Lloyd’s CEO: Climate Is the ‘Biggest Single Opportunity’ the Insurance Industry Has Ever Seen

According to the CEO of the centuries-old insurance market Lloyd's, climate is the "ultimate systemic risk" and represents "the biggest single opportunity the insurance industry has ever seen."

Source: CNBC | Published on November 10, 2021

climate change and higher insurance rates

In an interview with CNBC, John Neal, the British company's CEO, attempted to paint a picture of how his industry would operate in the future.

“We think of Covid as systemic risk — climate is the ultimate systemic risk, so this is our chance to show businesses, communities and even governments how we can help,” Neal, who was speaking at the COP26 climate change conference in Glasgow, Scotland, said last week.

Climate-related events have already had an impact on the insurance industry in a variety of ways, ranging from floods and rising temperatures to cold snaps.

According to the Association of British Insurers, a severe freeze in the United Kingdom in 2018 resulted in payouts for burst pipes totaling £194 million (approximately $263.16 million) over a three-month period. During the same year, an extreme heatwave caused over 10,000 homes in the United Kingdom to file claims for subsidence damage. According to the ABI, this totaled more than £64 million.

Aside from payouts, the ABI mentions another potential stumbling block. "There is a risk that, if the transition to a low-carbon economy is disorderly, the value of many of the assets in which insurers invest will fall with little warning," it says.

According to the ABI, the aforementioned represents an opportunity for companies that make an early shift to "more sustainable assets."

While there are opportunities, there are also challenges, as highlighted by Deloitte's comprehensive report on climate change and insurance.

It appears that forethought is essential. According to the executive summary of the Deloitte report, many insurers still have "some way to go in getting to grips with how climate change will affect their business models in the medium to long term."

Another issue is climate-related litigation. Insurers are "waking up to the growing risk that they may have to pay for the legal costs and damages of fossil fuel companies targeted by climate lawsuits," according to a publication from the Insure Our Future campaign last week.

Turning the screw and ESG

ESG — environmental, social, and governance — ideas have become a hot topic in recent years, with a wide range of companies attempting to boost their credentials by developing business practices that align with ESG-related criteria. The insurance industry is no exception.

Speaking to CNBC’s Steve Sedgwick at COP26 last week, Christian Mumenthaler, who is CEO of reinsurance firm Swiss Re, said: “In 2017, we switched the whole 100 billion asset base to ESG standards … we stay invested in every industry, but we pick only the 50% best in terms of ESG.”

Mumenthaler was asked if coal was included. "It covers everything on the investment side," he explained. "There are some things we've excluded, so if you're a pure coal company, that's out."

"But it's like turning the screw over time," he continues, "because we say that the carbon footprint of this asset portfolio has to be zero by 2050."

Mumenthaler proposed the same idea of turning the screw in terms of underwriting. "We do not finance new coal power plants; instead, we have stated that we will phase out existing ones by 2030 in rich countries and 2040 in poor countries."

He emphasized the importance of starting a conversation with CEOs to "encourage them to join the movement."

The long game and data

Back at Lloyd's, Neal was asked about pricing climate risk when providing insurance and whether the tools to do so were available. His response emphasized the significance of accumulating knowledge over time.

“We’ve got 25 years of high quality weather data,” he said. “The frequency and severity of … convective storms, right the way up to hurricane related activity we see in the U.S. – we’ve got amazing data on that,” he went on to add.

"The advantage we have is that, unlike, say, life insurers, who make long-term decisions, we reprice our products every 12 months," he explained.

“So in real time, we’re managing weather and trying to understand weather and then trying to extrapolate that through a climate lens.”

Looking ahead, Neal was upbeat about his industry's prospects. "The insurance industry manages $35 trillion, so we're part of the solution, if you will, of putting our assets at risk to support transition," he explained.

He concluded by saying: “I genuinely, genuinely think … climate is the biggest single opportunity the insurance industry has ever seen.”