Climate Change and Insurance, Part 2

Jason Thistlethwaite discusses risk-modelling approaches to climate change (Runtime: 3 min, 12 sec)

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Jason Thistlethwaite of the University of Waterloo discusses how insurers can change their risk-modelling approach to be better prepared for extreme weather.

Related Article: Insurers unprepared for extreme weather: University of Waterloo study


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Text Transcript

My name is Jason Thistlethwaite. I’m an assistant professor in the faculty of environment at the University of Waterloo.

How can insurers change their risk-modelling approach to be better prepared for extreme weather? I think the big gap in the risk-modelling approach is in the use of predictive models—particularly climate models.

This is a significant cultural change for most of the industry, who rely on sound, actuarial analysis, which is largely historically based. Climate change introduces significant uncertainty into those historical assumptions. The risk-modelling community needs to be better able to grasp how that uncertainty is likely to affect things like premiums, but also investment strategies and diversification strategies.

So I think there are three steps here that insurers should be considering.

The first is broader than just risk modelling, and that’s having a sound and prioritized focus on climate change risk management within their corporate governance.

This could be giving responsibility to climate change risk management to a senior person, either on the board or within the C-suite; having a climate change risk management committee; and also, perhaps, even rewarding and incentivizing employees for their ability to support climate change risk management.

The second is in underwriting, and here is the significant task of trying to better understand how uncertainty associated with climate change is likely to reflect premiums.

There’s a lot of uncertainty in climate change models. They tend to be quite high-level and very difficult to scale down to a particular local market. But the technology and science around climate change risk is improving significantly, and it’s time to start taking a look at how should our underwriting practices adapt to be better able to capture climate change?

And the third is to take a look at how climate change is likely to affect insurance investment portfolios. Insurers are large institutional investors.

A key measure here would be to follow the recommendation of the financial stability board’s taskforce on climate change disclosure, and conduct stress-testing to see whether a series of events—both physical events, such as several hurricanes along the U.S. east coast or Canadian east coast, in addition to changes in regulation that lead to, for instance, further divestment from fossil fuels—how do these affect the diversification of an insurance portfolio?

I think those three steps—corporate governance, underwriting and investment—will produce competitive advantages for those insurance companies. They’ll be better able to detect where the climate signal is influencing their risk more, and where the signal is less, and they’ll do a much better job in balancing their services in ways that make sure that insurance is available and affordable to those who need it most.

 

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