Only sustainable business is good business in the long run
Unlike the COVID-19 crisis, climate change is a global systemic risk for which there's no expiry date and no vaccine. And the protection gap will continue to be exacerbated by it. The effects of climate change are not only manifested through large natural catastrophes and the destructive power of hurricanes and typhoons, but also the accumulation of local weather events.
In the last decade, climate change has increasingly led to extreme weather conditions such as torrential rains and flooding in some regions of the planet, as well as longer and scorching summers prone to wildfires and severe drought in other regions.
From an insurance perspective, 2020 was rather uneventful for the industry in terms of large-scale events, with no single major peak primary-peril, loss-making event. Losses were, however, incurred from many small to mid-size events, the so-called secondary perils. These accounted for more than 70% of insured natural catastrophe losses in the year.
Our industry can play an important role in addressing climate-related risks and helping communities bounce back when disaster strikes to promote resilience and future sustainability.
Our sustainability journey continues
Swiss Re has a long history around sustainability. Our first publication discussing sustainability-related issues dates back to 1979! Some milestones include our decision to go 100% greenhouse gas neutral by offsetting operations emissions in 2003 and the introduction of our Sustainable Business Risk framework in 2009.
A decade later, in 2018, we pioneered the movement to steer underwriting portfolios away from coal through our Thermal Coal Policy. The policy initially focused on direct and facultative business. Today, many of our clients and peers have joined us and are working towards reducing thermal coal exposure in their portfolios.
In February of this year we took yet another important step in the development of Swiss Re's carbon steering mechanism on the way to reach net-zero emissions by 2050 and agreed to extend our Thermal Coal Policy to Treaty business. The extended policy introduced specific exposure thresholds, effective from 2023, for multiple P&C lines. It sets a long-term reduction path of these thresholds, targeting a total phase-out of thermal-coal related business in OECD countries by 2030 and in the rest of the world by 2040.
For its own operations, Swiss Re is committed to achieving net-zero emissions by 2030, focusing primarily on emission reduction measures as part of its strategy to ’do our best’. Since 2020, we are sourcing 100% of its power from renewable sources. To prevent going back to the pre-pandemic travel intensity, Swiss Re has set itself a 30% reduction target for flight emissions for 2021, relative to the 2018 level.
But the race to net zero requires more from all of us. It is time to move the bar higher and work together across our industry to advance sustainable business.
New opportunities in sustainable business
For the insurance industry, the drive towards sustainability must include intensifying the dialogue on thermal coal and assessing coal exposure in underwriting. These policies are not only about exclusions. There are opportunities too.
We have started our second year of evaluating all our portfolios against the UN Sustainable Development Goals (SDGs) and identifying opportunities linked to them. There are many chances to support transition products.
In the automotive space, for example, our New Energy Vehicles (NEVs) offering comes with a modular and increasingly deeper level of engagement. It starts with identifying the effects of NEVs and their technical and economic specificities on motor insurance - providing NEVs technical, market, regulatory and insurance specific insights - to then determine the immediate and prospective effects of such vehicles on insurers' portfolios.
Ultimately, our goal is to offer our clients a tariffication tool, providing insurers of electric vehicles with specific adjustment factors for Motor Third Party Liability (MTPL) and Motor Own Damage (MOD) covers. As we look at further development opportunities, this product, currently in R&D stage, is being discussed with some of our key clients.
Another area of focus is big potential accumulations in offshore windfarms in areas exposed to tropical cyclones or hurricanes across Asia, Africa and the Atlantic coast of the US. While Swiss Re supports the development of renewable energy, we remain cautious due to the potentially significant, plausible energy supply disruption in the event of a natural catastrophe event making landfall in those areas.
In some scenarios, the development is restricted due to lack of insurability of the assets because of accumulation. In others, costs to insure them would be prohibitive.
A pivotal role for re/insurers
Re/insurers must play a pivotal role in mitigating climate risk – as risk experts, risk capacity providers and investors in resilient infrastructure. For us, this means having to cope with higher losses as well as dealing with greater uncertainty.
It calls on the insurance industry to fundamentally change our risk assessments, leveraging our risk knowledge and deploying new technology. Sustainable business is good business and a clear opportunity to get on the front foot.