving our understanding of these risks, and our ability to measure them and get the right amount of capital behind them so that everybody can go forward with a lot more confidence.
We’ve got an opportunity. We’ve taken a few licks over the last few years as an industry but I think we have a great opportunity to cement our legacy for a generation, and to see the fruits on our communities and the businesses around us: the world that we pass on to the next generation and beyond.