The weather and climate have been central topics of conversation for insurers for virtually as long as merchants first started talking about safeguarding their marine cargoes in the Lloyd’s coffee house in London.
But in common with all public and private organisations, shifting approaches to corporate social responsibility, legislation and public policy, investment strategy and financial reporting mean that the nature of the climate conversation has been changing rapidly. Perhaps what has altered most fundamentally, particularly recently, is that long-term reputations are on the line as the public demands action and becomes almost the stakeholder of final call.
If anyone needed further convincing about the shift in the tone of the climate discussion, even the most skeptical CEO will have taken notice when someone as influential as BlackRock CEO, Larry Fink, says measures of sustainability will be central to its future investments.
What is evident to me from this changing conversation is that while the insurance industry has to make sure it plays its own part, it can also play a significant wider role in addressing the physical, economic, liability and transition risks that business and society as a whole are facing.
That’s because, as part of taking responsibility for moving to a lower carbon economy, public and private organisations need to quantify how they will affect, and be affected by, the climate change trajectory.
That accumulated insurance-related knowledge that I referred to earlier has made its way into extremely sophisticated climate and natural hazard models. Through extensive research and development and close relationships with leading academic and professional institutions, our analytical tools can be central to helping organisations identify, understand and quantify climate risks. From there adaptation and mitigation solutions can be developed.
Climate resilient investment
One such application of these tools is to increasingly integrate analysis of climate risk and ESG (environment, sustainability and governance) principles in investment decision-making and financial reporting, as envisaged by initiatives such as the Task Force for Climate-related Financial Disclosures and the Principles for Responsible Investment. As a major investor in its own right, the insurance industry stands to benefit more than most from such moves.
An important further step from a financial viewpoint is to promote a commonly agreed framework for valuing climate risks. With this in mind, Willis Towers Watson has recently partnered with the World Economic Forum to form a public/private coalition, backed by many of the largest financial organisations in the world that aims to develop an end-to-end analytical framework for the pricing of climate risks in investment decision-making.
Closing the insurance gap
While efforts to make capital spending on infrastructure more climate resilient and carbon neutral can be expected to escalate, an immediate issue to tackle is how climate-related impacts disproportionately affect countries and populations that are least financially equipped to deal with them.
Here again, robust analytics tools have been key to the ongoing development of individual parametric covers such as crop damage and natural catastrophe emergency response programmes in susceptible regions of the world. That work is extending into other areas, such as insuring for restorative work on coral reefs.
It is also why it is so important that the London Market Group represents the London insurance market on bodies like the Government’s Financial Services Expert Trade Advisory Group. Here we can work with the UK Treasury on future UK trade policy outside of the EU to try and open up these markets and promote London’s expertise in areas prone to climate related risks to build resilience against natural disasters and protect against emerging risks.
As science enables all of us to understand more about the nature of climate change, one thing should already be abundantly clear. There are no plug and play solutions, but the insurance industry’s experience with climate-related analytics should be part of them.
Nicolas Aubert is a board member of the London Market Group and head of Great Britain at Willis Towers Watson.