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How well are reinsurers managing climate change risk management? | Point of view

Working with reinsurance clients over the past 18 months has been fascinating as they learned about 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 is also urgency as reinsurers are under pressure to assess and manage their risks and demonstrate compliance.

So how are reinsurers doing in the face of climate risk? It varies greatly. Some clients have made significant progress and have a clear vision of what they want to achieve. Others are just getting started and need help shaping their whole journey and guidance in their first steps. But what we’re seeing is that almost all clients are showing positivity and commitment to building climate change resilience in their business and being honest about where they stand today.

The industry is accelerating as reinsurers gain confidence in understanding climate change risks and reassess their longstanding role as climate risk experts. The industry knows that these skills are in demand, turning risks into money and price loss risks, and also influencing a wide range of stakeholders in risk mitigation.

What information do we get from working with customers? First, recognize that climate change risk is a broad concept. It is worth being specific about the part of climate change risk that interests us. Is it about how the climate will change in the future or how it has already changed? It is important to make this distinction because it is difficult to establish the impact of climate change to date.

“Some clients have made significant progress and have a clear vision of what they want to achieve. Others are just getting started and need help shaping their whole journey and guidance for their first steps”

Some reinsurers have sought to take climate change risk into account in their current estimates and integrate it into their view of risk. But there is significant uncertainty around historic climate change because it is difficult to distinguish signals of climate change from other natural climate variations, especially for rare and extreme events. Instead, we see clients using information from future projections to better understand their current climate views.

Second, customers want to move away from “one-size-fits-all” views of risk, such as those designed solely for regulatory purposes. They want flexibility – with short-term views and hypothetical views over the next five to 10 years. While long-term climate change visions focused on regulation to 2100 are excellent for regulators and policymakers, they are less useful for reinsurers. RMS climate change models are designed to support these current and future use cases, while being aligned with the regulatory environment.

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

Customers have success with RMS climate change models because they provide the science down to the dollar loss specific to their exposure, with measurements consistent with existing processes. Flexibility, integration and industry standardization are becoming important as climate change risk analysis begins to mature.

Joss Matthewman is a Principal at RMS