Green giant: how AXA XL is scaling heights on climate

When AXA XL appointed its head of pricing & analytics from Global Market Reinsurance to the newly created role of head of climate, he faced the tough task of building on the work started by former XL Group chief executive officer Mike McGavick, XL Catlin chief executive officer Stephen Catlin, and ongoing with AXA Group chief executive officer Thomas Buberl.

But it’s an undertaking that Andrew MacFarlane has wholeheartedly embraced to ensure the AXA XL division’s efforts are aligned towards furthering AXA’s climate leadership position.

MacFarlane grew up in Johannesburg and family holidays allowed him to develop “an underlying love and appreciation of nature” while exploring the South African bush. As a teenager in the 1990s, he was among a group of young people selected to tour the country and learn how communities could work with nature in a sustainable way.

In addition, the bigger picture issues were already clear to him. “Even back then, I remember debating the rights and wrongs of elephant culling,” he said in an interview with Bermuda:Re+ILS. “Moving to Bermuda 15 years ago was an opportunity to gain an appreciation of all things related to the ocean.”

Less than two months into his new role, AXA XL launched the Coastal Risk Index (CRI) at COP26 in November 2021. The CRI is a tool that maps current and future flood hazard resulting from climate change and integrates, for the first time, the protective benefits of coastal ecosystems—such as coral reefs and mangroves—into insurance risk models.

The CRI was developed in partnership with AXA’s scientific partners, IHE Delft (the Netherlands) and the University of California, Santa Cruz, and the Canadian government through the Ocean Risk and Resilience Action Alliance (ORRAA). Founded at the UN Secretary General’s Climate Summit in 2019, ORRAA is pioneering finance and insurance products that unlock investment in coastal resilience. In addition to AXA, ORRAA’s founding members include Ocean Unite, the Global Resilience Partnership, and the government of Canada.

ORRAA was launched as part of the XL Catlin Seaview Survey, an initiative begun in 2011 by Underwater Earth, the University of Queensland and AXA XL (previously XL Catlin). ORRAA aims to drive $500 million of investment into coastal natural capital by 2030 through pioneering innovative finance and insurance products that reduce ocean risk in vulnerable regions and communities.

The CRI is in addition to tools AXA XL is already using, MacFarlane said, such as the Digital Risk Engineer. This uses internet of things technology to monitor the health of clients’ physical assets and buildings around the world remotely. An easy-to-install device is integrated seamlessly into a building to capture real-time data from connected systems such as energy, water (including sprinklers), heating, ventilation, and air-conditioning.

MacFarlane highlighted the three combined elements of the CRI, which evolved from the Ocean Risk Index that was presented at the XL Catlin-sponsored Ocean Risk Summit held in Bermuda in 2018.

“The first is creating a view on the potential impacts of sea level rise and storm surge in the future under different warming scenarios. Two other parts concern exposure, by looking at the impacts on local communities, and vulnerability. That first part is working now and the other two are already in the pipeline,” he said, stressing that the CRI reflects the inter-relationship between the elements of any risk equation, which are hazard, exposure, and vulnerability.

The challenge facing the industry is even more sophisticated than that equation, MacFarlane said. This is why AXA XL stresses the transition and liability factors in any consideration of climate risk in its 2021 report, “Protecting What Matters”.

“The physical risk is something we have been modelling for years. However, it is important to understand how all aspects of the physical risk equation will evolve and interact in the future as the climate changes, not just the hazard. The economy needs to transition if we are to have any chance of meeting the Paris goals.

“This will bring challenges and opportunities for re/insurers as change is driven through policy, technology, and consumer behaviour. Alongside that is the growing and changing nature of oversight and regulation. This has the potential to increase the liability to which our clients and the industry is exposed.

“It’s easy for us to think about the physical, the transitional and the liability aspects separately given how we define them, but we operate in a global system and we need to recognise that they are all related,” he said.

AXA XL produced a report, titled “Optimising Disaster Recovery”, in partnership with the Centre for Risk Studies at the University of Cambridge in order to analyse the role that re/insurance plays in the global economy. It is an opportunity to emphasise the value of re/insurance, MacFarlane said.

“The report focuses on the role we have in disaster recovery; in putting communities back on their feet, and quickly, post-event. As an industry we could do a better job of highlighting how economic activity wouldn’t be able to exist to the extent that it does if it wasn’t for us.

“We enable our clients to focus on what they do best and, as the world transitions to a clean economy, and the risks associated with that evolve, we will be there to help push that transition along. It’s about drawing attention to re/insurance and finding ways to close the protection gap between the insured and economic losses.

“The research with Cambridge showed that for every percentage point increase in insurance protection, measured by premium as a percentage of gross domestic product, the recovery time associated with a natural disaster reduces by around 12 months. That statistic demonstrates the value of re/insurance in disaster recovery and is something governments should gain an awareness of because, where there is a protection gap, the insurer-of-last-resort is effectively the government.

“Protection isn’t only at the policyholder level but can be provided at the macro level as well, so that in the event of a particular loss, a payout would be triggered, whether on a parametric or an indemnity basis. It’s about making governments aware of products that exist to enable money to move quickly to the communities that need it most.”

Alongside technological developments, including the CRI, is AXA’s work in the Net Zero Insurance Alliance, the UN-convened group of more than 20 leading insurers representing more than 11 percent of global insurance premium volume. AXA is the chair of the alliance until “at least” October 2023, MacFarlane said.

“Having a net-zero underwriting portfolio by 2050 requires clear interim targets and a framework that allows us to measure the carbon emissions associated with our portfolio. We need to have that measurement, that key performance indicator, to enable us on the journey, to be a steward of the environment, and help move the global economy to net zero,” he explained.

AXA’s global vision would mean little, however, without change internally, MacFarlane stressed. He highlighted three such developments: the AXA for Progress Index; its Corporate Social Responsibility (CSR) strategy; and its Climate Academy.

The AXA for Progress Index was launched in April 2021 as a tool to measure the progress and reinforce the impact of its climate strategy. As an investor, AXA aims to decrease the carbon footprint of its general account assets by 20 percent by 2025 and reach €26 billion ($27 billion) in green investments by 2023.

As an insurer, it targets an increase in premiums on green insurance products to €1.3 billion by 2023, and an increase in the number of customers covered by inclusive protection to 12 million by 2023. As a company, it plans to make its employees leaders of the transformation, by training them in climate issues by 2023, as well as reducing its own carbon emissions by 25 percent by 2025.

Climate and water are key pillars of AXA XL’s CSR strategy. For example, it is committed to reducing its exposure to the thermal coal industry to zero by 2030 in the EU and OECD countries, and by 2040 in the rest of the world. Another example is that it is funding research by Pennsylvania State University into ways drought risk can be better managed in the most vulnerable communities.

AXA aims for all 160,000 of its employees—of whom approximately 9,000 work for AXA XL—to have completed its Climate Academy by the end of next year. This training has four parts: learn the science; rethink the business perspective; commit to change; and transform. So far, more than 80 percent of AXA XL employees have completed the course.

“We are ensuring that our colleagues are appropriately resourced to understand the potential impacts that a changing climate will have for the lines of business that they support,” MacFarlane said. “I’m not aware of another re/insurance company that has committed the time and resource to upskilling its staff in this way.

“AXA has been a leader in driving progress on climate risk for a number of years and we certainly want to keep that leadership position. There has been a lot of work on the investment side and our attention is turning to what we can do as a re/insurer through our underwriting. My role, created last year, is to provide that focus at AXA XL through the commercial re/insurance business we have, and drive the climate focus on the underwriting side of the balance sheet,” he explained.

The transition to a low-carbon economy requires global changes to ensure “green investment” becomes the norm, he said, adding that this evolution could be as soon as five years from now.

“We have to be very cautious about what is portrayed as ‘green’ and ensure that policies, regulations and reporting are not simply ‘greenwashing’. That will depend on governments’ attitude towards implementing change, how quickly technology evolves, and how quickly we as consumers decide with our wallets that we want to change how we behave,” he said.

Global frameworks provided by the Task Force on Climate-related Financial Disclosures and by the International Sustainability Standards Board are “massively important”, MacFarlane said, to separating greenwashing—and the reputational risk it entails for re/insurance clients—from genuine climate activities. In addition, there are green investment guidance in the form of taxonomies, such as the EU taxonomy on sustainable finance, which has been “instrumental” to helping AXA develop its Progress Index.

As a father of three, MacFarlane is mindful of the “generational fairness” of actions the global community takes now.

“My parents are of the generation that had a long period of relative political stability and continuous growth. Some people in the 1970s and 1980s did raise the flag on climate change and we know, with hindsight, that if we’d acted sooner, we’d be in a very different place now.

“Undoubtedly, there have been improvements, not least the lifting of billions of people out of poverty over the last few decades, but there’s a need for generational fairness because our kids will need to come up with solutions to problems not of their own making.

“When I look at the opportunity we have, thanks to the attention now on what needs to be done, and the brainpower and investment behind that, I would say I’m cautiously optimistic,” he concluded.