Climate risk initiative of the year, Aviva
Climate change poses undeniable financial risks for re/insurers' business models and customers around the world. There has been plenty of talk, but often little real action beyond the 'warm words'.
Aviva wins InsuranceERM's award because its climate value-at-risk (VaR) initiative shows the practical benefits that can be achieved when insurers focus resources, time and expertise on climate risk management, as well as collaborating with other knowledge partners.
The insurer's climate VaR considers four potential future climate change scenarios, developed by the Inter-governmental Panel for Climate Change (IPCC).
Each scenario describes a potential trajectory for future levels of greenhouse gases that can be mapped to potential temperature rises and levels of mitigation required.
The four scenarios all assume a gradual path in which temperatures rise slowly, but climate policy is ramped up at varying speeds with a fairly high degree of global coordination. They do not consider the transition risk in a more chaotic policy environment.
Aviva included the results of the scenario analysis in its 2018 climate-related financial disclosure for the first time, as part of the Task force on Climate-related Financial Disclosures (TCFD) reporting recommendations.
The initial result of Aviva's climate VaR analysis compares a range of outcomes (5th to 95th percentile) for the different scenarios considered.
It shows exposure is greatest in relation to the business-as-usual 4°C scenario where physical risk dominates, negatively impacting long-term investment returns on equities, corporate bonds, real estate, real estate loans and sovereign exposures.
In all scenarios, the climate VaR tool found the impact on insurance liabilities is more limited than on investment returns. However, it highlights there is potential for some impact on life and pensions business as a result of changes in mortality rates.
Aviva's approach was marked by collaboration and the tool was developed in conjunction with the UN Environment Programme Finance Initiative and Carbon Delta, an environmental data analytics firm.
The insurer has also extended the climate VaR approach with Elsewhere, a risk management and quantification consultancy, to enable it to be applied to its whole balance sheet.
Asked why Aviva launched the climate VaR initiative, Loubna Benkirane, head of actuarial function innovation at Aviva, says the insurance industry is increasingly concerned about the impact climate change could have as asset owners, asset managers and insurers.
She says: "Using a measure like Climate value at risk puts climate change in a language that our sector readily understands. We are looking at how climate change could impact all the aspects of our business. We need to act today to contribute to a better future for our customers and investors.”
In terms of updates to the tool, Ben Carr, analytics and capital modelling director at Aviva, says: “We are continuing to make enhancements to the approach we used for 2018 such as covering more insurance perils and regions. We are also working with other insurance players under the auspices of United Nations Environment Programme Finance Initiative to build out scenario analysis capability for insurance liabilities more generally and build methodologies”.
He concludes by saying the tool’s value lies in helping Aviva understand how climate-related risk and opportunities can inform business decision making processes, as well as providing transparency to the market.