Holistic approach to environmental systemic risk and insurance now essential
9th Oct 2014 by Members
Why it is important: The paper explains why insurers should care about environmental systemic risk. Traditional underwriting assessed risk as immediate and direct results of isolated incidents on single entities. However, in a world beset by impacts of climate change and degradation of natural resources, potential exposure to risk can no longer be contained. Although there is a long term upward trend in the frequency and size of extreme weather and other events with insurance losses showing a significant corresponding increase, industry response to it has been slow.
The paper makes a good case for an urgent need for greater understanding of the interdependencies with other environmental issues such as biodiversity and water availability and non-environmental ones such as energy, food and business chains. It urges an increasingly integrated approach.
Why it is timely: The private sector is increasingly concerned. The World Economic Forum found four of the ten biggest global risks in 2014 are environmental. Meanwhile the 2014 PwC Global CEO Survey also shows environmental risks to such as resource scarcity and climate change are high up in corporate consciousness. New regulations being introduced place responsibility for adaptation or mitigation measures to the environment as a result of their activities with companies.
The advantages of greater understanding and management of environmental risk exposure are clear in a highly competitive industry. Therefore, an industry-wide approach is now necessary. For all stakeholders, inclusion of environmental systemic risk is necessary for the overall good of the industry and its customers and insurers are recognising this.
Key points: The paper sets out main points that include how environmental systemic risk and its ripple effects develop, the complex and uncertain nature of such risks as a threat to an entire business system. Understanding the complexity and vulnerability of ecosystems as a matter of urgency is vital to understanding environmental systemic risk and fundamental to pricing ecosystems services. This in turn is vital for sustainable and practical proposals and to create sustainable, practical proposals for sophisticated risk management.
The report makes the following recommendations to increase understanding and addressing the implications of environmental systemic risk on business activities:
- Talk to governments and regulators
- Collaborate with other insurers and reinsurers and bring in regulators at an early stage
- Build close relations with information providers including external ones like academics, NGOs and risk modellers
- Engage more with customers
- Participate in industry initiatives.
Suggestions for individual insurers include:
- Establish a clear mandate from the Board for identifying environmental systemic risk and integrate it into core insurance processes
- Conduct a portfolio review to assess the impacts
- Identify any opportunities for competitive advantage
- Review underwriting guidelines to reflect environmental systemic risks
- Undertake more research and identify better data to inform levels of pricing, capital and reserves to match changing risks.
The paper stresses the opportunity for initiative in an issue which has widespread impacts across all industry stakeholders, and for long term benefits.