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Act first think later on climate change and natural capital

Translating the universal truth of climate change into industry specific codes means the insurance sector must learn to accept climate change risk through practical changes, writes Brian Cantwell.

For anyone aware of David Attenborough’s address to the United Nations in February, we are now into a phase of irrevocable and constant change in the earth’s climate.

"If we continue on our current path, we will face the collapse of everything that gives us our security: food production, access to fresh water, habitable ambient temperature and ocean food chains," Attenborough said.

The essence of the statement is that the climate stability that humanity has enjoyed across many previous civilisations is gone.

This poses existential problems for those in the insurance industry, which must price in risk to sell its products and cover its claims.

The environment is not a constant that can be relied upon and is a changing threat to financial services. Climate change risks are like any other risks businesses have to assess, manage and mitigate.

Most insurers are not in denial about climate change, but are wondering about the practicalities of how to adapt their business to make a positive change, that does not put them at a competitive disadvantage, and keeps shareholders happy.

Lost in translation

The problem is best asked in simple questions. Insurers accept that the climate is changing. But what to do, and how to do it?

There are those that are trying to translate what is happening on the front pages into technical language that insurers can act on and understand.

The Natural Capital Coalition has developed a protocol that provides organisations with a framework that helps them identify their nature-related risks and dependencies and put a value on the resources. All this as part of the business-as-usual risk management of firms.

The We Value Nature Project is a 3 year Horizon 2020 project to promote the uptake of the protocol. The Coalition has also developed sector specific supplements and training material. To enhance this process for the finance sector we have organised roundtable discussions for insurers, asst managers and banks to fine tune the training material and best serve their requirements.

For insurers in these conversations the big hitting points were about large physical risk numbers, and the resulting reduction of coverage in policies in the future as a result.

Many insurers think that governments must take more of an active role, not just to educate the public about the truths, but also to seek a central underwriter or underwriting fund that may have the capital to cover the worst case scenarios, like a central bank does for banking.

But the emphasis to act and change is still there, as despite these ideas, money is not enough to fix the problem of all-out climate disaster.

The best tonic is to figure out practical answers on how to change now.

Act first, think later

Insurers must both sell products that will assume a changing climate, and make environmentally-aware investments that will not exacerbate climate change. It is winning on the first issue, not so much on the second.

Market competition has been a stop in the flow of change, as has best practice. Insurers are waiting to see who takes the first step.

Aviva chief executive Amanda Blanc has pointed out the issue in the Financial Times on 1 March.

“The underwriting needs to catch up with the investments,” she told the FT. “We need to be having conversations with corporates around our ability to underwrite something which is no longer sustainable.”

Other insurers such as Axa, Allianz and Zurich have started the awkward process of reducing cover for businesses involved in carbon-intensive industries which have not given signal that they plan to change their behaviour.

But the logistics of how to do this for executives remains a grey area without there being an agreed guide on how to make change happen.

ICAEW and the current situation

At the top level, green investments and green products may be easier conceptually than explaining to the board the need to withdraw products that are currently commercially viable but are bad for climate change.

Recent ICAEW involvement in industry initiatives and roundtables has centred on materials created to explain how to change boards and decision makers’ minds at insurers.

Financial Services Faculty Technical Manager, Audit and Reporting, Zsuzsanna Schiff, who has been leading the work for the Institute, said that insurers need to tackle the difficult issue of practicalities now in order to make things easier in the future.

Schiff said: “There is a vast amount of intellectual capability in the sector that ranges from understanding financial markets, legal consequences, modelling the most extreme risks and in the best cases, understanding their customers.

“Firms will have to carefully consider how to get ready for a world that looks too scary to insure – for now. They will have to be instrumental in helping the rest of us assess, manage and mitigate not just the climate change risks but the potentially devastating effects of us exploiting the resources nature has provided us with. Liability risk, specific for insurers might be instrumental in making these points loud and clear.”