The Reinsurance Response to Climate Change | Episode 3

Patrick Nobbs:    Hello, welcome to the Sapiens Insurance 360 Podcast. I’m your host Patrick Nobbs, and I’m so excited that you are out there listening. This is where we discuss the latest news, trends, and issues from across the insurance solutions to technology spectrum. Today we have a very special guest, Martin Greenberg, who is Sapiens’ senior subject matter expert in reinsurance. Martin has many years of experience in IT development and management, as well as domain expertise across the entire insurance business. He served in the Israel IDF Computer Center for over eight years, developing and directing comprehensive logistics projects, and afterwards held several managerial positions in the Israel Phoenix Insurance Group, including CIO and assistant general manager of the Hadar Insurance Company, Manager of IT Development and Systems at City Fire Insurance Company in London, and was CEO at the Noga Insurance Company. Prior to joining Sapiens International in January 2006, Martin held the position of deputy manager at FIS software for over five years, managing the general insurance P&C product and global clients. On today’s program, we’ll be discussing the reinsurance response to climate change. So Martin, welcome to the show.

Martin Greenberg:   Thank you, Patrick. It’s great being with you today. Hi everyone, and thank you for the introduction.

Patrick Nobbs:    My pleasure, my pleasure. So in this day and age, it’s next to impossible to not be aware of the issue of climate change, comprising long-term shifts in temperature and weather patterns that appear to be driven by the burning of fossil fuels, which have created a greenhouse effect in the Earth’s atmosphere. So based on your understanding of this, what is the effect of climate change and the environment on global events?

Martin Greenberg:  Patrick, I think climate change awareness is catching on. People are more aware. The public is more aware of the effect of climate change on the environment, on the entire globe, due to the continuous burning of fossil fuels like coal, oil and gas, which result in production of heat-trapping gases. We’re experiencing global temperature rise, which is resulting in warming oceans, shrinking ice sheets, glacier retreat, decreased snow cover, and ocean acidification. Unfortunately, [due to] these phenomenon, change will continue through the century and beyond, which will result in severe droughts and heatwaves. Hurricanes become stronger and more intense. The sea level rising by one to eight feet, that’s a prediction by the end of the century. And the Arctic becoming ice-free. Effects, of course, will vary by region. Not all regions are the same, but focusing on the U.S. as an example, looking at the Northeast, Southeast, they will encounter heat, more heat waves, and flooding resulting from the sea level rising. The Midwest [is] expected to experience extreme heat and heavy downpours. The Southwest, I would say it’s more about increased wildfires on top of what they have today, declining water supplies, and reduced agriculture yields. So the effects are quite significant across the globe.

Patrick Nobbs:   Yes, I understand. And just in one country across the U.S. we can see that there’s major impacts, but they’re not the same impacts and presumably, this is mirrored across other parts of the world.

Martin Greenberg:   Absolutely, absolutely Patrick. Yes.

Patrick Nobbs:  Okay. So let’s move quickly on then. I just wanted to address if climate change is already resulting in greater risks, how is this affecting the insurance industry?

Martin Greenberg:   Well, insured values, naturally and constantly, will be growing due to population increases, urban density, [and] economic growth. In climate-change affected areas, the growth in insured values will become even more significant. This was actually verified in a worldwide study conducted by Munich Re in 2014. Extreme weather events such as prolonged droughts, hurricanes, floods, and severe storms, they significantly increased the insured losses. So the insurer reactions to the growing risk and increased losses are obviously resulting at rising premium rates. And in extreme cases, they must pull out of markets, which is a disaster for the economy at that reach.

Patrick Nobbs:   Yeah, yeah.

Martin Greenberg:  If I go a bit further into, not just by region, but also by types of insurance, lines of business, some examples, property you can classify actually two categories of events in property. Natural catastrophes, which are low frequency and high severity. The bulk of the insured losses related to climate change, they come from property-related losses arising from natural catastrophes like hurricanes, tropical cyclones, earthquakes, and winter storms.

But then you have the secondary tiers which people are not that much, uh, aware of, which are higher frequency and lower severity. There are more and growing insured losses arising from these perils such as strong thunderstorms, hailstorms, floods, droughts, wildfires, landslides, snow freezes, plus a variety of events. And then you think about not just property, but also liability, for instance, transportation infrastructure. It’s deteriorating from increased temperatures. It’s just an example, causing roads to buckle, bridges to expand, and airport tarmacs even to melt. So transportation injuries are on the rise. That also is affecting more events, more losses. But the other types of insurance lines of business, professional liability, varying by profession, architects and engineers failing to design and engineer for resiliency and to slow the emission of greenhouse gases. There also, that’ll create more losses, directors and officers (D&O) increased claims over the failure to report climate change risks to address financial risks to shareholders and to mitigate emissions and incorporate other carbon-neutral activities. And we could go on and on about different, other lines of business with more examples.

Patrick Nobbs:  So what we are saying here is that the impact on the insurance industry goes much further than the traditional risks. It, it transfers into, across liability, into professional liability, and, is extremely widespread.

Martin Greenberg:  Absolutely.

Patrick Nobbs:    Okay. So my next question really is, really about the level of awareness. What is the level of awareness of insurance companies of climate change, and how do you think they’re addressing the issues it’s creating?

Martin Greenberg:  Well, it’s quite difficult, Patrick, to receive statistics from the entire world.

Patrick Nobbs:   Yes.

Martin Greenberg:  But fortunately, Moody’s Analytics recently conducted interviews and a survey of 30 insurers across the globe, including Europe, North America, and also Asia and Australia. Turns out that 52% of the respondents think that there will be significant changes in current risk assessment tools and models to incorporate climate risk impacts, or at least to make them climate risk aware. So these companies, at least more than half of the respondents think that climate risk must affect the way we assess risks and how we price our risks. 34% of them think that climate change will result in acquiring, we’re building totally new models. You can’t even use the previous models. You have to change the models entirely in order to assess the up-to-date risks due to climate change. And only a handful, only 14% of the companies, plan to handle climate risk by using their existing risk management capabilities. So I’d say, they’re not really prepared. If you think about the majority, you have to be prepared towards the future. Climate change has quickly become one of the more, I’d say important risks faced by insurers. Appropriate internal measurement and management will be vital to ensure long-term business strategy resilience.

Patrick Nobbs:    So this is a very real issue for insurers. And it seems like, while some are not dealing well with the issue, others seem to be more prepared.

Martin Greenberg:  Yes. They’re, I think they’re becoming more prepared, and also are willing to invest in models to assess correctly the risks.

Patrick Nobbs:   Yes. And that, that to some degree, is quite a bit reassuring. So moving on, I wanted to address specifically how reinsurance is affected by climate change events and how they’re responding to the challenge.

Martin Greenberg:  Well, reinsurers at the end of the day, insurers will have the risks, will have the losses.  It’ll be transferring quite a lot to reinsurers. A large percent of the increasing insured losses will be reinsured, there’s no question. So this will certainly result in increased reinsurance premiums because in order to, cover these risks, of course insurers will have to pay and it’ll affect the entire public. This will vary of course by region, by lines of business, as we spoke about before. For instance, property catastrophe losses are the most obvious and most likely to increase in the near term to be covered. Reinsurers will also need to exercise proper exposure management due to climate risks and insist that the underlying insurers are doing the same, because of the insurance industry. They’re in the same boat because of increased exposure. Reinsurers will increase the use of capital market solutions, alternative risk transfer to address property catastrophe losses. The sums are huge and you can’t always support everything using traditional reinsurance methods. Reinsurers are increasing focus on modeling, particularly on secondary risks that we mentioned before, like winter storms, heat waves, wildfires, and flooding. It’s not just a severe risk. And they’re also working on new models for hurricanes because the new hurricane behaviors resulting from climate change are different from traditional. And they have to work out what is the risk here and how do we cover it and what is the appropriate pricing for that.

Patrick Nobbs: Understood. Understood. This is a fascinating topic and I’m sure we could talk about it and may talk about it again for a much greater length.

Martin Greenberg:  Absolutely.

Patrick Nobbs:   For the time being, however, Martin, many thanks. Thank you for being with us.

Martin Greenberg: It was a great pleasure being with you, Patrick!

Patrick Nobbs:   And well done for unpacking such a timely, important topic that I’m sure we’ll be hearing more about in the months and years to come. And to all our listeners, thank you so much for spending this time with us here today. And thank you to everybody for listening because we’ve got more coming. So it’s just goodbye for now and be sure to tune in next time to Sapiens Insurance 360.