The return of the Baden-Baden meeting in person this year also brought the reappearance of the climate protesters. Groups including Insure Our Future, Parents for Future, and Fridays for Future were all very much present. They called for, among other things, attendees to exclude coal from reinsurance, including treaty reinsurance, which they see as a significant loophole in commitments to exit from the industry.
“Insure our future, not fossil fuels,” ran one of the more common slogans.
Such protests have become a regular fixture at Baden-Baden. The difference this year, however, was that there was as much talk about environmental, social and corporate governance (ESG) issues inside the meeting as outside.
And the discussions won’t have ended with the wrap-up. Many of those speaking during the week stressed that ESG factors would play a role in negotiations ahead of the January renewals.
The self-preservation society
Much of the reason for this is not the protesters in Germany, nor even the growing pressure from campaigners more broadly. Instead, it’s a perhaps inevitable consequence flowing from the increasing recognition of the impact of climate change.
The industry has had to cope with continuing and significant hurricane losses and increasing claims from secondary perils, such as floods. As Monica Cramér Manhem, president of international reinsurance and managing director of SiriusPoint, said: “In the last few months, we’ve seen dramatic flooding in Europe with the tragic loss of lives, but also the significant precipitation resulting from Hurricane Ida in the US.
“Other catastrophe losses around the globe have put pricing of catastrophe business and climate change in focus.”
“Many players in this industry are now starting to ask questions about more long-term climate change.”
Laurent Marescot, RMS
The reinsurer, which launched only in February, recently reported a $266 million underwriting loss in the third quarter, most of it the result of the European floods and Ida.
As Swiss Re’s head of Northern, Central & Eastern Europe Frank Reichelt remarked: “Climate risks have a price tag.”
That growing bill has seen reinsurers asking new questions—not least from the modellers. On one hand, re/insurers have for some years wanted to understand the extent to which the impacts of climate change are incorporated into cat models. The answer to that is “completely” when looking at the short term, according to Laurent Marescot, senior director at RMS.
“It’s vital to understand that the models as they are built include the signal of what has happened over the past 40 years or 50 years,” he explained.
Given the one or two-year period over which most business is written, that has served most needs. Increasingly, though, pressured partly by regulators but also by their business or strategic considerations, some are seeking alternative views.
“Many players in this industry are now starting to ask questions about more long-term climate change,” said Marescot. “It’s particularly key if you’re in property lines of business, infrastructure or manufacturing.”
Earlier this year, RMS launched a range of new probabilistic models to enable insurers to model the future impact of climate change on scenarios from the UN Intergovernmental Panel on Climate Change across different time horizons: those looking ahead 10 years to help with portfolio management, and 50 or 100-year outlooks useful for regulatory stress tests, for example.
Mutual engagement
Pressure is growing on insurers not simply to consider climate change, but also to tackle it. The Insurance Summit, which coincided with Baden-Baden and was hosted by the Italian Insurance Association (ANIA), heard speakers discuss how the insurance industry can help society become far more resilient to climate change and contribute to the G20’s priorities.
Global Federation of Insurance Associations president Don Forgeron said: “Global insurers were among the first to model climate risk and to sound the alarm about the potential impact of human-influenced change. Today, we are on the front lines as physical climate risks rapidly escalate worldwide in the form of heat events, wildfires, floods, and tropical storms.
“Beyond this role, the insurance industry has a pivotal role to play in facilitating our collective transition to a sustainable economy. Let there be no doubt: there is enormous potential in sustainable finance.”
Changes wouldn’t come overnight, added Forgeron, but over time the industry could help “evolve our economies and our way of living”.
Reinsurers and cedants are beginning to ask questions not just of themselves but of each other, and the discussions are going further than simply issues of climate. ESG factors will be a topic for both sides in renewals negotiations, predicted Mike Van Slooten, head of business intelligence for Aon’s Reinsurance Solutions division.
“I anticipate some mutual disclosure around the ESG credentials of cedants and reinsurers,” he said.
It’s not just talk. Many re/insurers have already appointed ESG officers, even if the nature of that role is yet to standardise across the industry. And more specific developments suggest such appointments are not simply tokenistic.
“Let there be no doubt: there is enormous potential in sustainable finance.”
Don Forgeron, Global Federation of Insurance Associations
It’s probably no coincidence that the commitment to consider ESG is particularly explicit among some who are most clear about the need for rate rises at renewals.
Hannover Re, which warned of double-digit increases, has also committed to monitoring the carbon footprint of its cedants. It is committed to achieving net-zero emissions in its business operations by 2030 and in its reinsurance portfolio and investments by 2050. It said it would take a proactive role in developing methods to determine the greenhouse gas emissions of reinsured customer portfolios.
“The insurance industry is undergoing a transformation towards greater sustainability, and we want to shape this transition in a dialogue with our customers and peers,” said the reinsurer’s chief executive officer Jean-Jacques Henchoz.
Carrots and sticks
Most of the moves are framed in terms of incentives and opportunities. Aon’s Slooten’s comments, for instance, came as Beazley secured approval from Lloyd’s for a new ESG-focused syndicate, for example.
Following in the path of those such as Parhelion, which claimed the title of “the world’s first fully sustainable insurer” when launched in June, Beazley’s new syndicate will focus exclusively on offering additional capacity to businesses that perform well on ESG metrics. Initially, it will accept D&O, healthcare, financial institutions, London Market US cyber, property, marine hull, marine cargo and aviation business. Premiums will also be invested in line with Beazley’s responsible investment strategy.
“By creating the first specialist ESG syndicate at Lloyd’s, Beazley is taking an early step in delivering our commitment to embed ESG across our organisation, including our underwriting,” explained Adrian Cox, its chief executive officer.
“Beazley has a track record of creating innovative underwriting vehicles, and Syndicate 4321 delivers this to clients that have already achieved ESG standards. We continue to support all our clients, at whatever stage they are in their ESG journey, with meaningful risk management and insurance capacity.”
It is not hard to detect the implicit threat on the horizon, however. In September, Liberty Specialty Markets became the first insurer to sign up to Willis Towers Watson’s Climate Transition Pathway (CTP): an accreditation framework “that provides insurance companies and financial institutions with a consistent approach to identifying businesses with robust low carbon transition plans aligned to the Paris Agreement”.
The broker’s global head of natural resources Graham Knight explained: “The scheme, and its inclusion of insurers such as Liberty, will help ensure it can provide continued access to insurance for companies committed to transition.”
During Baden-Baden, SCOR also announced that it would also align its capacity to support the CTP. Olivier Perraut, chief underwriting officer for specialty insurance, said: “Our conviction is that reinsurers and SCOR, in particular, have an essential role to play in insuring the energy transition.
“We believe this CTP approach is an important way to support our clients in their own commitments to follow credible transition pathways as they transform their business model and align to the objectives of the Paris Agreement.”
For those committing to following such pathways, such initiatives promise increased capacity from insurers and reinsurers in future.
Image: Shutterstock / Sina Ettmer Photography, Zenobillis, hrui
