Risk and resilience
Paul Wilson, Partner Catastrophe and Climate – Securis Investment Partners LLP
Marc Lehmann, Head of Physical Climate Risk Advisory – Howden Climate Risk & Resilience
How to understand climate cycles and catastrophic risk and what is the impact on risk models was the focus for experts from Securis Investment Partners and Howden.
What may have previously been considered exceptional events are now a more regular feature of the hurricane season. Paul Wilson highlighted Hurricane Beryl as an example. Although Beryl was categorised as ‘exceptional,’ Wilson says it was not unexpected given the higher-than-normal sea surface temperatures earlier this year, particularly around the Caribbean.
“It reflects how we view risk at Securis,” said Paul Wilson. “We’re moving from a statistical classroom view of risk to something far more dynamic, more focused on tracking evolving climate risk.”
A dynamic and long-term view
Marc Lehmann explained Howden’s risk approach. The company has a dedicated climate risk and resilience team covering physical climate risk, transition risk, and climate liability risks. Solutions provided by the broker include “climate-aligned risk products” such as parametric insurance. Marc’s team is responsible for Howden clients including large financial and non-financial corporations. Like Securis, Howden takes a long-term view of risk.
“We’re looking five to ten years ahead, and in some cases as far as 2050,” says Lehmann. “We use climate analytics to understand current risk to create a baseline risk profile. Then we might ask, for instance, ‘How does flood risk change in Europe for a portfolio in the next 10 or 12 years?’”
Models and risk engineering
When it comes to risk model specifications, Howden’s clients have different needs. Howden doesn’t offer a simple “black-box” approach.
“Sometimes you need to provide a tech-enabled solution, other times a consultative service, to help answer investor questions. And it will depend on the particular peril, especially localised perils.”
Wilson emphasised the importance of responding to dynamic risks, which can change through time or external conditions such as sea surface temperature. Paul and his colleagues need to provide regular risk assessments for Securis’s investors.
“When we talk about hurricane risk, sophisticated investors ask us: ‘What does risk profile look like right now?’”
He added that Securis has a ‘toolbox’ approach, to address specific questions in real-time. This also helps client make investment decisions before the start of the year.
While Wilson and Lehmann underlined the value of risk models, Lehmann said that assessing a risk from the desktop using models isn’t always the right solution. Sometimes, ‘climate risk engineering’ is required, which involves going on-site to do a physical, in-depth vulnerability assessment.
“The key driver for risk assessment and variability now is understanding how the hazard might change,” says Lehmann. “We can model quite well for today’s situation, but in 10 years, the exposure will look different.”
Risk management strategies
Vinay Mistry, Chief Risk Officer – Apollo
Ruth Petrie, Principal Risk Scientist – Inigo
Advanced climate analytics and parametric solutions provide insurers with more options for precision in risk protection, Insurers such as Apollo and Inigo employ scientists to help provide the dynamic view needed for today’s changing risk environment.
Ruth Petrie agrees with Paul Wilson, that an event the size of Hurricane Beryl was not expected, so it wasn’t surprising to see a storm that early in the season. Petrie said that Inigo uses a metric called ACE (Accumulated Cyclone Energy) which gauges the whole hurricane season and predicts how bad the losses could be.
Managing connected risks
Ruth said Inigo focuses on developing risk views for different perils, particularly US hurricanes. One of the company’s strategic aims is to understand climate variability in the short term and interrelated risks. She pointed out that US hurricanes impact many parts of an insurer’s business, such as underwriting, capital management and portfolio management. The challenge is to provide insights to her colleagues to enable them to manage portfolios and connected risks against a backdrop of a complex changing climate.
Turning to parametric insurance, Vinay Mistry described Apollo’s collaboration with NormanMax Insurance Solutions which provides parametric cover for hurricanes and earthquakes.
“NormanMax partnered with us to establish a Lloyd’s syndicate. It wanted a product that was very ESG-friendly, with the emphasis on ‘social’ for natural perils and the protection gap. But we found there is interest for other elements of ESG; for example, parametric insurance for a reef in Costa Rica, so we’re developing a parametric product that covers many perils.”
Ruth also discussed collaboration. She highlighted Inigo’s work with Reask, which has helped Inigo build its ability to dynamically assess US hurricane risk.
“One of the brilliant things about Reask is that it gives us an assessment of potential landfall information,” says Petrie. “Reask removes that bit of uncertainty for us.”
Choosing the right predictive model
Parul Kaul-Green, Founder & CEO – Eduaimon Consulting
With so many models now available from different vendors, making the right choices is getting more difficult. Parul Kaul-Green, an independent consultant who has worked in senior leadership roles for AXA and Liberty, shared her experience of modelling and highlighted the challenges faced in high-risk areas.
“Model provenance is important. Insurers look at the methodology and test the accuracy of results against their other, more established models and their in-house models. It’s common to run pilots, look at adaptability, and consider the ease of integration.”
Parul explained that provenance is important because it gives scientific credibility. Methodology and explainability are crucial. She added that the traditional models from longstanding vendors often form the baseline for risk assessment regulators are very familiar with those models, so if they are missing, there will be questions.
With changing climate risks, the industry recognises the need to augment these baseline models with new information. Insurers can also include some proprietary information to gain competitive advantage. Insurers are increasingly hiring climate scientists to provide insights that complement and go beyond vendor models. Parul used an example from AXA to show how technology can add value:
“AXA Climate has used live drone data to give a very granular view about the state of the physical assets covered by AXA.”
Minding the gap
Insurers must negotiate blind spots and try to bridge model gaps. For example, California and Florida present particular climate challenges.
“Many insurers are now saying that the risk around wildfire, where data is limited and models are still not mature, is too uncertain or too great. Some areas are becoming uninsurable. Insurers are exiting Florida and California. It’s the same for hurricanes because of their growing strength and the season arriving earlier.”
She also mentioned floods in Germany, underlining the point that insurers need to develop non-traditional models for these growing risks. We need more granular data to insure these evolving risks because if you have a huge amount of information on a particular asset, you can determine the appropriate premium, rather than using “metal level information” and pricing at a level no one can afford or deciding to exit altogether.”
In conclusion, Parul said scenario modelling and visualisation, together with greater flexibility and experimentation, are very helpful and can provide the context for more precise underwriting.
Watch the full event on-demand
You can watch the six full panels filmed live at the event featuring speakers from EigenRisk Inc., Reask, Alesco Risk Management, Vave, Scrub AI, Renew Risk, Synergy Cloud, Securis Investment Partners LLP, Howden, Apollo, Inigo and Eudaimon Consulting.
