The re/insurance industry is missing the bigger picture and doing itself a disservice by pinning down the blame for rising losses solely on climate change and focusing heavily on just the ‘E’ of environmental, social and corporate governance (ESG) issues.

That is the view of Bill Churney, president of extreme event solutions at Verisk. Speaking to Monte Carlo Today, he explained that insurers looking to better manage their risks stemming from catastrophe losses need to delve deeper into other key factors that they are not accounting for.

“The industry does itself a disservice to pin what has been seen over the last few years on climate change,” Churney said. “If they’re not getting the exposures right, and maybe not accounting for inflation, they’re missing a much larger driver of the growth and losses.”

He pointed out that the average cat losses the industry has paid out on over the past five years have jumped to about $100 billion per year compared with closer to $50 billion over the prior five years.

“Why are we seeing this? How do we achieve good returns in a market like this? And is this a sign of climate change?” he asked.

Clients need to remember a couple of key points to understand these higher losses, he said. “There is growth in the number and the value of the exposures, the properties they’re insuring. In the context of inflation, you have to ensure that your data is accurate and properly valued. Otherwise you’re going to get incorrect pricing, no matter what models you are using.

“The other piece is simply variability,” he added. “Catastrophes don’t occur on a predictable schedule. If you put those two factors together that probably drives 80 percent of what we’re seeing.”

Churney says that while climate change may account for some of the increased losses, re/insurers must also take into account these factors, as well as inflated claims due to challenging legal environments in some markets.

A more quantitative approach

In terms of ESG, Churney said, of the three pillars the insurance industry has been “most heavily focused on the ‘E’ related to climate risk”.

“It goes beyond climate risk,” he argued. “How might the insurance industry be a proactive force and think about some of the other issues such as biodiversity risks, droughts, water, scarcity and food insecurity that will have cascading effects on insurance losses?

“The industry is starting to get to a point where they would like to assess that,” he said. “But the industry needs to embrace a more quantitative approach to assessing risks.”

Verisk has recently completed a new analysis of global insured losses, detailing key global financial loss metrics based on its latest suite of models and updated property exposure data that reflect the near-present climate risk.

Churney emphasised that the company is investing heavily in models that are reflective of today’s climate that “go beyond looking at hurricanes or floods but look at things such as biodiversity risk, heat, stress, and water stress, which may in the end, drive significant losses in the industry”.