The insurance expert at the ADB speaks about the insurance industry coping with the growing number of extreme weather events 24 August 2021 An interview with Arup Chatterjee Principal Financial Sector Specialist, Sustainable Development and Climate Change Department at Asian Development Bank In this second part of the interview, Arup Chatterjee, Principal Financial Sector Specialist, Sustainable Development and Climate Change Department at Asian Development Bank, speaks about how the insurance industry is coping and innovating to respond to the growing number of extreme weather events. He also speaks of strategies being used by insurance companies to better manage extreme weather events. Unravel: In the first part of this interview, you talked about responses financial market stakeholders and governments are considering to mitigate climate risks. Is it practically possible to implement these measures in emerging and developing economies transitioning to a low carbon economy? Arup Chatterjee: Overall, financial authorities in emerging markets note significant teething problems in capabilities, data and tools. Today’s reality is that the taxonomy, necessary rules, regulations, standards and best practices remain nascent, weakly defined and not harmonised. As a result, immense challenges confront financial institutions, particularly around quantification and scenario analysis. Due to weak policies and conventions in the financial industry and a lack of climate risk disclosure besides adequate support and incentives to act, very few financial institutions actively incorporate climate risks into their financial decision-making. Moreover, because of the immaturity of business models and the risk management practices still evolving, there is a perceived lack of private benefits to scale up climate finance. A few financial institutions have incorporated their exposure to climate risks in their investment, lending, and underwriting decisions and integrated them into their broader risk management processes. As a result, environmental, social and governance (ESG) issues are gaining in with institutional investors exerting their influence and channelling investments into projects that deliver measurable non-financial benefits while improving long-term financial returns. Even major credit rating agencies now factor ESG elements, including climate risks, in their ratings, to varying degrees. Any successful response will need to involve a mix of compulsory and voluntary measures backed by a robust framework for assessment, implementation and monitoring. Such a framework should leverage the innovations happening in big data, data analytics, automation, artificial intelligence and machine learning to help meet the sustainability ambitions. Unravel: With the number and frequency of these events multiplying at such speed, can the insurance industry cope even if awareness increases and buy-in for insurance increases? Mr Chatterjee: One cannot precisely comment on the level of preparedness of the Asian insurance industry to deal with rising climate change-related losses and the extent it will threaten their underwriting and investment portfolios. In the absence of adequate disclosure and climate-specific stress-testing, beyond traditional catastrophe models, it may not be easy to assess the effectiveness of insurers’ actions to withstand extreme weather events and defend their underwriting and pricing decisions. Insurance of some risks can either become unaffordable for customers or unfeasible for insurers. And, this could lead to underinsurance, higher rates of self-insurance and increased demand for disaster relief from the public sector. However, compared to other financial market participants, insurance companies still fare much better in understanding the impact of climate risk on their balance sheets. Insurers need to shift business models away from transactional risk transfers and indemnity payments towards mitigating physical climate risks such as rebates for using resilient construction materials or working with the government to improve land use planning and building standards and policies. The insurance industry can seize the opportunity to offer innovative solutions – parametric insurance, pooling mechanisms by collaborating with governments to provide affordable coverage and alternative risk transfer solutions using capital markets for specific risks. Insurance companies should also consider re-evaluating their investment-allocation strategies. They should restructure their portfolios towards supporting a sustainable decarbonised economy. Unravel: With the vast amount of data now available to quantify climate change risks, how do you think the growth of insurance markets will be impacted in the medium- to long-term in Asia? Mr Chatterjee: Granular mapping of financial exposures to different climate change drivers will help better assess vulnerability across Asia’s sub-regions at the sectoral and institutional levels. For example, it can help quantify exposures to physical climate hazards and emission-intensive firms concentrated across economic sectors at a sub-national level. Additionally, it can quantify exposures to climate risk drivers concentrated in financial institutions. The massively increasing volume, velocity and granularity of data sets will allow consumers and insurers to see and understand risks clearly. Moreover, it can transform how insurers see large pools of consumers and price risks. Premium pricing will more accurately reflect risk behaviour. With a better understanding of customers’ risk profiles, insurers will be able to provide closely tailored and more accurately priced products. In addition, the use of data to provide early client warnings can give an incentive to undertake risk mitigation. Thus, in practice, price signalling can drive better behaviour and reduce risk. As a result, it offers enormous insurance benefits for society, such as improved risk management and fairer premiums. Of course, this will have implications on the cost and availability of insurance for all consumers. A small group of consumers may have to pay more for insurance because they may belong to a higher risk category, although they may not control the risk they seek to insure. The regulators will need to tackle privacy and discrimination-related concerns. Additionally, governments must develop plans to finance uncontrollable risks to protect society, particularly the vulnerable, in collaboration with commercial insurers. Unravel: How can the insurance industry prepare consumers for adapting to climate change and prioritising financial protection? Mr Chatterjee: Despite ample evidence that insurance is a climate change adaptation tool, significant challenges remain that impede the ability of the industry to deliver on its full potential. In emerging markets, there is a need for risk and insurance literacy. The insurance industry can improve the capacity to identify and assess risk by using modelling techniques and approaches developed over the years. Risk assessments can help drive climate-sensitive public policies, investments and risk management solutions. They can invest in generating capability and expand awareness of the pros and cons of the different risk financing instruments available to reduce risk, manage residual risk and considerations around tradeoffs. However, building risk capacity and insurance literacy is not an easy task and is time-consuming. Unravel: What business strategies are insurance companies adopting to help better manage extreme weather events? What innovations do we see in insurance products that will be relevant for emerging markets? Mr Chatterjee: Building resilience to extreme weather rests on three pillars: resistance – the ability to lower impacts; recovery – the ability to bounce back; and adaptive capacity – the ability to learn and improve. These pillars of resilience can be influenced depending on how specific insurance mechanisms are structured to respond to extreme weather. Insurers are pursuing business strategies that include combining multiple extreme weather events in a single policy and linking the purchase of extreme weather event insurance to a more commonly required and enforced product. In addition, policies covering weather-related risks are being extended and introduced to new sectors. Some insurers incentivise adopting green or energy-saving policies by offering lower premiums like premium discounts for hybrid low emission cars. Insurance policies covering solar panels, hydropower, geothermal energy, or bio-fuels are increasingly available. Carbon dioxide-related insurance coverage is another emerging product for companies interested in reducing carbon emissions to gain carbon credits to sell on the market. This activity creates risks for businesses that fail to reach their target and earn credit. So carbon credit delivery insurance can protect them against such risk. In addition, insurance is available for the risks associated with capturing carbon dioxide and storing it underground. Certain insurers are also offering to offset carbon emissions caused by some insured activities. Adjustments to third-party liability policies covering environmental liability, directors’ and officers’ liability, and other professional liabilities are taking place to cover liabilities linked to climate change losses. One also observes collaboration between the public and private sectors for setting up insurance pools and public reinsurance or backstopping support for catastrophic losses in addition to private reinsurance coverage. Also, we see insurers bundling extreme weather event insurance with conventional general insurance coverages and risk financing mechanisms to fund losses through public-private partnerships. For the agricultural sector, there is a shift towards comprehensive crop yield insurance by linking with agricultural subsidies. The use of multi-risk or yield insurance is being pursued actively by ensuring that the entire cultivated land is insured. And subsidies are being directed as a premium contribution to multi-risk policies. Additionally, pool-like structures or public reinsurance for systemic risks such as droughts in collaboration with the public sector and insurers are also on the anvil. Parametric or index insurance is gaining recognition. Using remote-sensing data to monitor crop patterns, insurers can pick up early signs of crop failure due to climate changes. This data further enables the insurer to gauge the risk for large numbers of small farmers, making insurance more affordable. All these innovative approaches offer important cues to insurers in emerging economies. They are crucial for designing appropriate insurance products for reducing the protection gap. Source: unravel.ink

CDRI announces 'International Competition for Imagining Disaster Resilient Infrastructure' (IDRI), where young minds can share their idea of 'resilient infrastructure' in any art form including photographs, animations, comics, poetry, thought pieces etc., and win cash prizes worth US$1800, along with a chance to get featured at COP 26. Launched on 12 August 2021 to commemorate the International Youth Day, the competition is open to youth from all nations in the age group 15 to 32. Further details of IDRI are available in the poster below as well as at https://y4ri.cdri.world/ This one-of-a-kind competition aims to engage, inspire, and invigorate the young minds and future change makers in the field of disaster resilient infrastructure. We greatly appreciate your support in promoting the contest across your networks. About CDRI - Coalition for Disaster Resilient Infrastructure (CDRI), launched by the Honourable Prime Minister of India at the Climate Action Summit in New York in 2019, is a multi-stakeholder global partnership of national governments, UN agencies and programmes, multilateral development banks, the private sector, academic and knowledge institutions. It aims to address the challenges of building resilience into infrastructure systems and associated development.

The Working Group I contribution to the Sixth Assessment Report addresses the most up-to-date physical understanding of the climate system and climate change, bringing together the latest advances in climate science, and combining multiple lines of evidence from paleoclimate, observations, process understanding, and global and regional climate simulations. Disclaimer: The Summary for Policymakers (SPM) is the approved version from the 14th session of Working Group I and 54th Session of the Intergovernmental Panel on Climate Change and remains subject to final copy-editing and layout. The Technical Summary (TS), the full Report Chapters, the Annexes and the Supplementary Materials are the Final Government Distribution versions, and remain subject to revisions following the SPM approval, corrigenda, copy-editing, and layout. Although these documents still carry the note from the Final Government Distribution “Do Not Cite, Quote or Distribute” they may be freely published subject to the disclaimer above, as the report has now been approved and accepted. Source: ipcc.ch

The earthquake insurance coverage rate in Turkey has crept up to 58% at present from 56% last year, according to data released by the Natural Catastrophe Insurance Pool in conjunction with the 22nd anniversary of the devastating Marmara Earthquakes in 1999 that fell on 17 August. On a regional basis, the Marmara Region ranks first with an coverage rate of 70%, followed by: Aegean, 59% Central Anatolia, 54% Eastern Anatolia, 51% Mediterranean and Southeastern Anatolia, 50%, and Black Sea, 46%. The average annual premium is approximately TRY163 ($19.40), and the highest insured amount for residential property is TRY268,000. TCIP Coordinator Erdal Turgut told Insurance Gazette, “Today, the insurance rate in our country has reached 58%. As TCIP, we make all our plans considering a possible major Istanbul earthquake, and our loss compensation capacity has increased to TRY40bn.” This capacity, under the management of Turk Reasurans, has been created completely independently of government resources and will only be used for the compensation of earthquake-induced damages to the homes of Compulsory Earthquake Insurance policyholders. Goal Mr Turgut added, “Our goal, of course, is to reach a 100% coverage rate and to insure all homes within our scope under the Compulsory Earthquake Insurance scheme. That's why we declared 2021 as the year of mobilisation with the goal of reaching 100% insurance coverage.” TCIP operates the Compulsory Earthquake Insurance scheme (DASK), which was established in 2000 after the 17 August 1999 Marmara Earthquake to cover damages caused by earthquakes to residential properties. The total amount of compensation paid out by TCIP to the insured since its establishment has reached TRY1bn. Source: meinsurancereview.com

On June 16, 2021, S&P Global Market Intelligence hosted a webinar to look at a range of ESG initiatives taking place across the global insurance industry. This blog summarizes some of the key issues that were discussed. Matthieu Bardout, Global Head of ESG Commercial Strategy, Banking and Insurance at S&P Global Sustainable 1 moderated the session that included five speakers: Butch Bacani, program leader for the UN Environmental Program (UNEP) Principles for Sustainable Insurance (PSI). Yvonne Braun, Director of Policy in Long Term Savings and Protection at the Association of British Insurers (ABI). Steven Bullock, Managing Director and Global Head of ESG Product Innovation and Analytics at S&P Global Sustainable1. Nina Chen, Sustainability and Climate Initiatives Director at the New York State Department of Financial Services (DFS). Dave Jones, a former Insurance Commissioner and Director of the Climate Risk Initiative at the University of California, Berkeley Center for Law, Energy and the Environment. Five Key Takeaways A great deal of activity is taking place around the world to address climate issues and the role that insurance companies can play in the transition to a green economy. Insurers face substantial risks on the investment side of the business with extensive exposure to fossil fuel-intensive assets, and need to begin to seriously address this reality. They are also exposed on the underwriting side, especially with increasing regional and global losses being driven by catastrophic weather events. There needs to be important dialogues between the investment and underwriting groups, so they are in sync for their firms to meet net zero targets. The regulatory world is moving towards mandatory disclosure, and insurance companies should take up these issues now. The industry already uses catastrophe modelling techniques, so there is an opportunity to start integrating more forward-looking climate scenarios into that analysis to have a better understanding of exposure to a vast array of different transition and physical risks. Yvonne Braun, ABI: Yvonne described how the ABI is the voice of the insurance and long-term savings industry in the U.K., and a lot is happening in the country. For example: (1) there are now clear requirements in place for pension providers to explain how they account for ESG risks, (2) the U.K. government will be making TCFD disclosure mandatory across the entire economy by 2025, and (3) the Bank of England launched the Climate Biennial Exploratory Scenario, which includes 10 of the U.K.'s largest insurers and long-term savings providers and will gather extensive data to enable a comprehensive assessment of the risk management required for climate change. The U.K. government is also reassessing the regulatory framework, which presents a large opportunity for insurers to support the green transition. To do that, however, some changes are needed to the capital rules. The ABI has submitted a paper to the U.K. regulators making the case for Solvency II reform to allow a wider set of assets to be eligible for the matching adjustment. That would enable the long-term savings sector to unleash both the capital they hold and the capital that is coming in future savings to help with the transition. Government can also play an important role by structuring transition investment opportunities in a way that guarantees predictable and long-term cash flows, making them attractive to the insurance sector. Yvonne feels there is a large role for insurers to play in the transition, given how connected the industry is to the economy and the lives of customers. Dave Jones, Climate Risk Initiative at the University of California: Dave explained how the National Association of Insurance Commissioners (NAIC's) Climate Risk Disclosure Survey asks a series of qualitative questions of insurers in the U.S. regarding what they are doing to address climate change. Looking back at answers given in 2016, it was clear that U.S. insurers were not paying enough attention to transition risk, particularly in their investment portfolios. In response, he launched the Climate Risk Carbon Initiative that required the top 670 U.S. insurers to report on their investments in oil, gas and coal enterprises, as well as utilities deriving more than 50% of their electricity from fossil fuels. Findings showed that there was approximately $555 billion (U.S.) in fossil fuel investments, and approximately $21.4 billion in thermal coal enterprises. The work has continued to evolve, and in 2018 Dave undertook the first climate risk scenario analysis of insurers' portfolios using the 2° Investing Initiative's Paris Agreement Capital Transition Assessment (PACTA) model under three scenarios for the portfolios of the 600 largest insurance companies. Findings showed a significant misalignment. David pointed to a number of critically important developments since that time. For example, in 2020 the Commodity Futures Trading Commission looked at the entire landscape of U.S. financial regulators. One of the recommendations was that the insurance industry should undertake climate risk analysis as part of its ongoing enterprise risk management governance, and that there should be mandatory disclosure of those risks. More recently, the Biden administration has issued an executive order directing the Treasury Secretary, as the Chair of the Financial Stability Oversight Council, to oversee a plan that would encompass all U.S. financial regulators and their approach to incorporating climate risk analysis in their supervision oversight of financial institutions. One component directs the Federal Insurance Office of the U.S. Department of Treasury to assess the adequacy of state insurance regulators' oversight as it relates to climate risk. Hopefully that will encourage more state insurance regulators to incorporate climate risk analysis and assessment in their supervisory practices. Nina Chen, New York State DFS: DFS supervises and regulates the activities of nearly 1,800 U.S. insurance companies and more than 1,400 banking and other financial institutions. As the first ever Director of Sustainability and Climate Initiatives at DFS, Nina works across insurance, banking, consumer protection and research innovation to integrate climate considerations into all programs. DFS is the only U.S. financial regulator to establish a holistic set of expectations on managing the financial risks from climate change for both banking and insurance-regulated entities. Nina described how DFS has now included questions on climate-related financial risks in the exams of insurers, and has been providing feedback to the responses. A report was recently released on the transition risk exposure that New York domestic insurers face based on the 2019 asset data. Findings showed that these investments have a meaningful exposure to carbon-intensive sectors, and exposures vary dramatically by insurer. Nina sees supporting insurers on the journey of managing climate risk as part of her work. DFS is also actively engaged with national and the international counterparts to facilitate consistency across jurisdictions, an important issue for all. Butch Bacani, PSI: PSI now has 200 members worldwide that have signed global ESG principles that are tailored to the insurance industry, including 100 insurance companies that represent $14 trillion in assets under management (AUM). An extensive network of insurance market bodies and supervisory authorities have also signed the PSI. Butch explained that the priorities for the organization include: (1) understanding different climate change scenarios and their impact on insurance portfolios across physical, transition and litigation risks, (2) determining the meaning of ESG for underwriting, (3) reviewing the agenda for life and health insurers on the underwriting side, such as looking at the connection of climate change and mortality, and (4) establishing a Net-Zero Insurance Alliance. The UN-convened Net-Zero Asset Owner Alliance is a sister initiative being led by insurance companies and pension funds committed to the transition. Steven Bullock, S&P Global Sustainable1: Steven reviewed recent research conducted by his team to provide visibility on some climate-related risks and opportunities relating to the investment activity of the insurance industry in the U.S. Taking Trucost Environmental data, which is carbon emissions and fossil fuel exposure of listed and private companies, along with NAIC information on disclosures, team members were able to understand the different types of assets in insurance portfolios to calculate the climate-related issues. They then created a financial hierarchy using S&P Global data. For example, investments in corporate bonds were mapped to the issuer, and investments directly in subsidiary companies were mapped to the ultimate owner. The team looked at almost 4,000 insurance portfolios, representing approximately 1.65 million securities and $6.5 trillion in AUM. Within the portfolios, there was exposure to fossil fuel-related activities amounting to approximately $582 billion worth of revenue, or 9% overall exposure. On the opportunity side, the team looked at activities linked to the sustainable activities outlined in the EU taxonomy, which are those that can contribute to the transition to a low-carbon future. Findings showed that 22% of the AUM was linked to sustainable activities, indicating some of the potential opportunities. The team also found extensive variation depending on the size of a portfolio. The approach and findings underscores the fact that a very detailed analysis of portfolios and their exposure to fossil fuel activities is required to truly understand a company or the constituent-specific factors. In wrapping up the session, it was agreed that collaboration is needed to move things forward, as no one organization has all the answers. Source: spglobal.com

The cost of fraud across the Asia Pacific (APAC) region last year rose to 3.51 and 3.87 times the amount of actual lost transaction values due to the rise of fraudulent transactions. These figures, which came from the LexisNexis® True Cost of Fraud Study from LexisNexis® Risk Solutions for the Philippines in 2020, show a significant increase from 2019’s regional average of 3.40. LexisNexis Risk Solutions is a global leader in combining advanced analytics and global identity intelligence technology with innovative financial crime technologies like machine learning, artificial intelligence (AI), and robotic process automation (RPA). These solutions enable precise risk perspectives during the customer lifecycle, allowing customers to make timely and correct decisions and address financial crime risk. Source: 1.Manila Bulletin https://mb.com.ph/2021/08/19/ph-true-cost-of-financial-crime-compliance-rises-by-44-in-2020/ 2. Adobotech https://www.adobotech.net/financial-crime-compliance/ 3. Techpatrol https://www.techpatrl.com/regtech/ 4. The Philippine Business & News https://thephilbiznews.com/ph-true-cost-of-financial-crime-compliance-rises-by-44-in-2020/ 5. Teknogadyet https://www.teknogadyet.com/2021/08/lexisnexis-risk-solutions.html 6. Malaya Business Insight https://malayaph.com/index.php/news_business/ph-true-cost-of-financial-crime-compliance-up-44/

The inaugural multi-modular ASEAN Reinsurance Programme (ARP), developed collectively by members of the ASEAN Insurance Education Committee, was launched in the early part of 2021 in response to the call for concerted regional efforts to raise technical capabilities in reinsurance. Endorsed by the ASEAN Reinsurance Working Committee, the Programme has to-date trained about 100 young ASEAN reinsurance executives in the various aspects of Reinsurance under the various modules. This Capstone Programme was conceived to serve as a culminating learning experience for those who had attended the earlier modules of the ARP. Applying the concepts that they have learnt, participants will be grouped by countries to develop their own case-studies that are specific to their country and to present them to a panel of judges on the last day of the ASEAN Reinsurance Team Challenge. Learning will be peer-based as well as facilitated by mentors/coaches. Those who did not attend the earlier modules can benefit from the morning lectures which will touch on the topics that had been covered in these modules. A webinar highlighting the various capital management regulatory regimes in ASEAN will be organized prior to the module. Click here to register and download the brochure.

The 4th ASEAN Insurance Summit, organised by the ASEAN Insurance Council and managed by the Singapore College of Insurance (SCI), will be taking place virtually on Tuesday, 26 October 2021. This year’s Summit provides a platform for senior insurance leaders and practitioners to share their perspectives on sustainability issues, such as climate change and its impact on the ASEAN insurance industry, as well as to contribute to the ASEAN Economic Community policy-making process. Source: asiainsurancereview.com