Different Ways Insurers Can Deal With Climate Change

Feb 24, 2022 / by AAIS

Dr. Phil Klotzbach, Ph. D., from the Department of Atmospheric Science at Colorado State University, says climate change is real. In a recent interview he explained that “if you go back to the late 1800s, parts-per-million of carbon dioxide was about 280; now we're sitting at about 420. We've gone up by about 50 percent of what we were about 140 years ago. With that, we've seen a global temperature rise of about eight- or nine-tenths of a degree Celsius … about 1.5 degrees Fahrenheit.”

The impact to insurers from these relatively small changes in temperature can be significant, affecting things like heat waves and severity of storms, which lead to more claims and larger claims. “I focus on is how climate change impacts hurricanes, … not just intensity, but also the effect on tertiary things like sea level rise and…more rainfall.”

AAIS also spoke with Woody Bradford CEO and Chair of Conning, a leading global investment management firm serving the insurance industry. He says plainly that “understanding different climate scenarios (and their effect) on investments can be very challenging.”

“There are many factors that impact the level of climate change risk that different insurance companies face in their portfolios…technology risks associated with the technological shifts in products and energy consumption that we see moving to a low-carbon economy, policy risk, regulatory and legal aspects that differ by jurisdiction, physical risk, and cash flows (affected by) higher payouts on different liabilities and the impact on different investments.”

Conning has developed a Climate Risk AnalyzerTM tool that takes a stochastic approach to understanding how climate change can impact an investment portfolio. Mr. Bradford explains how the Climate Risk AnalyzerTM “models help clients look at their portfolios from a range of different scenarios and perspectives.”

He also notes “it's critical to look for stranded assets or assets whose values could decline in a less carbon-friendly environment … We try hard not to impose a moral view of an industry, or of an issuer, in our work with clients. It's not intended to be an exclusionary exercise for the portfolios; it's meant to be a process that helps our clients understand how climate risk impacts portfolios … and to help them think about where they want to take risk, where they don't want to take risk. and how that (risk) fits into the overall Environmental, Social, Governance (ESG) objectives, principles and values of their company.”

Tags: Community, Issues & Trends, Homeowners, Climate Change, P&C Insurers, AAIS News & Views, AAIS Insights, Modeling/Actuarial, Insurance Line of Business

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