Just how well are reinsurers dealing with climate change risk management?

RMS’ Joss Matthewman looks at industry progress in understanding climate risk science and embedding it into decision-making…

Working with reinsurance clients over the last 18 months has been fascinating as they get to grips with understanding and managing climate change risk. It’s a new dimension for risk management – with new approaches to learn and adopt which is never easy. There’s also an urgency, as reinsurers come under pressure to assess and manage their risk and demonstrate compliance.

So, how are reinsurers doing with regards to climate change risk? It varies greatly. Some clients have made significant progress and have a clear view of what they want to achieve. Others are just starting out and need help to shape their entire journey and guidance on their first steps. But what we see is that almost all clients demonstrate positivity and commitment to building climate change resiliency into their business and are honest about their current position.

The industry is gathering pace as reinsurers grow in confidence around understanding climate change risk and reappraise their long-standing role as climate risk experts. The industry knows these skills are in demand, turning hazard all the way through to dollar loss and pricing risk, and also influencing a wide range of stakeholders in mitigating risk.

What insights do we have from working with clients? First, recognise that climate change risk is a broad concept. It pays to be specific about what part of climate change risk is of interest. Is it how climate will change in the future or is it about how it has already changed? It’s important to make this distinction as establishing the impact of climate change to date is difficult to do.

“Some clients have made significant progress and have a clear view of what they want to achieve. Others are just starting out and need help to shape their entire journey and guidance on their first steps”

Some reinsurers have looked to account for climate change risk in their present-day estimates and integrate this into their view of risk. But there is significant uncertainty around historic climate change as disentangling climate change signals from other natural climate variations is challenging, especially for rare and extreme events. Instead, we see clients using insights from future projections to better understand their current climate views.

Second, clients want to move away from “single-use” views of risk such as those designed solely for regulatory purposes. They want flexibility – with near-term views and what-if views over the next five to 10 years. Although long-term, regulatory-orientated climate change views through to 2100 are great for regulators and policymakers, they are less useful for reinsurers. RMS climate change models are designed to support these use cases both now and in the future, as well as being in step with the regulatory environment.

Third, even if your business understands climate risk science, how does this insight get into your existing tools and feed decision-making networks? We see lots of new solutions on the market that understand science and hazard, but not the consequent loss, and tangential climate change views that do not complement existing tools.

Clients are having success with RMS climate change models as they deliver the science right through to dollar loss specific to their exposure, with metrics that are consistent with existing processes. Flexibility, integration and industry standardisation are becoming important as climate change risk analytics are now starting to mature.

Joss Matthewman is a Senior Director at RMS