Pricing nature in insurance
As reporting standards of the Task Force on Climate-Related Financial Disclosures (TCFD) are implemented a new topic takes off: Nature & Biodiversity. A Task Force on Nature-related Financial Disclosures (TNFD) is about to emerge with the aim of developing recommendations, which could also change how insurers report and write business.
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Reporting requirements (voluntarily or mandatory) have a strong impact on how insurance companies report and steer their business. This has been demonstrated by the Task Force on Climate-related Financial Disclosure (TCFD)1 currently being implemented. This approach seems now to be replicated with an emerging Task Force on Nature Related Financial Disclosures (TNFD).2
This comes in the context of the 2021 Conference of the Parties to the Convention on Biological Diversity,3 where the next global biodiversity framework to stop species decline will be a main topic agenda.4 The majority of the biodiversity goals set in the last decade have not been met, and the conference will seek to establish new ones. One proposed goal is to value nature “through green investments, ecosystem service valuation in national accounts, and public and private sector financial disclosures.”
As comparison, the TCFD has more than 1 000 supporters, including insurance supervisors and financial firms representing assets of USD 138.8 Trillion.5 TCFD recommendations are now being implemented through legislation and regulation in many jurisdictions.6
Under the TCFD recommendations, insurers as well as agents in other industrial sectors should show how climate-change resilient their portfolios are. Implementing climate-change related considerations into actuarial models is one way to do this.7 On the life side, the impacts of climate change are currently under investigation. As the WHO and the Lancet Countdown on Climate Change and Health suggest, without action negative impacts on excess morbidity and mortality can be expected.8 This will impact insurance. Finally, investments will also be influenced by TCFD.
Quantifying the impact of the decline of nature will pose an even bigger challenge. TNFD thinking on how to halt deterioration is still in nascent stage, and understanding the impacts or adapting actuarial models and reporting figures will be challenging. The COVID-19 pandemic points to the inherent complications.
A key risk driver for the frequency of pandemics is deforestation in biodiversity-rich tropical areas. Deforestation can connect new pathogens via roads to population centres: in other words, forest loss makes pandemics more likely.9 To quantify such scenarios could be one of the tasks when reporting on “Nature-related Financial Exposures” becomes a requirement of corporate disclosure.
As the risks related to the loss of nature become more material, the pressure for stringent measures increases. Economic growth is a big driver of nature’s decline, and a way to change course is to make the financial impacts in corporate accounts visible. For the insurance industry, this is good news. The increasing transparency on client exposures enables more informed and targeted underwriting and risk selection. It also opens up business opportunities such as nature-based insurance solutions.10
1. Task Force on Climate-Related Financial Disclosures, https://www.fsb-tcfd.org/
2. Task Force on Nature-Related Financial Disclosures, https://tnfd.info/
3. Fifteenth meeting of the Conference of the Parties to the Convention on Biological Diversity, https://www.cbd.int/meetings/COP-15
4. Discussion paper Post 2020 Global Biodiversity Framework, https://www.cbd.int/conferences/post2020/post2020-prep-01/documents
5. About: History, Task Force on Climate-Related Financial Disclosure, https://www.fsb-tcfd.org/about/#history
6. TCFD Status Report 2020, October 2020, 2020 Status Report: Task Force on Climate-related Financial Disclosures ‒ Financial Stability Board (fsb.org)
7. Climate change and related risks have truly significant implications for underwriting, investment, and even an insurer’s operational activities., KPMG, https://home.kpmg/xx/en/home/insights/2020/05/preparing-for-climate-related-disclosures.html
8. Climate change and human health ‒ risks and responses. Summary, WHO, 2003, https://www.who.int/globalchange/summary/en/; N. Watts, “The 2020 report of the Lancet Countdown on health and climate change: responding to converging crises”, THE LANCET, 2 December 2020, https://www.lancetcountdown.org/2020-report/
9. IPBES #PandemicsReport: Escaping the ’Era of Pandemics’, ipbes, https://ipbes.net/pandemics
10. Swiss Re Nature-based insurance solutions, Swiss Re, 27 November 2020, https://www.swissre.com/our-business/public-sector-solutions/our-solutions/nature-based- solutions/world-heritage-site-nature-based-solution-leads-way-reducing-risk-rising-sea-levels.html