Understanding the impact of climate change on an investment portfolio is quickly becoming a priority for many businesses, and data and analytics company CoreLogic said the insurance industry is currently ‘most ahead of the game’ compared to banks, investment firms, and other financial services providers.
Dr Pierre Wiart, head of consultancy and risk management at CoreLogic, said insurers have been making use of the analytics tools available when it comes to assessing climate risk, and this has given them a ‘broader perspective’ compared to just gathering historical data and making projections based exclusively around past figures.
He said this had not always been the case with the finance or investment sector, which had placed less emphasis on data analytics and risk assessment in relation to climate change.
“What we’ve seen is that out of the older financial services sectors, the insurance industry has been the one which is the most ahead of the game when it comes to understanding and evaluating climate risks,” Dr Wiart said.
“That has not been translated or used so far in the banking and investment sectors.”
“CoreLogic recently partnered with Munich Re to evaluate all the various natural hazards that we’ve observed in the Asia-Pacific region, and we’ve created a combined view of all the natural perils that could affect various areas,” he explained.
“We can then go down to the property level, and we can identify which properties would be most affected by the overall combined risks. From there, we can evaluate how much of the portfolio is at risk, and use that valuation to understand the overall impact to your portfolio. As a portfolio manager, you can then see what might need to be addressed in the future.”
“It’s important to remember that these models are a scientific assessment of risks, and so they are an enhanced view of, say, a historical perspective of a flood that happened only in one region,” he added. “They’re more complete and offer a broader picture of the risks.”
As part of its analytics, CoreLogic has also mapped out potential future scenarios for a range of different natural events – something Dr Wiart said will help insurers, banks and investment firms in their assessments of whether or not they want to take on a particular risk.
As the progress of climate change speeds up, he said, these future scenarios are likely to become a key part of risk modelling and due diligence.
“These views really help us understand the trends in specific areas, whether that’s floods, bushfires or coastal erosion with sea level rise,” he said.
“That way, you can really understand the risks before integrating them into your balance sheet.
“It can also be used to install a dialogue with clients and have a better relationship with them, and it allows you to discuss potential issues that they may face in the future.”
Insurers in New Zealand are currently preparing for a mandatory climate reporting law, which will come into effect in 2022.
Read more: CoreLogic solution for insurers
Milena Malev, general manager financial services & insurance at CoreLogic, said that the impact of climate change is ‘very important’ to the insurance space, and that, ultimately, working together with data analytics will be the best way of increasing resilience and ensuring both businesses and communities are prepared for the inevitable.
“Climate strategy, and understanding the potential impacts of climate change and natural hazards on the overall resilience of portfolios is very important to our industry,” Malev said.
“The impact of natural hazards and climate change on physical assets is something that banks and insurers need to understand, manage and report on.”
“CoreLogic has been helping banks and insurers deal with the impacts of natural disasters for many years, and we have been providing property vulnerability and catastrophe modelling capabilities in Australia and New Zealand,” she explained.
“We’ve been delivering property data and climate risk insights to help the industry better understand climate-related risks, and embed them as part of their strategy and risk management framework.
“There is no doubt that climate change provides opportunities and challenges to the industry, and, by working together, we can best combat climate change and the financial risks arising from it.”