WTW: Climate matters

Christopher Au, associate director, at WTW's climate and resilience hub, speaks about how the company is helping insurers tackle one of the most important issues of our times

Why is climate risk such a threat to insurers?

Christopher AuThe systemic nature of climate risks poses material challenges across both the underwriting and investment sides of an insurer's activities. Two aspects are worth drawing on.

The industry's unique appeal – the ability to price risk – must remain accurate. This pricing function helps to direct investment and financial flows, and in turn support entrepreneurship. Mounting climate risk requires insurers to continue to provide updated methods of assessing and quantifying risk, for both primary and secondary impacts. Quick solutions or shortcuts are not durable amidst this changing risk profile. Moreover, the accuracy of the insurance pricing function is essential for the solidity of the wider financial sector by directing investment and entrepreneurship.

There is also a profound relevance question. As climate risk develops, premium increases are likely to be required to ensure adequacy. In areas of intense natural catastrophe and man-made risk, we've already seen forms of public-private partnerships. Without public financing or guarantees, these flood, tropical cyclone, and terrorism insurance programmes would be unviable. To predict the expansion of PPPs – as was evidenced in proposals for future infectious disease risk financing mechanisms – is not unreasonable. The industry needs to remain focused on key segments of risk, risk reduction, and provide a risk-bearing offering to ensure it remains far more than a distribution and servicing agent of public-private partnerships. Such considerations are amplified for societies without the government ability to provide extensive fiscal support.

How is WTW helping insurers to tackle climate risk?

Our work stretches across both physical and transition risk. WTW invested in a dedicated, cross-company climate risk and resilience team in 2014, predicated on the understanding that insurance and insurance-tools will need to be applied more broadly in society. The cadence of updates to our services, programmes and products to address climate risk is testament to these years of research, innovation and public policy engagement. The target was, and remains, economic and social resilience.

Insurers are at the centre of that agenda. We frame our physical and transition risk offering as helping insurers adjust their own portfolios to a low carbon, riskier environment, and helping insurers provide capacity and products for their clients and society in this emerging environment.

What kinds of updates and initiatives did you launch in 2021?

2021 was the result when several years of innovation meets increasing market demand. Landmark activities included:

  • Placement of the world's first parametric insurance transaction to help enable ground-breaking debt restructuring for marine conservation by the Government of Belize. Payouts are made to creditors, maintaining – rather than extending - the original repayment timetable. This parametric wrapper has enormous potential for the financial resilience of island and coastal nations, where hurricane risk is hugely significant
  • The launch of the Climate Transition Index (CTI): this is an approach that looks beyond simple strategies such as carbon exposure and enables investors to address the financial risk to company share prices caused by a climate transition by building balanced, mainstream, Paris-aligned portfolios. This deploys our proprietary Climate Transition Value at Risk (CTVaR) metric
  • Placement of a coral reef insurance parametric for the Meso-American Reef. This fast-paying parametric hurricane insurance programme, to enable reef restoration, demonstrates how novel approaches to risk financing can incentivise and deliver the rapid action that is so beneficial to building reef resilience in the face of the increasing impacts of climate change, from warming oceans to severe weather events.

Do you think the insurance industry is making progress on addressing climate change?

The industry is certainly taking a series of positive steps and individual companies are leading the way in different fields. I think we all know the pace of change needs to accelerate.

The expansion of the insurance approach and insurance tools to additional lines of risk, in new contexts is going to become important. As climate risk becomes salient for businesses and society, the industry must continue to demonstrate added value. There are proven product structures such as parametric, which are not themselves a new technology – far from it – but their application to support financial resilience is going to become increasingly pertinent.