Taking the lead on climate change risk

How a major global insurance company used innovative climate change solutions from Moody’s to measure the impact of physical climate risk on its book of business and get ahead of the curve on climate disclosure reporting

Key takeaways

• Better climate governance
• Insurer is well-positioned to meet climate-related disclosure requirements
• Insurer demonstrated leadership and satisfied investor and stakeholder concerns
• Project expanded to encompass different perils and regions
• Factors unrelated to climate change, such as increases in exposure, are likely to be more meaningful drivers of near-term risk
   

The challenge — climate change disclosure and governance

A major global insurer was under growing pressure from shareholders to understand how climate change was impacting its underwriting portfolios, both now and into the future, under multiple climate change scenarios up to the end of the century. The aim was to use the information for longer-term business planning to prepare and adjust its property catastrophe underwriting.

The insurer was also aware of growing regulatory pressure, including disclosure frameworks such as the Task Force on Climate-Related Financial Disclosures (TCFD), which are currently voluntary but are already influencing climate change regulatory disclosures. The company wanted to provide metrics around its physical climate risk exposure as part of a wider push to take the lead on responsibilities around environmental, social, and governance (ESG); sustainability risk; and climate transition.
 

The solution — climate risk expertise and flexible analytics from Moody’s

The insurer was already using Moody’s RMS™ catastrophe models across its business, which were embedded into its underwriting and corporate management process. However, “bending the exceedance probability (EP) curve” would not deliver the insights needed to capture future climate change risk and drive strategic decision-making. While the insurer was an industry leader in understanding and quantifying cat risk within the near term (one-six years), it lacked the tools, experience, and processes to respond to mid-term and long-term risk. The clear solution was working with Moody’s consultants to make the analysis consistent with business and modeling processes already in place.

The project kicked off looking at North American hurricanes and Australian cyclones, assessing three specific time horizons: 2030, 2050 and 2100. Moody’s analysts worked with the carrier’s internal catastrophe modeling and exposure management team, analyzing a Representative Concentration Pathway (RCP) scenario for future greenhouse gas concentrations. Models were calibrated to represent the scientific consensus on climate risk drivers and outcomes under each time horizon and emissions pathway based on extensive scientific literature. At each stage, Moody’s consulting services communicated levels of uncertainty in model output.

The company felt Moody’s was best positioned to interpret scientific consensus around climate change and its likely impact on physical risk from natural perils. Working with Moody’s also offered stakeholders an "external seal of approval," helping the organization demonstrate that it had worked with industry-leading analysts and taken concrete steps to build a clear view of how climate change was influencing major perils in its book of business.
 

The outcome — clarity around climate change and its impact on the portfolio

The new insights were critical to increasing confidence with shareholders and supporting business planning. The ability to effectively communicate climate change risk using traditional industry loss metrics, such as average annual loss, helped the insurer’s senior leadership team gain instant credibility with shareholders. Furthermore, with both a near- and long-term view of climate risk, they were able to plan more effectively for the uncertainty that climate change brings to their book of business.

Equipped with insights based on multiple climate change scenarios, the insurer is building new capabilities to operationalize climate change science to meet the new and emerging business and regulatory challenges. Next steps include licensing the new Moody’s RMS climate change models for European windstorm, North Atlantic hurricane, and European flood risk. With these new models embedded in its view of risk, the company can now easily incorporate climate change insights across different time horizons into its existing workflows.

As a result of this project with Moody’s, the company has been able to demonstrate leadership in the market and diligence to its investors and other stakeholders, as well as proactively position itself in anticipation of TCFD-inspired and other climate change-related regulations.