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Climate change illuminates risk management

Risk managers face evolving climate-related liabilities and exposures as they struggle with increasing losses from unusual weather events and rapidly changing climate policy measures in the United States.

The raised bar for regulation and publication requirements and how companies prepare for climate change. risks come among major investor review of their exposures to environmental, social and societal issues, experts say.

It will also, as governments, corporations and investors accelerate efforts to transition to a greener economy.

The cumulative effects of recent weather disasters, such as the polar vortex in February and the winter storm that hit Texas and the south, causing widespread power outages and billions of dollars in damage, have brought the management of these risks into sharp focus. [1

9659002] Last year was memorable for many reasons, says Joseph Gates, chief executive of American Family Mutual Insurance Co. in Madison, Wisconsin.

In addition to historic wildfires in the western United States, severe convective storm activity and a deterrent that hit Iowa and Illinois, the year saw a record hurricane season, he said.

Natural disasters in the United States caused $ 95 billion in economic losses in 2020 with $ 67 billion in insured losses, against $ 51 billion in economic losses and $ 26 billion in insured losses in 2019, according to data from Munich Reinsurance Co.

Even if a certain weather event cannot be linked to climate change, the increases in the frequency and severity of losses must be recognized, experts say.

With accelerating wildfires, hail and winter storm events "what we are seeing is that there are new asset exposures that are not really being considered," says Amy Barnes, London-based head of sustainability and climate change strategy at Marsh LLC.

As a result, risk managers need to re-evaluate their portfolio and modeling, she said.

"Financial planners say the past is not always a guide to the future, and it certainly turns out to be the case with much of the modeling we do around natural disasters," said Barnes.

In March, disaster management model Risk Management Solutions Inc "19659002] Swiss Re Ltd. analyzes not only historical trends and loss experience but increasingly forward-looking climate-based forecasts in its insurance," said Pranav Pasricha, adding that it will incorporate future climate change analyzes into its key disaster risk models, including its North Atlantic Hurricane Model. New York-based Global Property and Accident Manager. Reinsurer Solutions.

"This may mean that, based on the hazard or region, we may consider a longer or shorter period of time for our models that more accurately reflect our views on how climate change can affect the frequency or severity of that danger, "said Mr. Pasricha sa.

The unsurpassed winter storm that covered Texas caused extensive damage, said Jennifer Waldner, Houston-based head of sustainability at American International Group Inc.

"The state's independent power grid failed. It left millions of people without heat or power for many days; many were left to handle frozen and busted pipes, and about half of the state's population was without drinking water. Many things went wrong, she said.

Ms. Waldner commented during a webinar hosted by the Institute of International Finance and EY Global Insurance. Last month.

“It is clear that there is much more work to be done to promote climate adaptation initiatives to help communities build to withstand the physical effects.

Policy shift

As weather and climate-related losses continue to require a growing toll on companies and their insurance companies, the Biden administration has placed environmental, social and social governance issues and climate change on its agenda.

On January 27, President Joe Biden issued executive orders stipulating that climate change must be at the heart of national security and foreign policy. This followed the measures taken on the first day of office, such as rejoining the Paris climate agreement, canceling the Keystone XL pipeline permit and reintroducing a number of environmental regulations that former President Donald Trump had rolled back.

Another executive order, issued by President Biden on February 24, aims to make US supply chains more resilient, versatile and secure. It refers to threats to supply chains from "climate shocks and extreme weather events", among the various conditions that should be reviewed.

ESG and climate change are no longer just a discussion or a societal issue but are fundamentally driven by the government, says Atul Vashistha, founder and chairman of Supply Wisdom, a risk intelligence company based in New York.

The downgrade began with a March 3 announcement by the U.S. Securities and Exchange Commission's investigation department that the agency "will need to see companies integrate climate and ESG considerations into their information and investment-related methods," he said. .

In its statement, the division said it would review "whether companies are considering effective ways to improve response to large-scale events."

On March 4, the SEC announced the establishment of a working group on climate and ESG in its oversight department. [19659002] Climate change has also become a focus for the US Federal Reserve, says Nigel Brook, a London-based partner at Clyde & Co. The development is not only due to the change in administration but to the fact that “it is more and more obvious that this is a risk that affects financial institutions more by and large, "he said.

The situation is dynamic, with a lot of change, and "risk managers must come before that," said Vince Morgan, a partner at Houston-based law firm Bracewell LLP and former chairman of the State Bar of Texas section on insurance law.


Like the tobacco disputes that took a while to work their way through the courts, "you will see people raising (climate) issues in all sorts of ways that you cannot predict," Mr Morgan said (see related history).

In addition to changes in enforcement and rules, there will be changes when President Biden appoints federal judges, he said.

Pricing Challenges

Meanwhile, risk managers who want to better mitigate the economic impact of climate risks continue to navigate challenging market conditions for commercial insurance.

In a tightening market, it is more difficult to place insurance coverage, and the greater the risk, the harder it is to place coverage, says Katherine Klosowski, global vice president of natural hazards and structures at FM Global, in Johnston, Rhode Island.

Companies need to protect themselves against the damage of climate change, because "they may not be able to get full insurance coverage for that risk," Klosowski said.

Technology is playing a growing role in helping companies understand, evaluate and reduce climate risks, she said (see related history).

Insurers are in a difficult position when it comes to choosing the right risk or tying the right coverage at the right price, says Scott Ritto, vice president of risk management at Kilroy Realty Corp. in Los Angeles.

"Sometimes we say that this market is hardening because insurers have paid losses that they are trying to recover or to get back premiums to compensate for the losses they have paid, but they have to look at future losses

It is important for companies to make sure their insurance companies understand exactly what they are doing to deal with the physical and reputational issues related to the climate, he said. Insurers have a role to play in ensuring that communities are resilient going forward with an expectation that the climate will be more volatile than it has been in the past, Gates of American Family said.

"As best we can, we We are responsible for trying to find the right balance between the risks we have on board the company and the premium we take to compensate for it," he says.

Natural disaster risks may become "less insurable" in the future due to climate change, an increase in insurance density and economic growth, said analysts at Fitch Ratings Inc. in a February 22 report.

Policyholders may become reluctant or unable to pay for expensive nature conservation, which could lead to a gradual withdrawal of insurance for natural disaster risks, says Fitch. .

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