Asking the right questions about climate change

12-05-2021

Asking the right questions about climate change

Ross Nottingham & Mike Palmer, Hiscox

While admitting to not knowing all the answers, Hiscox Re & ILS believes that cooperation and partnerships will be vital in future to meet the challenges of climate change and to identify the opportunities for new covers and capacity.

Climate change can’t wait, according to Hiscox Re & ILS. Frustrated with projections looking far into the future and models too reliant on the past, the reinsurer has introduced a new underwriting framework with climate change at its heart. It is being applied across its business.

With the industry facing pressure from governments, regulators, investors and others to show how it’s addressing climate risks, it’s unlikely to be last to revise its approach. Earlier this year, The Geneva Association’s task force on Climate Change Risks Assessment outlined the importance of insurers developing a framework for climate risk assessment and scenario analysis.

To discuss these issues, Hiscox Re & ILS’s chair of North America, Ross Nottingham, and its head of analytics and research, Mike Palmer, joined Intelligent Insurer’s Re/insurance Lounge, the online, on-demand platform for interviews and panel discussions with the market’s leading players.

Together they explained why a new approach was needed and what it will mean for the business, insurers and the insured.

“We’re conscious that the tools the industry uses to measure risk in most instances don’t contemplate climate change.” Ross Nottingham, Hiscox Re & ILS

The long and the short of it
To an extent, as Palmer explained, the framework is not a great departure for Hiscox. It merely formalises what the business was already doing.

“The industry uses catastrophe models, and we always ask ourselves how those tools are put together in the first place, how they are calibrated and—particularly with climate change—whether the risk levels they are calibrated to are appropriate for the questions we use them to answer,” he explained.

However, the new framework formalises this process: it is a response to increased interest from regulators, investors, the media, customers and Hiscox’s staff in environmental, social and corporate governance issues more broadly.

“We’ve had an increasing number of questions recently on climate change, what our approach is and how we tackle it,” said Palmer. The new framework provides clarity on these issues.

Click here to watch the full video

As Nottingham explained, one core assumption of the approach is that past events are no longer a good guide to the current risks.
“We are convinced, unfortunately, that weather in the future is going to be a lot more volatile than the weather of the past,” he said.

“We’re conscious that the tools the industry uses to measure risk in most instances don’t contemplate climate change. In fact, they tend to be based on a long-term view, which we don’t think is an appropriate baseline.”

Another assumption is that existing research, and the broader focus on climate change from researchers and the media, won’t necessarily address the issues that are most important to the business.

“For example, often in the media the question of climate change is posed in terms of how things will have changed by 2050. That’s quite a long way in the future, and companies like ours are more concerned with the immediate time scale,” explained Palmer.

“We care about 20 to 40 years in the future, and it is a valid question. However, given that we write mostly annual policies, we would like to focus on what’s happening now.”

The framework aims to tackle these shortcomings. The hope is that asking some simple but focused questions at the outset will clarify the actual impacts of climate change on Hiscox’s portfolio. Preferably, it will do so before losses occur but, failing that, the company is also determined to learn from claims.

“Losses are often the most expensive part of research,” remarked Nottingham.

“We’d love to work with anybody who is interested in contributing to the discussion.” Mike Palmer, Hiscox Re & ILSTheory into practice
In practice the questions, combined with traditional modelling tools, enable Hiscox to draw a risk map. This first identifies how strong the “climate change signal” is for different risks in different parts of the world. It then evaluates the impact of that change on the company’s risk level given its underwriting book and exposures.

Already this has drawn attention to some key issues for the business, such as wildfires in the West of North America.
“We’ve put some time and effort into reassessing that risk and how the standard tools are applied in that area,” said Palmer.

Click here to watch the full video

However, the intention is not simply to improve pricing or avoid a build-up of exposures, said Nottingham. The insurer aims to share its thinking with clients and invite others to contribute. To this end, much of the work ends up on its blog and webinars.

“It acts as a call to arms to them to come and work with us,” he said. “It’s very powerful, and it embeds us with our partners.”

As Palmer concluded, that cooperation will be vital in future not only to meet the challenges of climate change but also to identify the opportunities and need for new covers and capacity.

“We’ve done a lot of work internally, but we are humble enough to know that we don’t have the full answer, and the reason we do these things is to invite collaboration.

“We’d love to work with anybody who is interested in contributing to the discussion,” he said.

To view the full Re/insurance Lounge session click here.

Hiscox Re & ILS, Climate change, Insurance, Reinsurance, Ross Nottingham, Mike Palmer, UK

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