Short-term Insurance Strategic Risk Forum: Climate Change and its Relevance to the South African Market – 10th June 3013

Understanding Insurer Responses

Greg Lowe, Head of Sustainability, AON EMEA

Why should insurers care about climate risk?A) Changing Risk Patterns

1970

1971

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2011

0.0

20,000.0

40,000.0

60,000.0

80,000.0

100,000.0

120,000.0

Earthquakes/tsunamis Man-made disastersWeather-related natural catastrophes

1992: Hurricane Andrew

1994: Northridge EQ

1999: Winter Storm

Lothar

2001: 9/11 attacks

2004: Hurricanes Ivan, Charley, Frances

2005: Hurricanes Katrina, Rita,

Wilma

2008: Hurricanes Ike,

Gustav

USD bn, at 2011 prices

2011: Japan , NZ EQs,

Thailand flood

2010: Chile, NZ EQs

•Source: Swiss Re, sigma No 2/2012

Multiple Stresses

“Instability is likely to be greatest in areas of multiple environmental stress” Source: The DCDC Global Strategic Trends Programme 2007-2036- UK Government Ministry of Defence

b) Public Opinion

Need to shape public policy, manage reputation and respond to customer expectations.

An international IPSOS Survey demonstrated that: 61% of those polled think that insurers have a role to play in limiting

risks related to climate change 57% that they can help people adapt to the consequences of

climate change. 17% of those surveyed, claimed climate change is “already”

affecting the type of insurance they buy - 39% believe that this will happen in the short term and 31%, in the longer term.

Governments and public institutions are also increasingly looking to insurers to play a role in signalling climate risk effectively.

c) Regulation

Source: International Energy Authority

Action Together: ClimateWise

• 2006 – 2007: DESIGN

Industry leaders agree and launch ClimateWise Principles

• 2008 – 2009: EMBEDDING

Members use Principles as framework for action with the reporting commitment serving as an accountability mechanism for independent review

• 2010 – 2011: BUILDING COLLABORATION

Step-change towards pro-active collaborations

• NOW 2013- 2014: ACHIEVING IMPACT

Focus on integration into business strategies and the development of partnerships to achieve greater impact

ClimateWise exists to be the global insurance industry’s leadership group to drive action on climate change risk.

ClimateWise Principles

1. Lead in risk analysis...

2. Inform public policy making...

3. Support climate awareness amongst customers...

4. Incorporate climate change into investment strategies...

5. Reduce environmental impact of business…

6. Report and be accountable...

ClimateWise Membership

Strategic Partnerships:

Risk Analysis – Strategic Considerations

Uninsurable risk: - As the severity and frequency of risk increases insurers will need to think

differently if they are to provide risk solutions.Typically insurers have focused on low frequency, high severity events. What is their role in addressing climate change ‘tipping points’ i.e. melting sea ice, sea level rise?

Uninsured risk:- In advanced economies the insurance recovery on large weather events is

50% of economic loss. In emerging economies it is 7%.

Interconnectedness of risk

- Human-induced changes to land cover and the buffering capacity of ecosystems are of equal or greater importance in driving increasing risks, when compared to climate change.

Risk Analysis – Aon Response

Research Partnerships are Key - Aon Benfield Research is a collaboration with

19 leading research institutions globally, to enable re/insurers, their clients, governments and non-governmental organizations (NGOs) to protect and grow their organizations in the face of natural hazards and socio-economic risks.

Scenario Planning Helps Identify Needs - To gauge our own challenges, we use scenario

planning to look at what areas of our business and the wider industry are prepared for future changes in climate, and what areas need future proofing.

Risk Analysis – Collaboration - Health

Challenge What does climate change mean for insurance health and protection provision?

Worked with

leading environmental epidemiologists and public health practitioners

Key outputs

- Recommendations for coding and collecting data- Opportunities for cross-sector health partnerships- Consideration of links between life and non-life cover

Customer relations – Strategic Considerations

• Information: Costs for some risk causes will trend upwards; insurers should aim to make “customers” aware of this so they can plan for it.

• Products: New products to meet emerging risk challenges e.g.– Weather derivatives– New technologies e.g. for energy production.

• New Customers: possible new classes of customer for most affected risk areas– State or municipal government– Communities in areas vulnerable to foreseeable increases in risk

exposure– Micro-insurance communities.

Customer relations – Aon Response

Make it Easy - Customers want to do the right thing, but they want it included as part of a

standard product/service. Our UK TRIO product makes sustainable reinstatement clauses standard in the policy at no extra cost. We need more insurers supporting brokers in this capacity.

Understand Your Customer Base - How green is your customer? When dealing with corporate clients,

understanding where they stand on climate change and sustainability is useful for building relationships and developing new products. We are in the early stages of building this into the sales process and it allows us to flex our innovation better by understanding customer needs in this space.

Customer relations – Collaboration Energy

Challenge What are the opportunities for insurers to facilitate and profit from low carbon technologies?

Worked with Energy companies Carbon Capture and Storage Association

Key outputs Report identifying insurance products that could contribute to managing liabilities associated with Carbon Capture and Storage and therefore contribute to its commercial viability

Investment – Strategic Considerations

At $25 trillion insurers control more than 11% of global financial assets and together with pension funds, another industry which makes long term promises to pay, need to understand both the risks and opportunities faced by these assets due to climate change

Assets:• Increased risk

to some long term asset classes of premature obsolescence

• New asset classes

Investment – Collaboration

Challenge What does excellence in incorporating low carbon decision making in insurance and reinsurance investment strategies look like?

Key outputs A framework for decision making across asset classes considering strategic asset allocation and asset liability management; thematic allocations and portfolio mandates.

Policy & Partnerships – Strategic Considerations

Communicating consistently- Are insurers giving consistent messages to stakeholders in terms of

promoting an economy that is resilient to climate risk?

Taking leadership- What is the role of insurers in promoting actions by other stakeholders?

Policy & Partnerships – Aon response

We Can’t Do It Alone - The best results come from

collaboration. While we have relationships with policymakers, our best engagements come with groups such as ClimateWise, research bodies, or insurance trade bodies. An industry voice is always strongest.

• Impact Forecasting

• Academic &

Industry

Partners

• Relationships

based on key

deliverables

• Working with IF – “Hands

on” cooperati

on

• Individual compone

nt Developm

ent

• Owners of the

models

• Understanding all

assumptions taken

by partners

• Driving the

Development

Policy & Partnerships – Collaboration – Urban Resilience

Challenge: How can city authorities, long term fixed asset owners and insurers contribute to city resilience (focussed on the US)

Working with:

From Managing Disasters to Managing Risks

Katharine Thoday

ClimateWise Secretariat

Climate Risk Management

Documenting existing initiatives

Majority of schemes are agricultural (both index and indemnity based) followed by: - sovereign disaster risk

- micro-insurance

- property catastrophe

Majority of schemes in South America and Caribbean, followed by Asia, Pacific and finally Africa

Majority of schemes insure individuals, Governments or meso-level organisations. SME’s rarely considered

The role of risk reduction

The full potential of utilizing risk transfer for adaptation is far from exhausted

Making the transition

Creating shared value

Moving from business continuity to comprehensive climate risk management

Customer relationsTurning climate risk into business opportunity

Policies & PartnershipsBuilding public-private risk governance

Risk analysisDisclosing climate risk on the balance sheet

Integrating climate risk into investment

International frameworks

Priority Actions:

1. Ensure that disaster risk reduction is a national and a local priority with a strong institutional basis for implementation.

2. Identify, assess and monitor disaster risks

3. Use knowledge, innovation and education to build a culture of safety and resilience at all levels.

4. Reduce the underlying risk factors.

5. Strengthen disaster preparedness for effective response at all levels.

International frameworks

http://www.preventionweb.net/

The business case for disaster risk reduction

- Definition of clear responsibilities across public and private actors- Standardisation risk assessment approaches- Targets and indicators i.e.

- reducing risk in building stock by a determined factor- No. increase in absolute poverty levels in a year of disaster- No. of measures introduced at community level

International frameworks

Cancun Adaptation Framework 

Assessing Addressing Enhancing implementation – National Adaptation Plans

- Possible development of a climate risk insurance facility to address - Options for risk management and reduction, risk sharing and transfer

mechanisms such as insurance, including options for micro-insurance, and resilience building, including through economic diversification;

Influencing change – collective influence

CHALLENGE: How can insurers reduce the environmentalimpact of the claims process so as to contribute cost-effectively to mitigating risk?

ASSESSING KNOWLEDGE

December 2010: Report with recommendations for sustainable supply chain management

COMMUNICATING AS A SECTOR

UK Industry-wide guidance on Sustainable Claims Management based on carbon foot-printing of domestic property claims Influencing Building Damage Management Specialists

Influencing change – benchmarking & integration

Climate change issues are no longer considered a ‘separate’ issue to be dealt with by a sustainability or corporate responsibility team

Gold rating characteristics:

1. Strong strategic statement on the importance of climate risk, specifically referencing core functions impacted

2. Well articulated plan to address the risks/opportunities arising

3. Evidence of action to address the challenges, referencing core functions above

Influencing change – Networked knowledge

Role for Southern African Insurers

ClimateWise members want to be able to:• Reflect issues and experiences relevant to SAIA members and the

Southern African Insurance market in ClimateWise activities and materials

• Support action to address climate risk in the Southern African market

Challenges and opportunities

– How we miss what we can’t currently measure.  – How to build internal capacity. – The balance between making decisions based on

avoiding risk as opposed to taken advantage of opportunities.

– Valuing the long term.– The role of insurers in challenging the short termism

of Governments and macroeconomic frameworks that also don’t account for ‘externalities’.