Race to net zero: (Re)insurance has critical role, but needs to catch up

A plenary session focused on ‘The transition to net zero – commitment or lip service?’ got day three of the conference off to a flying start.

I n an opening address before the session, Swiss Re CEO reinsurance and group executive committee member Moses Ojeisekhoba said the industry had “a significant role to play in trying to bring about the pledges that many companies around the world have made around net zero, whether the goal is to reach net zero by 2050 or 2060”. Referencing a recent study by Swiss Re Institute, he said that investments of up to $273bn will be needed for companies to reach those goals.

(Re)insurance lagging

During the session, however, Bain & Company partner and head of APAC financial services practice Henrik Naujoks brought up how the insurance industry still lags in its net-zero commitments. Only 35% of the top 20 insurers have made net-zero commitment through to 2050, compared to 85% for the top 20 banks.

Zurich Resilience Solutions, Asia head of distribution, customers and growth Audrey Walls also pointed out that while there are over 20 members in the NetZero Insurance Alliance (NZIA), they still represent only 14% of global GWP.

Reinsurers could be doing more. She highlighted how most NZIA members are insurers and called for more reinsurers to lend support to the organisation.

Insurance is complex

Swiss Re head life and health products Asia, managing director Karen Tan said that insurance is not a straightforward business with underwriting activities that go through many layers upstream and downstream.

She talked about how the NZIA has been working with the Partnership for Carbon Accounting Financials (PCAF) to look at how insurers can make change happen.

At the very foundation of it all, measurements are required. “What gets measured gets done,” she said. “The NZIA is working together with the PCAF very closely to figure out how we can measure the carbon emissions coming from underwriting activities. And they have a proposal that is due to be disclosed or shared more widely, and with the intention of being finalised towards the end of this year.

“This is a concrete action. We first need to get to measurements before we can talk about targets, because when we don’t have a consistent measurement, a commitment is just a commitment. That’s why people talk about lip service because you can find it anywhere you want.”

Collaboration needed

As to whether companies are just paying lip service with their net-zero commitments, Aon head of credit solutions, Asia Steve Taylor does not believe this to be the case

He acknowledged the scale and difficulty of the challenge. “We need the largest allocation of capital, arguably ever, to reduce global warming, to hit net zero... Is it lip service? No. Is it difficult? Yes,” he said.

Taking a political risk perspective and highlighting some of the major issues over the past year, he brought up how China and the US produce a significant proportion of global emissions. He said that collaboration will be needed to hit net-zero goals.

A difficult regulatory topic

Reflecting on the time he had previously spent in IAIS, Global Asia Insurance Partnership CEO Conor Donaldson said the transition to net zero is a difficult regulatory area.

“Sometimes, even though we’re all talking about the same thing, we’re not talking about the same thing. The taxonomy is a big challenge,” he said.

“The insurance sector has a strategic imperative to get this right. I want to see a constructive conversation where a regulator and regulated entity can discuss how we can work cooperatively together to understand the issues and the complexity ... and develop a framework that is sufficiently sensitive to capture credit risk, but also enables the insurance sector to provide the critical role that it has to play in terms of supporting a transition to a net-zero economy.”

Intergenerational understanding and communication in reinsurance

Organisations with multi-generational workforces will have to overcome challenges in developing a common understanding with employees from different age groups. Speakers at the ‘Future of work – leading the multigenerational workforce’ roundtable represented and shared insights from four generations: Baby boomers, gen X, millennials and gen Z. 

“I feel that, for most of the time, when I share my problems with senior people from other generations, they’re willing to listen, share their experiences and provide me with some comfort,” said Nanyang Technological University student Yanbin Xu who has two years of reinsurance practice experience. As a gen Z, he thinks it is important that his contributions at work are recognised.

“I realised that I had four generations in my team. As a people manager, we always need to inspire the team to leverage everyone and deliver a better performance. It is important to create an environment within the team that bridges the gap between different generations and helps them to find the best way to deal with each other.

“This is challenging and needs a lot of effort. You need to listen, understand and lead by example, but before that, you need to have an awareness as well,” said Munich Re Asia P&C regional head of claims Donna Zhang. She said it was important to understand different mindsets but at the same time, avoid labels on each generation and overcome biases.

“The younger generations are very fortunate in the environment in which they grew up. It was a very different world in the environment I grew up with professionally because it was very hierarchical. There was a lot of distance between senior people and younger people. You had to be very careful of what you said and be obedient. There was no speaking out in discussions and talking about how you feel. You just had to get on with it,” said Eliot Partnership Asia Pacific executive chairman and partner Andreas Thiele.

“I think we need to create safe spaces for different generations to speak up and also allow them to share openly in organisations. I think the biggest challenge for the workplace is to create a safe environment for honest feedback,” said SCOR Asia Pacific head of life underwriting risk management Meng Meng.

Differentiation is key for cedants in the Asia Pacific region to stand out from the pack

By AXA XL Re Asia head of reinsurance Ann Chua and AXA XL Re Asia head of treaty underwriting Mr Dan Bryan

As we head into the busy year-end renewal season, reinsurance buyers in the Asia Pacific region are faced with a market that is seeing property catastrophe rates continue to harden and capacity retract. Added to this dynamic, reinsurers, cedants and their clients all are seeking to find ways to manage and transfer the risks associated with climate change. Against this backdrop, cedants and brokers have a vital role to play in proactively communicating insights about portfolios and sharing more granular risk data to ensure that their reinsurance partners are able to continue to provide secure capacity and effectively underwrite risks.

“As the reinsurance market gears up for the January 1 renewal season, buyers of property reinsurance treaties can expect a period of hard rates to continue. And reinsurers are looking to deploy their capacity even more prudently and working with those cedants that can demonstrate a good knowledge of the risk make-up of their portfolios. Those cedants that can differentiate themselves will be better positioned to secure coverage and capacity in the tight market. Cedants will need to be more proactive, working with their brokers too, to provide greater data granularity and insight into their portfolios, to enable reinsurers to more accurately assess their exposure and determine the deployment of their capacity – for next year and, the longer term,” said AXA XL Re head of reinsurance for Asia Ann Chua.

AXA XL Re head of treaty underwriting Asia Dan Bryan said, “The Asia Pacific region has seen a number of natural catastrophe events in the past few years in addition to a higher frequency of non-catastrophe claims which have underlined the importance of understanding and managing in greater depth the underlying risks in a portfolio. If we, as reinsurers, can obtain better data about a portfolio then we can work closer with cedants and provide more aligned reinsurance coverage. We want to help our clients grow their businesses profitably and the better the insights we have relating to growth strategies, the more appropriate the treaty reinsurance coverage we can provide.”

The global economy is - as we are feeling in our wallets - in an inflationary period currently, with the costs of raw materials, energy and many other commodities rising sharply. It is therefore essential for cedants to share more information, not only regarding their business development strategies and renewal priorities, but also on the actions they are taking to navigate challenges such as inflation, climate change and catastrophe risk. The adverse development of the loss estimates on events in the last one to two years in the region has also demonstrated the challenges in loss assessment – be it due to inflation, the effects of covid including the labour crunch or supply chain disruption or a combination of all these. We are globally much more interconnected and no economy can stand on its own without being impacted by developments in other parts of the world. Hence, a greater understanding of how our clients are steering their portfolios and managing their claims will go a long way.

Risk modelling is one way that both we and our cedants can gain greater insights into the risks that portfolios contain. And our partners in the broking community too can play a more active role by helping clients not only to use and understand data analytics more effectively but more importantly, enable us (client, broker and reinsurer) to work together to find mutually viable reinsurance coverage, terms and conditions, recognising that there is a cost of capital even for unused or underutilised capacity.

Climate change and catastrophe risk management

Adding to the global economic, pandemic and geopolitical conditions, there is the continuous challenge from the impact of climate change which is also keenly felt in the Asia Pacific region, an area that historically has been prone to natural catastrophe risks from flood to windstorm to typhoon to earthquake. In the first half of 2022, according to industry data, natural catastrophes caused more than $22bn in economic losses in the Asia Pacific region, with only about $8bn of losses being insured.

As well as the risk to property, these events exact a heavy human toll. In 2021, 57m people across the Asia Pacific region were affected by natural disasters, according to the International Federation of Red Cross and Red Crescent Societies.

On the back of this, catastrophe risk management remains one of the priority areas for all stakeholders – be it buyer or seller. The challenges that are presented by climate change cannot be solved by risk transfer alone and, hence, there is a need for communities, public authorities, cedants and reinsurers to work together to find long-term solutions to mitigate risk in order to facilitate affordable (re)insurance solutions.

Secondary peril challenges

Some property risks in the Asia Pacific region are difficult to model or are not currently modelled. This makes understanding the underlying exposures in a cedant’s portfolio a challenge, and, again, greater granularity of data and information would help reinsurers assess the exposure and provide more fitting coverage.

For example, strikes, riots and civil commotion coverage is typically included in property insurance coverages in the region. In recent months and years there have been multiple incidents of civil unrest and strikes across the region, as, indeed, there have been across the world. And these events do result in both insured and uninsured losses. With the continued global economic and inflationary environment, it’s important for us as reinsurers, and our clients as cedants, to be aware of these potential challenges. Those clients who are able to demonstrate that they are ahead of the curve and taking steps to understand and manage some of the risks associated with such perils in their own portfolios, will be able to differentiate themselves from their peers when it comes to securing reinsurance coverage.

January 1 and beyond

The upcoming renewal period is likely to be a busy and dynamic one for many cedants. A hard market and restriction in capacity for some areas mean that cedants will need to stand out from the pack to ensure they can secure the capacity and appropriate coverage they need for the year to come.

At AXA XL we are committed to this region, having been present for almost 50 years. In addition to the strong balance sheet-backing of the AXA Group, we are able to offer our clients access to a huge breadth and depth of knowledge and technical resources – through a combination of regional knowledge and global expertise.

We want to partner with our clients, to have open and productive dialogue with them about their portfolios. The more granular the risk data we can see, the more appropriate the coverage we can offer and the more certainty we can hope to give our clients. With more detailed exchanges, we can then be more ready to work with both clients and brokers to review and optimize the reinsurance programs to achieve a win-win solution. As we head into the next year, we look forward to talking with our clients and their brokers and helping them on this journey to better understand, manage and, ultimately, transfer risk.

Preparing to address climate change uncertainty

By Gallagher Re’s Ms Yingzhen Chuang

News from around the world and a continuing stream of scientific outputs, has almost everyone convinced that climate change has had, and will continue to have a noticeable impact on weather patterns. Intensive rainfalls and record-breaking heatwaves are now widely believed to be products of the warming earth. We have seen global temperatures rise by approximately 1.1⁰C compared with 1850-1900 (according to IPCC), and this long-term trend may continue gradually with forecasts of worsening conditions for the rest of this century. For the insurance sector, as the industry which exists to manage the financial implications of the world’s climate risks, it is an issue of critical importance, today and in the future.

A new normal?

Climate change and its associated impacts have and will continue to have, multiple implications for (re)insurance companies underwriting risk. The most obvious is that a change in climate conditions may cause an increase in volatility around the frequency and severity of weather-driven natural catastrophe events, not necessarily next year or in the immediate future, but in the longer term. A holistic approach involving realistic and properly-informed underwriting alongside positive and practical progress in climate resilience will help the insurance sector to effectively manage its risk, concentrating its resources where most appropriate, and therefore best fulfilling its role in society.

One example of such outcomes is the change in the intensity and spatial distribution of rainfall, which directly impacts flood risk. Floods in China’s Henan province in July 2021 caused economic losses of as much as $19bn, and insured losses that reached nearly $2bn, comprising more than half a million claims. The Henan floods were the costliest natural catastrophe event ever in China for insurers, but not the costliest in terms of economic losses. Similarly, following three weeks of flooding in eastern Australia earlier this year, insurers have been hit with claims in excess of $4bn, making the event the largest flood loss ever in the country.

The Australian floods followed 2019-20’s extensive and devastating bushfires there. The Australian bushfires were one of a cluster of unusual wildfires world-wide which have cost insurers billions in recent years. While floods can be considered as a primary peril in many parts of Asia, wildfires constitute a so-called ‘secondary peril’ from the perspective of insurers. But many people have begun to believe that floods, wildfires, winter freezes, and summer droughts should no longer be considered secondary. As Typhoon Hagibis in Japan recently demonstrated, the damage from flooding can be as bad or worse than the havoc wreaked by the windstorm itself. It’s a pattern that has been repeated on multiple continents.

One thing we can all agree however, is that global weather continues to change, and that the insurance sector needs to continue to react (and to be proactive) in a positive, measured, and beneficial way. We can also agree that there is no definite trend of change in long-term losses after accounting for inflation, growth in exposure and growth in insurance penetration.

A climate ‘own view of risk’

The industry is in the early stages of quantifying the impacts of the emerging climate risk. (Re)Insurers and third-party vendors have developed plenty of catastrophe models to use in the measurement of physical risks arising from weather-related perils such as major tropical cyclones. But when the parameters change because the climate is changing, or when formerly ‘secondary’ perils are intensified due to incompletely understood changes to the world’s climatic conditions, it is prudent to reassess the suitability of existing models to adequately capture the risk that is being managed.

Existing vendor models provide a useful lens to view what may be considered a baseline of physical risk under the current climate. We already work with these models in the course of clients’ renewals and are able to customise analyses to address a model’s deficiencies and a client’s assumptions and claims experience to form a client’s ‘own view of risk’. A ‘climate view of risk’ can similarly reflect a client’s approach to the emerging risk, taking care to account for climate signals already incorporated into the specific model. Based on the detailed evaluations we have undertaken to date, point to the inclusion of a climate signal in some current models for cyclone and flood for Asia-Pacific. This may manifest as the incorporation of more severe events at higher frequencies than history has shown, making existing models conservative.

Other factors may contribute toward shaping a client’s view of climate risk. Insurers typically have understood the risks they carry, in particular for peak peril exposure, and the hazards which imperil them. What is then key is for the focus to expand towards secondary perils, and how the portfolio is distributed for these perils that may not in the past have been large loss drivers. This could potentially transform the underwriting strategy to be more risk based in response to these climate-impacted perils.

These findings and strategies can then be applied to develop clients’ tailored ‘climate-change view of risk’ that does not simply rely on what tools are available, but on what is best able to capture an ‘own view of risk’. Ultimately, we arrive at a tailored ‘climate view of risk’ aligned with the client’s understanding of the materiality of climate change impacts on their business.

The narrative for renewals

Gaining improved confidence in the impact of climate risk on an individual insurer’s risk portfolio is a sophisticated exercise which on its own is not the only or the initial action that risk carriers should take to mitigate climate change risk. As reinsurance renewals approach, three key steps can be taken to showcase to reinsurers that ceding insurance companies understand climate change risk, have considered its potential impact on their portfolios, and have started taking concrete actions to mitigate that risk.

First is to gain a thorough understanding of the risk on the books. Insurers need to know in more detail than ever what’s in their portfolios, and where the vulnerabilities lie. They should begin with the insured risks themselves, to determine, for example, if they lie within a potential storm-surge zone, or flood prone area. Address details may not be enough; and if risk detail is insufficient for such analysis, insurers should set about collecting it as a priority.

The second step is to understand the hazard, which is not a straightforward exercise, because climate impacts on some hazards have not yet reached scientific consensus, let alone been properly captured in available models. Still, it is essential to at least consider how risk profiles may evolve under its influence, and to ensure appropriate analyses and assumptions are undertaken in proportion to materiality to the business.

Finally, insurers should construct narratives around the practical policies they have implemented or intend to put in place to mitigate these risks, and therefore to alleviate the impact of climate change. These policies, rooted in overall risk appetite, will be informed by what’s been learned about risks and hazards in steps one and two.

On the macro level, these actions feed into a long-term business strategy. All that shapes the narrative that companies present to their reinsurers. Good, credible stories will be rewarded with more enthusiastic buy-in and support.

Insurers need not face this challenge alone. Gallagher Re’s team of climate specialists, including the recently-appointed Steve Bowen as chief meteorologist, have gained the best possible understanding of the current and coming impacts of climate change. Working closely with the Gallagher Research Centre our experts deploy the latest analytical tools to identify and assess exposures and help insurers to manage them. We harness our first-hand global knowledge, and leverage our academic partners, to help clients remain informed of changes to evolving national climate policies, regulatory changes, and mitigation measures. Through various offices throughout the Asia-Pacific region, we are here to help our clients combat climate change uncertainty.

Ms Yingzhen Chuang is head of climate and ESG strategy and execution with Gallagher Re.

Were the Henan floods a man-made disaster?

While climate change has increased the frequency and ferocity of Nat CAT events, the lack of adequate and balanced development of disaster and emergency management systems leads to even more severe catastrophic consequences. 

By Anoop Khanna

During the 24-hour period between 20 and 21 July 2021, Zhengzhou, the capital city of China’s Henan province recorded 612.9mm rainfall. The total annual average rainfall in the region is 640.8mm.

Historic economic and insured losses

The unprecedented precipitation and the consequential flooding led to more than 552,000 filed insurance claims, with the local Henan insurance industry citing total losses of $1.9bn. This has gone down as the costliest weather event ever recorded for Chinese insurers. The overall economic losses in Henan province were around $19bn. A sizeable portion came from Zhengzhou city itself.

The historic economic and insured losses apart, the more than 14.75m people in 150 counties and districts of the province were severely affected and Zhengzhou city itself suffered heavy casualties and property damage. Around 400 people died or were declared missing, with 380 in Zhengzhou alone.

Zhengzhou is billed as one of the star cities of China. From a railway hub a decade ago, the city is today a bustling metropolis with a threefold increase in its GDP over the decade. Zhengzhou has modernised its infrastructure rapidly and has been a pioneer in China’s ‘spongecities’ concept.

Investigation committee set up

For these reasons, the huge loss of life in these floods shook the country. To investigate the local response, assess the infrastructure shortcomings and put out measures to be adopted for future catastrophic weather events, China’s State Council set up an investigation team in August 2021.

The 46-page detailed investigation report released in January 2022 said the local officials failed to give due attention to the risk on hand and the implementation of Zhengzhou city’s emergency systems failed to rise to the occasion.

The report analysed the natural and human factors behind the disaster and casualties. It has made specific suggestions for correcting the shortcomings that exacerbated the losses.

The report said Zhengzhou did not have enough disaster prevention measures and several major infrastructural problems were ignored during its rapid development over the decade.

The city’s storm water draining facilities and systems to avoid waterlogging in its subways, tunnels and underground parking lots were poorly maintained or were seriously underdeveloped.

Zhengzhou had only 2,400 kilometres of storm water sewer pipeline, which is only 50% of that of other Chinese cities of similar size. This compounded the problem during the torrential precipitation.

The report says this reflects only implementation of developmental ideals but failure to manage the required safety, security and risk management that should accompany the development of this scale. The report also provides an analysis of the disaster-alerting systems in the Zhengzhou city.

Recommendations

The investigating team found that dithering and delaying the declaration of I-level of emergency response system into action even after four red alerts from the Zhengzhou meteorological department cost the city heavy.

The report has said it is important to improve officials’ awareness of risks and their capabilities in dealing with emergencies.

Emergency management to promote alerting and response systems also need to be reformed.

The city’s resources to prevent and decrease disasters and strengthen the society’s awareness and resilience to risks and capabilities in self-rescue need to be enhanced.

The problems and the weak links identified in the investigation can be used to guide the country in making targeted improvements, better prepare it for future major disasters and protect people’s lives and property, the investigation team has said.

China’s emergency response law that was enacted in 2007 and has played a significant role in preventing and reducing emergencies is now being considered for a revision following the Henan floods.

In an article about the challenges of extreme weather events Chinadaily. com.cn said, “The tragedy in Zhengzhou s h owe d t h a t unl e s s a d van c e d technologies and modern city planning are effectively integrated with an efficient and agile urban management system, subways, tunnels, underground parking lots and other modern urban infrastructure can become death-traps in minutes in an extreme weather event.”