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Short-term Insurance Strategic Risk Forum: Climate Change and its Relevance to the South African Market – 10 th June 3013 Understanding Insurer Responses.

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Presentation on theme: "Short-term Insurance Strategic Risk Forum: Climate Change and its Relevance to the South African Market – 10 th June 3013 Understanding Insurer Responses."— Presentation transcript:

1 Short-term Insurance Strategic Risk Forum: Climate Change and its Relevance to the South African Market – 10 th June 3013 Understanding Insurer Responses Greg Lowe, Head of Sustainability, AON EMEA

2 Why should insurers care about climate risk? A) Changing Risk Patterns Source: Swiss Re, sigma No 2/2012

3 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

4 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.

5 c) Regulation Source: International Energy Authority

6 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 industrys leadership group to drive action on climate change risk.

7 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...

8 ClimateWise Membership Strategic Partnerships:

9 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.

10 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.

11 Risk Analysis – Collaboration - Health ChallengeWhat 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

12 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.

13 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.

14 Customer relations – Collaboration Energy ChallengeWhat are the opportunities for insurers to facilitate and profit from low carbon technologies? Worked withEnergy companies Carbon Capture and Storage Association Key outputsReport identifying insurance products that could contribute to managing liabilities associated with Carbon Capture and Storage and therefore contribute to its commercial viability

15 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

16 Investment – Collaboration ChallengeWhat does excellence in incorporating low carbon decision making in insurance and reinsurance investment strategies look like? Key outputsA framework for decision making across asset classes considering strategic asset allocation and asset liability management; thematic allocations and portfolio mandates.

17 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?

18 Policy & Partnerships – Aon response We Cant 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 cooperation Individual component Development Owners of the models Understanding all assumptions taken by partners Driving the Development

19 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:

20 From Managing Disasters to Managing Risks Katharine Thoday ClimateWise Secretariat

21 Climate Risk Management

22 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. SMEs rarely considered

23 The role of risk reduction The full potential of utilizing risk transfer for adaptation is far from exhausted

24 Making the transition Creating shared value Moving from business continuity to comprehensive climate risk management Customer relations Turning climate risk into business opportunity Policies & Partnerships Building public- private risk governance Risk analysis Disclosing climate risk on the balance sheet Integrating climate risk into investment

25 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.

26 International frameworks 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

27 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;

28 Influencing change – collective influence CHALLENGE:How can insurers reduce the environmental impact 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

29 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

30 Influencing change – Networked knowledge

31 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

32 Challenges and opportunities –How we miss what we cant 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 dont account for externalities.

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