Page 32 - Insurance Times August 2021

Economists, central bankers, financial regulators, asset Beyond pricing and risk transferring
managers, investors, insurance analysts, credit rating
Climate Change represents an existential threat and
analysts, investment bankers, real estate professionals, and historical models are not predictive of the future. As more
scientists have produced an enormous trove of research
and more carbon gets injected into the system – risk grows
suggesting that climate change and the failure to plan for by the day and is increasingly assuming a systemic form.
an orderly transition to a low carbon economy can produce Transferring the risk is not only insufficient as it does not
staggering economic losses. solve the problem.

These losses relate to the physical risk of damages caused Moreover, pricing without factoring for externalities will
by climate change or the transition risk of stranded fossil further inflate the carbon bubble for insurers. Therefore, this
fuel assets as the economy transitions to low-carbon sources calls for what McKinsey prescribes – broadening the
of energy. relevance of the industry and changing outcomes. Needless
to mention the big clamour for Net Zero – what ought to
Physical risks of climate change pose a serious threat to be the last resort has become the first love. A license to
insurers, both on your assets side and on your claims side. greenwash.
There is ample data that rising sea levels and increased
storm intensity and activity will do substantial damage to In conclusion
coastal property values.
‘With physical risk becoming increasingly hard to price –
translation from hazard to exposure to damage and the
In addition to sea level rise and coastal storms, more manifestation of that in cash flows is just hard to model’.
frequent and intense wildfires, riverine floods, droughts, and This just about telescopes the pricing challenges into
heatwaves will also result in very large losses, much of them reserving misadventure. Factor in the rising environmental
insured. Indeed, the management consultancy McKinsey and societal demands – would it mean insurers might be
warns of massive physical risks that will increase flying blind till such time a dependable navigation protocol
“nonlinearly” as the earth continues to warm. appears on the horizon? Regulators, actuaries, analysts,
auditors, customers, investors, risk-managers, run-off
Transition risk is also significant for insurers that hold large managers, shareholders et al have a lot to ponder and act
stakes in fossil fuel assets. One economic paper reports upon. Looking back, an HIH or an Independent may appear
“economic literature combined with industry practices a minor aberration?!
suggest the presence of persistent market inefficiencies for
fossil fuel reserves, so these assets are likely to be stranded (With the permission of the author'.
and mispriced. Source: www.thediversityblog.com.)

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32 The Insurance Times, August 2021