Bermuda knows the ‘E’ in ESG is climate

Attending the world’s biggest insurtech event while a tropical storm crossed the Caribbean, and then opening a climate forum after Florida was hit by what had escalated into a category 4 hurricane, gave Stephen Weinstein, chairman of the Bermuda Business Development Agency (BDA), a sense of déjà vu.

Weinstein and BDA’s chief executive officer, David Hart, were among the 10,000 attendees at InsureTech Connect (ITC) in Mandalay Bay, Las Vegas on September 20–22. Just after that, on October 6, Weinstein was the keynote speaker at the InnSure Climate Initiative (ICI) Climate Forum in Cambridge, Massachusetts, supported by BDA climate vertical lead Helen Souza.

“ICI is a not-for-profit organisation that brings together insurance and climate to promote resilience,” Weinstein said. “I was invited there to offer my view of how insurers, reinsurers and other leaders in the risk transfer space are looking at the world of climate risk. Hurricane Ian had just happened. Clearly Ian is an enormously significant meteorological event, with significant economic losses and significant shared losses. And the fatalities are likely to go up.”

One key takeaway Weinstein had from ITC was its sheer size: it is a huge gathering that showcases the wealth of capital and science looking to innovate insurance.

“There’s no better visually visceral way to experience that than to see 10,000 people spinning around this enormous campus in Las Vegas. They have thought a lot about digitally enabled distribution and customer experience, but if I could add one thing to the debate it would be: let’s take advantage of enormous innovations in science to have a better understanding of hazards and then apply that back into financial and risk management business tools.”

We’ve been here before

Hurricane Ian became a high-end category 4 hurricane early on September 28, as it progressed towards the west coast of Florida, and made landfall at near peak intensity in southwest Florida on Cayo Costa Island, tying with several other storms as the fifth-strongest hurricane on record to make landfall in the contiguous US.

Hurricane Andrew of 1992 was “not wholly dissimilar” to Ian in terms of the devastation it caused, Weinstein said, but it triggered a paradigm shift in how insurers saw weather risk.

A wave of capital formation led to a burst of innovation that planted the roots from which Bermuda’s re/insurance market has grown. Notably, in tandem with public-private partnerships, the Florida executive branch, legislature and insurance regulator have promoted a culture of insurance in that state.

Weinstein said: “If you have a mortgage in Florida, you also have an insurance policy that covers wind storms. Sprinklers, a very cheap way to mitigate fire risk, are mandated in every building you ever walk into now because of efforts from the insurance industry.”

The challenge nowadays in Florida isn’t from storms, he continued, but “fraud carried on the tailwinds of hurricanes from four years ago”.

In contrast, the real losses from Hurricane Ian are exactly what the market exists to pay. Nonetheless Ian may be further evidence of a complex concern that extreme weather events, including hurricanes, floods, wildfires and drought, are becoming more frequent and intense, and impacting more people due to demographic changes

“Insurers have been the canary in the coalmine of noting that changes in climate are driving changes in vulnerability,” Weinstein said.

And climate change isn’t merely a matter of building homes away from coastal areas since it impacts “just about everything in the economy”, from business interruption to crop failure. That’s why regulators and investors are barraging insurers with questions on what they are doing to “understand, measure and mitigate” climate risk.

“There’s no escaping the flurry of demands for strategic plans because the ‘E’ in environmental, social and corporate governance (ESG) factors is climate,” Weinstein said, “and there are challenges in reporting to different standards and trying to satisfy the constellation of stakeholders.”

The “flip side” to this, he continued, is opportunity. Citing Lloyd’s data, he noted that a mere 1 percent increase in insurance penetration decreases the taxpayer’s burden by 20 percent of the damage from an event.

“Closing the insurance protection gap for climate perils is the most significant economic opportunity in front of us, and one that potentially does the most good,” he stressed.

Achieving this requires innovation across a range of territories and perils and also an understanding of the potential correlation between hurricanes in the US south-east, wildfires in Australia and extreme heat in Europe.

It is imperative, Weinstein said, that the risk transfer sector becomes more effective as communicators and collaborators.

“Our cluster of well-meaning people—reinsurance executives, climate scientists, public policy workers—has to do better to inspire action, particularly among consumers. To do that, we have to recognise our limitations and be prepared to collaborate more because climate change is so significant and the risks are truly global.”

The sector also needs to guard against actions by third parties that can lead to market distortion, such as subsidies, he said.

“The US Crop Program is an annual trillion-dollar moral hazard because it means Americans are subsidising the planting of water-intensive crops in deserts. It’s draped under the guise of insurance but actually it distorts the market, making it hard to support investment in resilience.”

At the same time, Weinstein finds recent reforms in the US Flood Insurance Program to better recognise and reduce risk to be encouraging signs of evolution in US public policy.

Transparency and standardisation, he added, foster innovation and so he welcomes the National Association of Insurance Commissioners’ internationally recognised Climate Risk Disclosure Standard for insurance companies.

“Regulators want to know what we’re doing and the desire to have physical and financial resilience will be enhanced by more disclosure,” he said.

Capturing ‘twofer’

When delivering his keynote speech at the ICI conference, Weinstein also encouraged delegates to view using the “asset side of the ledger” as an opportunity.

“We can invest in more research, but we can also invest in resilience and try to capture ‘twofers’ [two for the price of one]. It’s about deploying our capital in ways that generate a return but which also have synergistic benefits. And the most important form of capital is human,” he said.

Human capital means nurturing talent and a fine example of that, he said, is the merger of the Bermuda Institute of Ocean Sciences (BIOS) with Arizona State University, which is recognised as a global leader in sustainability efforts.

“Hashtag: the kids are alright,” said Weinstein, “because if you attract and retain talented teammates, they will drive you to be more aggressive on mitigating climate risk in a way we wouldn’t have thought possible five years ago.”

It is a mistake, he added, to assume that the expertise required to support climate risk finance can all be found on Front Street, Bermuda, or any one financial or innovation hub.

“Circling back again to Hurricane Andrew, the research was out there but I would hear people say, ‘No one understands it’ when what they meant was, they didn’t understand it. There were people out in the world who had studied the things that we needed to know. And when the market started to explore whether we could partner with experts already researching hurricane risk, then, lo and behold, there was indeed an impressive community of scientists who had built their careers in meteorology, climate science, engineering and other key disciplines, and we were able to construct partnerships to turn their work into tools for business application.”

One framework of pragmatic innovation, he said, is understanding not to let “the perfect be the enemy of the useful”.

“We can’t let fantasies of the perfect model get in the way of something that is really useful in the short to medium term,” he said.

Finding the most useful innovations and fostering opportunities for the Bermuda market means “moving out of the ecosystem of re/insurance” and forging relationships with, among others, the founders and funders of insurtech.

“They’re coming out of technology and looking to address our industry. We’re humble on this small island but we can’t let ourselves assume we would be punching above our weight on the global stage with the collaboration approach that has always characterised our insurance market,” Weinstein said.

“Climate risk requires all hands on deck because the scale of the task is truly global, and it is incumbent on us to make our efforts inclusive, inspiring and energising. And instead of viewing ‘risk’ as a scary word, we need to realise this is an exciting opportunity. It truly is a great time to be us,” he concluded.