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Wider collaboration key to meeting climate risk challenge

Insurance Consulting and Technology|Climate
Climate and Resilience Hub|Insurer Solutions

By James Vickers and Adhiraj Maitra | May 21, 2021

There is no such thing as an isolated economy in 2021. We learned this the hard way from COVID. The pandemic showed that coordinated action from individuals, corporates and governments is fundamental to effecting real change.

The pandemic also revealed that the journey to really getting to grips with the risks and opportunities presented by climate change will not be smooth. There will be bumps along the road. It will not be easy for companies when faced with all the complexities that climate change presents to distil these down into practical action. What is certain is that we will have to collaborate as an industry and partner more closely with government and regulators than we ever have done before.

The scale of adaptation required...and the amount of change that our customers are going to have to live with...is absolutely huge. We are just at the foothills of this challenge.”

Huw Evans
Director General, Association of British Insurers

The magnitude of the challenge ahead was laid out in uncompromising fashion by ABI Director General Huw Evans during a panel discussion conducted as part of Willis Towers Watson’s recent three-day Climate and Financial Stewardship Summit.

“The scale of adaptation required over the period ahead and the amount of change that our customers are going to have to live with and in some cases fund - whether they are individuals or businesses - is absolutely huge. And we are just at the foothills of this challenge.” - Huw Evans, Director General, Association of British Insurers

Regulators sharpen their focus on the road ahead

The path for regulators over the next few years is going to be as demanding as it will be for the wider industry. Climate risk-related challenges do not fit with traditional ways of regulatory working, historical data needed to populate many of the models on which global insurance regulatory frameworks are based do not exist, and the task of factoring the inherent volatility into a 20- to 30-year economic outlook is extraordinarily complex.

In the UK, for example, we have one of the world’s most highly-supervised sectors and a regulator looking to develop a climate change regulatory framework in conjunction with the industry on a step-by-step basis. And because London is one of the world’s foremost financial centres and a key market for leading international banks and insurers, the Bank of England’s exploratory climate stress test scheduled for June this year will have implications that reach far beyond the United Kingdom. With a focus on developing the tools and capabilities to better understand longer-term climate-related risks, key objectives of the exercise include understanding the size of risk adjustment needed, the broader sustainability of a firm’s operations, and how to improve a firm’s risk management capabilities.

This pragmatic approach may frustrate some external observers advocating for more immediate action. Move too quickly, however, and we risk missing opportunities that would more clearly identify the consequences of potentially ill-judged regulatory intervention. This could undermine the vital economic role of insurance in society globally, as well as impeding the longer-term goals of climate change mitigation.

Plans by the ABI to publish their own road map for the UK’s insurance sector in July 2021 should offer additional valuable guidance for both its members and the wider global regulatory response in navigating major upcoming challenges in terms of what insurers need to do, in what order and critically how to measure the risks.

Increasing the pace on climate change

The direction of travel towards mandatory climate disclosure is becoming ever more apparent and the Task Force on Climate-related Disclosures (TCFD) is clearly emerging as the gold standard for climate reporting.

Last year, the UK government announced its intention to make it mandatory by 2025 for all large UK companies and financial institutions to report in line with TCFD recommendations. This was soon followed by a consultation paper issued by the government on proposals to mandate disclosure in line with the four overarching pillars of TCFD recommendations for a much broader number of companies (not just those listed but also larger private companies).

If these proposals go through, companies will be subject to further regulation by the end of 2021, with a view to coming into force on 6 April 2022. The transition to a net zero economy – in the UK and elsewhere - is driving a pace of change that is rapidly accelerating for an increasing number of entities. Willis Towers Watson recently conducted a TCFD pulse survey to gauge the preparedness of the P&C and Life insurance industries in embedding climate change risk in their businesses. While the majority of survey respondents have started to embed climate change in their “business-as-usual” processes – including governance structures, regular discussions and detailed quantitative analysis - only a small percentage have completed or are in the process of completing their TCFD reporting. About 80% of respondents identified data and quantitative assessment as key challenges in embedding climate change.

While the financial services sector is generally not well prepared, these findings suggest that insurers are slightly more advanced, although plenty more remains to be done. The regulation of the global insurance industry has an integral role to play here, ensuring companies have the practical guidance necessary for an effective response that meets the scale of the task in the time required. And with so many technical and behavioural hazards presented by climate change, the steady, continuous developmental approach being adopted looks to offer our industry the optimal path to eventual success in embedding climate risk. Insurers will then find themselves well positioned to seize the transformative and structural opportunities presented by the low carbon, climate resilient transition.

Authors

Global Chairman, Willis Re International

Global Climate Risk Lead
Insurance Consulting and Technology


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