Column: Horner On Climate Solutions & Insurance
[Column written by Patrice Horner]
A Climate Investment Summit session on Leveraging Insurance for Resilience Systems focused on methods for financial systems adaptations to create Climate Solutions. The Central Bank of Ireland has sustainability and climate oversight integrated within is economic supervision. Resilient financial systems and a smooth transition is critical to a sound economy.
“It is critical to make rules and regulations and risk capacity at this juncture”, noted Yvonne McCarthy Head of Climate Change Unit, Central Bank of Ireland. There needs to be shared capacity across industries. Gaps are important to identify and address. The International Association of Insurance Supervisors [IAIS] just published its mid-year preview of the 2024 Global Monitoring Exercise [GME] analysis. Covering over 90% of global written premiums, the GIMAR mid-year update shares interim results on solvency, profitability and liquidity positions, and systemic risk developments.
For insurance and financial industries must move beyond existing product and to innovate to address the gaps. Much attention is on parametric insurance, which has specific triggers and amounts. Many in the industry believe this is an innovative approach. These can include performance guarantees and credit risk coverage. For example, there could be pollution-based triggers that cover leakage from Carbon Capture & Storage [CCS].
These concepts can be tested in limited circumstances, in a so-called innovation ‘sand-box’. To be able to build reliable new approaches, there should be an industry wide ability to share commercial terms to properly price the risk. There are also regulatory issues, such as banks to be able to transfer risk from their balance sheets to an insurance product, which is prohibited by the Basel Committee on Banking Supervision in response to the financial crisis of 2007-09. III. The industry needs to be enabled to appropriately transfer and manage climate risk.
Lloyds has recently issued a paper about a risk assessment ‘How can ESG data help insurers reduce climate risk?’ The ClimateWise Project, as part of the Centre for Sustainable Finance at Cambridge University, is a basis for ‘deliverables’ for organizations to collectively and innovatively tackle climate change and to ‘grow green revenue’, building on the pillars of insurance. Martin Massey Chair of the Institute of Risk Management [IRM] Climate Change Special Interest Group is launching a very timely practitioners guide on how to integrate climate change risk management into an organization’s Enterprise Risk Management [ERM] framework. Massey has also authored a book ‘Practical Approaches to Net Zero Underwriting’.
Risk appetite strategies are determined and approaches identified from an individual insurance company perspective. Due to the profitability of underwriting the fossil fuel industry, it is proving difficult to exit that business. For insurance companies, there are indirect benefits from derisking such as less volatile revenue streams. A Climate Mutual maybe a method for difficult to price incidents such as heat stress and droughts. The Carbon Friendly Association develops rewards for sustainable practices such as agricultural solutions for climate. Tactical Risk Management can focus on building back better, with discount incentives to the insured. Some clients ask for premium credits. The ‘hard to abate’ sectors such as cement and shipping should incorporate a carbon budget. These ‘first of a kind’ underwriting projects require a high level of expertise.
While carriers are examining client ESG criteria, customers need to ask about the insurers’ green credentials. Brokers can educate customers to explain what can be accomplished with insurance due to climate change. While insurance companies need to adapt risk appetites to address customer risk exposures. Some are engaging third parties such Guy Carpentry or Marsh to design profiles of projects for insurance companies to develop.
The pipeline for good projects to underwrite is slowing as a result of supplier under-funding and regulatory hurdles. Many projects are below limits in terms of the dollar size to underwrite. There is also pricing pressure from a competitive standpoint to secure good deals. Some are assembling pools of projects to group funding and underwriting. New assets bring new challenges, such as reinsurance for Wind, EV, and Solar projects. Hurdles for ‘transition tech’ will take time for maturity. Some insurers are leaving the market and exploring new types of revenue to support the industry. Martin mentioned the Parametric model or ‘Event Insurance’ with which Bermuda is familiar. For Climate Risks, a pre-agreed amount and a trigger event is determined. Index based risk models can be referenced for pricing. Swiss Re was mentioned as a leader in new risk underwriting.
- Patrice Horner, MBA, EFA
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Category: All, Environment
