Developing a strategy for climate change

Helping clients to manage the risk of natural disasters is the raison d’être of Bermuda’s reinsurance community. No other single factor affects its ability to do that more than climate change, but are there implications for re/insurers? Bermuda:Re+ILS asked readers.

“More than half (54 percent) of respondents believe their role is principally to help their clients manage the impact of climate change.”

The re/insurance industry is heavily influenced by science. Science drives its models and informs its understanding of risk. It stands to reason, then, that the re/insurance community should be aligned with mainstream scientific thinking on the question of climate change.

It was not surprising, therefore, to see that on the question of whether climate change is a problem, this was indeed the case.

Figure 1:

How concerned are you about climate change?

The biggest threat

There are still people who deny the existence of climate change, or argue humankind is not contributing to it. But of the people who work in Bermuda’s re/insurance industry, 57 percent of respondents to our survey said they are very concerned about this problem (Figure 2). One respondent described climate change as “the biggest threat to our very existence. Anyone who’s not very worried is in denial”.

The majority of the remainder said they were a little concerned by climate change—a difference that may say as much about individual temperament as it does about different opinions on the scale of the problem.

A more optimistic take on the issue was summed up by another respondent, whose relatively upbeat attitude was perhaps the reflection of a belief in the ingenuity of people rather than a dismissal of the scale of the problem humankind faces: “I believe (hope) that technological solutions will become available once the smart young minds focus on this important issue.”

Accepting the nature of the problem, however, is one thing. The trickier and potentially more controversial question is: what should the world, and the industry, be doing about it?

Figure 2:

How important is the role of re/insurance in tackling climate change?

What’s our role?

There is little sign that re/insurers are shirking their responsibility of doing their bit to find a solution to the climate change problem, but neither is there a high conviction that the industry is well-placed to lead global efforts in fighting the phenomenon.

More than half (54 percent) of respondents believe their role is principally to help their clients manage the impact of climate change, rather than influencing emissions levels directly (Figure 2). This view holds that the industry’s role is to develop products that will help businesses cope with issues such as rising temperatures and sea levels, and resulting migration flows. The industry does not run factories that burn large amounts of fossil fuels, so what more can it do?

Nearly 30 percent of respondents believe there is a little more the industry can do, indicating it can at least leverage its position to slow down global warming. This view acknowledges a greater level of influence over the customers, and ultimately the businesses that acquire insurance, and their actions (see below).

One respondent said: “Simply raising premiums on waterfront properties or refusing certain coverages will create the change that is necessary.”

Another 15 percent of respondents believe re/insurance is not an industry like any other, but has a special role as one of the main global custodians of risk, and that it is therefore critical in managing every aspect of climate change.

These respondents believe the industry can, and should, be using all of its considerable influence to encourage carbon reduction strategies in its clients, as well as helping them cope with the changes that are already taking place.

Figure 3:

How effective will the strategy of refusing to do business with high polluters be?

Will our strategies work?

What can re/insurers do to move the dial on global carbon emissions? The answer to this may be found in the plethora of climate change strategies that have already been published by carriers. The single biggest measure that many of these strategies have in common is a phasing down, and ultimately out, of business with high carbon polluters.

How effective will this strategy be?

Nearly half of the respondents to our survey (48 percent) believe this will be somewhat effective—a middle of the road answer (Figure 3). ‘A little effective’ garnered 9 percent of the responses, and ‘very effective’ received 22 percent. So it’s worth doing, according to the majority, without necessarily being a game-changer.

More than one in five respondents felt such a strategy would be ineffective. The concern may be that if the industry does not act as one body, high polluters will always be able to find a re/insurer to do business with. Such businesses may not have the full field to choose from, and may even see the cost of coverage go up. If the difference in the cost of coverage is smaller than the cost of reducing emissions, however, the full force of the incentive may not be felt.

Figure 4:

How would you rate the re/insurance industry’s response to climate change?

Steps on the journey

Phasing out business with high polluting companies is just one part of the strategy that many re/insurers have adopted. Others have taken additional steps, such as investing in low-carbon technologies themselves, pursuing carbon neutrality within their own offices and encouraging their staff to reduce their own footprints.

Some carriers have gone further than others, but as a whole, we asked, how do our readers rate these efforts?

Nearly 60 percent of the respondents to our survey believe the steps that have been taken so far are just the start (Figure 4), and that more needs to be done across the board if the industry is serious about using its position to leverage change.

The steps that have been announced so far do not go far enough, but respondents did not dismiss them as nothing: only 5 percent of respondents said the industry has not come to terms with the problem at all.

A little over a third of respondents believe the industry has made good progress, which implies a little more distance has been travelled on this journey, without suggesting arrival at the destination. The number of people who argued the re/insurance industry is leading the debate was very low, suggesting there is near-consensus that more is to come from the industry in this area.

Figure 5:

What does climate change mean for Bermuda’s cat re/insurers?*

*Respondents could choose more than one option

What is the impact on re/insurers?

Setting aside the question of what re/insurers can or should be doing about climate change is the matter of what it means for the industry right now. By influencing the frequency and severity of natural disasters, does climate change create business for the industry?

Or does it simply make it harder to manage that risk, and therefore make the industry less effective?

Respondents were free to make multiple selections to this question, as the answers were not mutually exclusive. Well over half of the respondents to the survey believe climate change is making catastrophes uninsurable—a word that is not used lightly by re/insurers (Figure 5).

Just over a third of respondents worried that climate change is making it more difficult to model the impact of climate change, affecting their ability to price products properly in a way that ensures the industry generates a profit.

Just under a third said that climate change is driving up the cost of coverage to a point that made it harder to sell, or less affordable for clients.

Video: | Photo by Abigail Keenan on Unsplash

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October 2020

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