Build modelling capacity

by Resolve Editor Kate Tilley

The increased frequency and severity of natural hazards puts greater onus on insurers and reinsurers to build their modelling capacity to accurately price disaster risk.

Three senior reinsurance executives discussed climate change ramifications in a panel session at WICA2023, moderated by UK lawyer Tim Hardy, who chairs AIDA’s climate & catastrophic events working party. 

In a pre-congress interview, Scott Reeves, Head of New Markets at Munich Re Australasia, said the impacts of climate change were becoming more evident as the world experienced increasingly frequent and more erratic extreme weather events.

“In the longer term, how well we as a society can respond hinges on our capacity to understand and measure the risk of change.”

Mitigation measures

Trent Thomson, Head of Australia & New Zealand at Swiss Re, in a pre-congress interview, said natural hazard events required mitigation and adaptation measures involving all stakeholders, combined with risk transfer.

“We must ensure action isn’t delayed and that the focus remains on proactively managing the increasing risk itself.”

Mr Thomson said the insurance industry must continue to collaborate with governments to manage risk, and build capacity to model and accurately price disaster risks. “We can also increase our efforts to improve insurance accessibility and penetration by developing more flexible and efficient forms of coverage.”

Karl Jones, Head of Global Strategic Advisory – Asia Pacific with Guy Carpenter & Co, in a pre-congress interview, said the reinsurance broker’s modelling and analysis helped manage clients’ uncertainty because “there is a great deal of variability around the impacts of climate change across Asia”.

He said Australia and New Zealand have good levels of insurance penetration, but “across Asia, we see many markets with significantly less coverage”. In markets where the protection gap – the difference between what’s insurable and what’s insured – is broader, societies are less resilient and more vulnerable. 

Innovative solutions

Mr Reeves said fewer than half the global losses from natural disasters were currently insured. “Continued development of innovative insurance solutions is one crucial aspect to narrowing the insurance gap.”

Mr Thomson said the insurance industry could continue to tackle the climate crisis at its source, by helping to accelerate the transition to greener infrastructure and lower-emission energy.

He said insurers and reinsurers’ specialised knowledge and data could help ensure future-proof infrastructure remains financially viable, but the changing risk environment means governments, businesses and other stakeholders all must participate.

Mr Jones said the increasing cost of risk and insurance was often cited as a challenge, but governments could support the industry and communities by changing the way insurance taxes, like stamp duty and emergency services levies, were applied.

“All stakeholders have roles to play in reducing the cost of risk. For example, reducing risk through mitigation measures – should these be incentivised by insurers’ pricing or introduced by government legislation? It needs a combination of both.”

Material inroads

Mr Jones praised property buybacks in flood-prone areas, as was occurring after the 2022 floods in northern NSW and Queensland but said it could take many years for those initiatives to make material inroads.

Mr Thomson said macroeconomic factors, like the resurgence of inflation, supply chain disruptions, labour shortages and rising construction costs, all added to the financial burden of post-disaster recovery. “That’s why proactive risk management and insurance should be prioritised.”

In the panel session, Mr Thompson said large losses were increasing and that increased reinsurance costs. Catastrophic losses were now $100 billion a year and the growth was exacerbated by the increased value of assets, urbanisation, and populations moving to riskier locations.

Mr Jones said some reinsurers were reducing capacity in risker areas. Two of New Zealand’s three major recent events had been floods, rather than earthquakes, and that had not been factored into pricing.

Mr Thompson suggested Australia, as the most exposed country in the world to the ramifications of climate change, should have a chief risk officer. That person should “be above the election cycle” to ensure long-term thinking.