A holistic approach to climate risks and opportunities
A white paper from Willis Towers Watson offers practical insights on how insurers can manage the enterprise risks of climate change.
As global warming contributes to more severe and frequent weather catastrophes, insurers and reinsurers will play a more prominent role in helping society mitigate climate risks and build economic resilience in the coming years. Faced with this opportunity to be global leaders fighting climate change, (re)insurers must build knowledge around the risks and strengthen their own operations.
A recent white paper, “The journey to net zero: An insurer’s guide to navigating climate risks and opportunities,” from Willis Towers Watson (WTW) and Wellington Management, aims to serve as a pragmatic guide for insurers and reinsurers as they navigate climate risks and opportunities.
“Climate change is a challenge that needs to be looked at holistically across all the different departments and functions within the [insurance] business,” paper co-author Yingzhen Chuang, deputy head of international catastrophe analytics at Willis Re, told PropertyCasualty360.com. “That’s one of the reasons why we’re fighting for a sort of balance sheet approach to it. You have the liability side of the business as well as the side that deals with assets, and they need to come together in order to work on a strategic plan.”
The paper offers insights for (re)insurers on defining, quantifying, and managing climate change through eight steps, including:
- Understanding climate risks and opportunities
- Develop climate risk scenarios
- Stress test exposed assets
- Develop a climate strategy for liabilities
- Develop a climate-aware strategic investment plan
- Holistic asset and liability management
- Organizational change — bring your people with you
- Questions to improve understanding
Approaching climate risk
First, in order for (re)insurers to establish a climate action plan, they must start by understanding that climate risk is an enterprise risk that also presents opportunities.
“Insurers do believe that they need to consider actions around managing climate risk and also think about opportunities around climate change and ESG (environmental, social and corporate governance) both from underwriting and investment perspectives,” said Adhiraj Maitra, co-author of the paper and director, insurance climate risk at WTW.
According to Maitra, there are three primary risks associated with climate change: physical, transition and liability risks. Transition risks refer to the effects on companies as economies decarbonize, and insurers must consider managing those exposures from an asset, underwriting or investment perspective when thinking about their mid-to-long-term strategies, Maitra explained. Failing to do so could mean missing out on opportunities.
To help the industry manage these transition risks, WTW is incubating an accreditation platform called Climate Transition Pathways that will assist insurance companies and financial institutions identify which organizations have robust transition plans aligned with the Paris Agreement.
Regarding physical risks, such as climate-related weather perils, insurers must consider the enterprise cost of mitigating acute risks while adapting to chronic ones, the paper suggests. Additionally, insurers should familiarize themselves with the processes, systems and products that will help society navigate climate change. That fundamental understanding will, in turn, help insurers avoid risk and seize opportunities.
Creating a strategy
Insurers will need to understand how to develop and integrate climate scenarios into their risk modeling when establishing a strategic approach to climate risk management and resilience, as stated in the white paper.
However, insurers of all sizes face challenges related to data and quantitative analysis that can get in the way of creating effective strategies. For smaller insurers, those challenges can expand to include raising awareness and resourcing, Maitra noted.
“There’s a lot of information out there around climate science,” said Chuang. “If you don’t have a background in it or the resources to do it, that makes it quite challenging. You see a lot of people offering services to help with this because it is a very big task. Translating that climate science into something that could actually be applied to business requires a lot of work. That’s where we bring in our partners, like the Willis Research Network, to do those translations. If the climate science tells you the atmosphere is warming by two degrees, what does that actually mean for floods or wind storms/?”
Once insurers have a firmer understanding of climate risks and opportunities, then they can move on to creating a forward-looking strategy. To achieve this, Maitra echoed a point Chuang mentioned earlier: think holistically.
“[Insurers should] not take a one-year view, but instead should think of [climate change] more mid to long term,” he said. “Understand why you are doing it. The ‘why’ can be because it is the right thing to do or because you are thinking about an M&A transaction or you’re thinking of increasing a credit rating. Understand the ‘why’ and then start there in planning a roadmap by identifying the risk, monitoring the risk and measuring the risk.”
From there, insurers must fully embed all actions within an organization by communicating the strategies from the top-down to motivate employees at every level to buy into the cause, Maitra added. This “change management” process highlights the transformational change insurers experience across people policies and practices when addressing climate change.
“Do not do it alone — take everybody in the company on that journey,” he concluded.
To read more insights from the white paper “The journey to net zero: An insurer’s guide to navigating climate risks and opportunities,” download it here.
Related: