Reinsurance Tutorials #2 - Season 3
Hi everybody 👋
Today, and for the second Reinsurance Tutorials video of the season, we will talk about "Climate change : a new deal ?"
This subject will be addressed by CCR Re experts Emmanuel Jacquemin, Nicolas Faure and Georges Guzman.
Let’s start! ⏬
[Nicolas Faure] : Hello, I am Nicolas Faure, and I am Senior Claim Advisor.
[Emmanuel Jacquemin] : Hello, my name is Emmanuel Jacquemin, I am Head of Underwriting - Non Life - Southern Europe and Latin America.
[Georges Guzman] : Hi, I am Georges Guzman, I am a CAT modeler.
[Nicolas] : If we are all here today, it’s to speak about climate change.
[Georges] : I would like to speak about one of the little known effects of climate change. It is claims, and more specifically about climate change litigation.
Did you know that the number of these disputes is rising in almost all jurisdictions?
The main reason is that organizations, mainly in western countries, are engaging in environmental policies mainly driven by new regulatory constraints. These new laws often include financial penalties when new ecological duties are not fulfilled. Most of these duties consist of gradually decarbonizing their activities.
[Nicolas] : Mining and fossil fuel producers are the organization most affected by this new type of lawsuit because of their activities. A newspaper investigated ExxonMobil and found that they had known about the potential climate change since the mid 70’s. But what sounds like a scoop is in fact not: many scientific research done at that time were predicting rising temperatures and those studies were made public at that time. What is most embarrassing for ExxonMobil is their inaction since that time and, as mentioned earlier, the ecological turn taken by these companies is mainly undermined.
Closer to us, Europe's largest bank and a major oil company are each being sued, one to stop financing fossil fuel producers, the other to stop an extraction project that would be too costly for the environment.
[Georges] : One of the first dispute to become famous involved the energy company Shell which was ordered in 2021 by a Dutch court to reduce its emissions of 35% by 2030. Since that decision, more and more similar disputes are being brought before different types of courts all over the world.
[Emmanuel] : In terms of underwriting, global climate change is very difficult to apprehend.
Firstly, there is an increase in the frequency of some risks, such as the North Atlantic Windstorm: while an average 4.5 hurricanes per year were expected in 1851, the number of hurricanes expected per year now exceeds 6. Another example: of the 20 largest wildfires ever recorded in California, 6 occurred in 2020 alone.
Secondly, there is also an increase in intensity. The severity of the 2021 drought in Brazil, the 2021 floods in Germany and the 2022 hail losses in France have exceeded the most pessimistic projections.
Finally, global warming is also generating new disasters, such as the heat dome in Canada or the huge wildfire in Siberia, both in 2021.
[Nicolas] : The last point that I would like to make concerns the financial aspect of the climate change litigation. It worth mentioning first that with the post-Covid boom along with the war in Ukraine, oil organizations are showing huge profits and a lack of decarbonisation efforts. They will surely face more and more lawsuits, but this should not be too painful for them because of the war chest they have accumulated so far.
Moreover, it is not only fossil fuel producers who have a large war chest. Some investors can raise huge amounts of money to invest in climate change lawsuits, not because they believe this is the right cause, but because their return on investment may be bigger than what was needed for the lawsuit.
[Emmanuel] : From an underwriting perspective, this translates in the following major challenges:
- Some treaty structures need to be adapted. This is particularly true for the aggregate covers (global covers?) due to the increasing weight of secondary risks.
- As this is a global phenomenon, it is very difficult to mutualise it. For example : how can the sea level rise be mutualised if it affects all coastal regions of the world?
- Pricing is difficult because reinsurers can no longer rely on past claims experience. CAT models need to be adjusted to take into account the increase in frequency and severity, which adds uncertainty to pricing.
- Loss development makes the definitions of risk appetite and retro-purchasing harder to define.
- The volatility of LOBs Real Estate and food-processing has increased a lot in recent years and it becomes very difficult to underwrite these lines on a standalone basis.
At CCR RE, we believe that climate change is a major challenge for our industry but we are convinced that it can be addressed with discipline, cautious approach and through diversified relationships.
[Georges] : Thanks a lot for watching this video.
[Nicolas] : We hope you enjoyed it.
[Emmanuel] : Thanks a lot and goodbye.
Bye for now 👋
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