Banks are using insurance models to assess risk
Banks are starting to use the same catastrophe models as the re/insurance industry as their borrowers struggle to secure cover for developments exposed to climate risk.
The convergence between the financial sectors could lead to banks demanding that their borrowers apply more resilience into their structures, Julie Serakos, senior vice president and head of model product management at Moody’s RMS, told APCIA.
Serakos, who joined RMS around the same time it was bought by ratings agency Moody’s, said this had been one of the benefits of the merger. It meant that bankers had become much more interested in the models being used by insurers and they were now talking the same language.
The former head of catastrophe analytics at BMS said: “The insurance crisis in Florida means a lot of coastal dwellings with multi-family dwellings and condominiums are not able to get the insurance coverage they need because of the heightened risk.
“That is putting pressure on banks who are lending to these building owners who are now finding themselves at risk of default on their loans because they can’t get the insurance coverage.”
As a result, she said, banks are now asking to see the models being used by the insurers and in some cases are using them themselves.
“Banks who assumed insurance coverage would be in place are now faced with having to educate themselves about the insurance industry because that in itself is a credit risk to them,” Serakos said.
“They are asking about the models that insurance carriers are using and are wanting to use them as well, which creates a great opportunity to be able to speak the same language across insurance and banking.
“Being part of Moody’s has opened up this whole new way of risk analytics in the credit side looking at risk,” she said.
This means banks could not only assess the risk of a particular property defaulting but could also model the loss of value that could occur if the building was damaged by a natural catastrophe.
“If that asset deteriorates in value, it creates an increased risk to the bank,” she said.
Serakos agreed this could mean banks refusing to lend to developers planning to build on sites which faced an extreme climate risk, although she said it was more likely that banks could demand that developers ensure they build more resilient structures.
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