Data, not political debate, is the most pressing need for the reinsurance and insurance industries facing record weather-related losses. Gaining a holistic view of weather-related property damage and associated supply chain impacts and business interruption exposures is crucial.
The insurance industry still has its head in the sand. That’s the message from the FT, in its report last week on the retreat of insurance and reinsurance businesses from net zero commitments.
The report notes the demise last year of The Net Zero Insurance Alliance, a UN-backed initiative to help the insurance and reinsurance “nudge the global economy away from fossil fuels and towards more sustainable energy sources”. It also draws attention to its interview with the new chief executive of Lloyd’s of London.
Patrick Tiernan has reneged from his predecessor’s commitments to ending coverage of the most polluting fossil fuels, such as thermal coal, oil sands or Arctic drilling. Instead, Tiernan proposes “more freedom” to insurers. He says that the market should remain “apolitical”, but the FT ties this retreat to the return of Trump. The US accounts for about half of Lloyd’s business, it notes.
“[T]he dilution of the ambition is as regrettable as the broader trend of governments and commercial entities kowtowing to the US backlash against ‘excessive’ green policies,” it argues. It comes at a time of “very obvious evidence of worsening climate risks”, it notes.
Nudging forward the green agenda is not virtue signalling; it’s a smart long-term business strategy, the paper argues, because the risks to the industry could be existential.
Underwriting or Activism? Insuring Nat Cat Risk
Pointing out the exposure of reinsurance and insurers to climate change is not political point scoring. It’s a hard reality. Global insured losses from natural catastrophes in the first half of this year were $80 billion, according to reinsurer Swiss Re’s preliminary estimates.
That’s almost double the average in the ten years to 2024, and the fifth year in a row when they’ve passed $50 billion in the first six months. In the UK specifically, 2024 was a record for weather-related losses, with insurers paying out for 12 named storms.
It may only get worse, too. Should the global trend continue, Swiss Re predicts losses this year could reach $150 billion. The long-term growth in insured nat cat losses, meanwhile, is now rising 5-7% annually.
But rising weather losses are not new, and re/insurers already have well-established mechanisms for managing these risks through premiums and risk selection.
They also largely write business annually, not for the long term, albeit with a need for a longer-term strategy. Leaving the politics aside, what the industry most urgently requires is better data to quantify and manage its weather-related risks.
Nat Cat Models and Supply Chains: The Missing Link
Of course, the industry has already heavily invested in nat cat modelling and loss models. Despite this, though, it often lacks a holistic view across direct and indirect risks. This hinders its ability generate accurate, realistic business interruption values that would enable better tracking and prediction of loss accumulation.
As has also been long recognised, supply chain risks and accumulation are central to this. SCAIR’s location-specific mapping of weather risks and supply chain modelling gives insurers visibility of not only their property damage exposures but also to business interruption risks. Capturing these ripple effects beyond direct physical damage losses to contingent business interruption and other associated losses is critical for insurers to be able to assess, select, price and underwrite their risks accurately.
Moreover, Munich Re’s Location Risk Intelligence technology, which powers the weather risk mapping, is effectively future-proofed. Its models include forecasts of how climate change will impact each location. That enables the business to write risks in its annual premiums and renewals, while making longer-term strategic plans on how exposures look likely to evolve.
Whatever role the industry plays in driving the energy transition, re/insurers need better solutions to manage the climate risks they face today. Recent losses might just be the nudge they need to address a long-standing problem.
