The Willis Research Network is an award-winning collaboration supporting and influencing science to improve the understanding and quantification of risk, with the aim to improve the resilience of our clients and society as a whole.
The purpose of the Willis Research Network (WRN) is to help society better prepare and cope with the types of events we have all experienced in 2020. Since our formation in 2006, the Network has focussed on developing the science of resilience to support the management of extremes from natural, man-made and hybrid risks.
Through the WRN, and our related activities such as the Coalition for Climate Resilient Investment, we are working hard to support development of expertise and provide wider adoption across the public and private sector.”
Rowan Douglas | WRN Chairman
Despite the operational challenges of 2020, the following pages illustrate another remarkable year in scientiﬁc collaboration, real-world application and impact across our research themes and geographies, including North America, Europe and Asia Paciﬁc. Long standing academic partners such as NCAR, Columbia University, NOAA SSL Oklahoma, San Diego State University, University of Exeter, University of Cambridge, Newcastle University, NU Singapore, Tohoku and UCL have been joined by partners from beyond the university sector including Cloud to Street, Mitiga Solutions, RUSI, Temblor and Metabiota. Over the last few years, our scope has continued to expand to encompass risks such as pandemic, cyber and political risk.
COVID-19 illustrates how we should all consider high-impact, low probability events within our core operations, planning and finances. Engineering and re/insurance risk management techniques, such as scenario development and stress testing, are now entering the mainstream. The WRN is at the heart of that integration, driven by our engagement with policy makers, regulators and market practitioners. Structural reform is underway on how markets evaluate, disclose and manage contingent risks and liabilities. Until these risks are effectively accounted for, resilience cannot be sufficiently valued and incentivised. The tragic results will be additional lost lives, livelihoods and assets in the years and decades ahead. Through the WRN, and our related activities such as the Coalition for Climate Resilient Investment, we are working hard to support development of this expertise and its wider adoption across the public and private sector.
Looking ahead, we have a busy year driven by mobilisation in response to the Climate Emergency, the upcoming CoP26 meeting in Glasgow and the needs of Governments, regulators, investors and others. The role of the WRN is to fill in the gaps between high level roadmaps and the practical implementation of the methods, metrics and models to integrate these risks into mainstream valuations and management. In December 2020, we propelled this process with a WRN Challenge Fund competition to support financial sector climate stress testing methods and models.
A decade ago, in September 2011, the WRN co-hosted a three-day summit in Washington DC with the National Academy of Sciences on Managing Extreme Events. Bringing together leaders from science, finance and public agencies, it played a significant role in catalysing the resilience agenda in the U.S. and beyond in the following years. Assuming the COVID situation allows, we aim to hold a second meeting with the National Academy in 2021 to mark the ten-year anniversary and identify the themes and approaches to help us all manage the coming decade.
To underpin all this progress, the Network has also undergone significant internal growth and development this year to prepare for its future. Its success owes most to Hélène Galy, Managing Director, WRN and her growing team. Our thanks also to Carl Hess, Vickie Sefcik and fellow members of the WRN Steering Group, the wider Willis Towers Watson team and WRN members, who have driven our collective projects and programmes. A special thank you to our clients whose engagement and support enables us to maintain our global research programme as a client service and a public good.
Willis Research Network Brochure Topics 2021
Weather and Climate
A re-invigorated emphasis on climate risk research
Downscaling climate change impacts on Atlantic tropical cyclone landfall rates
Projecting changes in severe thunderstorm frequency
Quantification of potential climate change impacts on
How do fishers asses and manage the risks related to extreme storms?
Rising levels of flood risk
Quantifying the climate change impact on flooding: scenario approach
Providing a view of risk in emerging markets
How remote sensing technology is becoming the key component of analysing flood risk
Terra Firma, a year of significant achievements
Tsunami fragility of buildings
Seismic resilience of telecommunication networks
Do earthquakes interact with each other, and how do we account for it?
Earthquake risk in realtime for Japan
2019 Ridgecrest: can earthquakes cause a chain reaction?
Quantifying the tail risk from very large earthquakes.
Better earthquake modelling for (re)insurance decision-making
People risk management in the modern world
Industry focus: towards a net zero and more resilience aviation sector
Pandemic models are evolving quickly; pandemic insurance needs to as well
Understanding and quantifying political risk
Understanding the digital acceleration
Understanding the startup landscape using knowledge spaces
Cybersecurity as strategic asset
Underlying and consequential costs of cyber security – cost of equity
Real estate has led the way as an early adopter of TCFD requirements. In this whitepaper Willis Towers Watson outlines key lessons learnt throughout the sector.
Task Force on Climate-related Financial Disclosures (TCFD) is being increasingly adopted by the real estate sector, with the past two years seeing significant momentum in adherence to the guidance1. Indeed TCFD disclosures made by Real Estate Investment Trusts (REITs) and Real Estate Management and Development organisations have increased. Total disclosures made in 2020 more than doubled the total number reported for 2019, and the number of disclosures for 2020 exceeded the total combined disclosures made over the previous three years from 2017 to 20192. This is in spite of the macro-economic decline and uncertainty, which has hit some landlords especially hard.
Total TCFD disclosures made in 2020 were more than double than the total number reported from 2017 to 2019
With disclosure mandatory (on a ‘comply or explain’ basis) from 2022 for premium listed companies3, this whitepaper outlines the key themes and lessons learned from real estate experience in addressing TCFD guidance.
The Investment Consultants Sustainability Working Group (ICSWG) has launched a guide to support trustees to assess their investment consultants on their climate competency. The ICSWG is a collaboration between 17 firms formed in 2020 taking action to support and accelerate sustainable investment initiatives in the UK.
Developed through collaboration between all 17 member firms
with input from ShareAction, The Pensions Regulator and the PRI, the guide is a
practical response to the 2020 Pensions Climate Risk Industry Group (PCRIG)
consultation, which recommended that pension scheme trustees require their
investment consultants and asset managers to demonstrate climate
The guide sets out five themes against which trustees should expect their
investment consultants to demonstrate their climate competency. These are:
Firmwide climate expertise and commitment
Individual consultant climate expertise
Tools and software (to support climate-related risk assessment and monitoring)
Thought leadership and policy advocacy
Assessment of investment managers and engagement with them
Examples of ‘positive’ and ‘best practice’ indicators are
proposed for each theme to help trustees assess their consultants in each area,
underscoring the commitment of the ICSWG to ongoing improvement of climate
“The indicators are deliberately stretching with the aim of
raising investment consultants’ standards and it should be acknowledged that
some of these indicators will be aspirational.” Said Luba Nikulina, of Willis
Towers Watson and co-Chair of the ICSWG. “However, this is an important step
towards developing good practice and practical guidance for schemes, in
particular those seeking to align with the recommendations of the Taskforce on
Climate-Related Financial Disclosures (TCFD).”
Download the “Guide for assessing climate competency of Investment Consultants” here.
It’s that time of year again! The beginning
of a new year marks a great time for dedicating oneself to resolutions, whilst
also giving us an opportunity to reflect on the past year and the moments that
shaped us. With that spirit of reflection in mind, we sifted through our
network’s article archive and selected some of our favourites from the past
year. We’ve sorted our favourite articles by topic, to make up a short, three-part
series throughout the month of January. To kick
things off, we bring you six articles related to climate adaptation for the
financial services sector.
While 2020 was a
big year in terms of newsworthy moments across the globe, there were also many
significant developments within the financial services sector. In September,
the United Nation’s Environment Programme Finance Initiative (UNEP FI) released
a report on Phase II of its Task Force for Climate-related Financial
Disclosures (TCFD) Banking Program with Acclimatise. The new report, “Charting
a New Climate”, provides financial institutions with a state-of-the-art
blueprint for evaluating physical risks and opportunities. A new learning paper
was also launched, one which provides insights on the lessons
learnt from implementing Green Climate Fund (GCF) Readiness projects in the
Caribbean and aims to inform future Readiness efforts in the region or
Despite the grave conditions many economies are facing due to
2020’s COVID-19-induced lockdowns, expectations for corporates and financial
institutions on climate risk analysis and disclosure have not slowed. In fact,
climate risk and reporting mandates only appear to be increasing. 2021 will see a continued
focus on climate risk analysis in the private sector, in the lead up to the 26th Conference
of the Parties to the UN Framework Convention on Climate Change (UNFCCC).
Acclimatise has now been acquired by Willis Towers Watson, where
we offer joined up services on both physical and transition related-risk
Launch of “Charting a New Climate: State-of-the-Art Tools and Data
for Banks to Assess Credit Risks and Opportunities from Physical Climate Change
By Acclimatise News
UN Environment Programme Finance Initiative (UNEP FI) has released
a report on physical climate risks and opportunities from Phase II of its Task
Force for Climate-related Financial Disclosures (TCFD) Banking Program with
climate risk advisory and analytics firm, Acclimatise. The report, “Charting a New Climate”, provides a state-of-the-art
blueprint to support financial institutions to navigate the changing physical
climate risk landscape.
Why climate resilience bonds can
make a significant contribution to financing climate change adaptation
By Maya Dhanjal
There is a rising cost associated with economic damages related to
climate change with 2019 being the most expensive year to-date and expected to
only get worse. Governments who are mainly responsible for providing this
funding are strapped in their ability to mobilise and manage emergency funds.
Resilience bonds provide a unique opportunity to hybridise principles in debt securities
and insurance policies and ultimately divert available funds into
climate-resilient projects that will enhance adaptive capacity, particularly
for long-lived infrastructure assets that have to face the test of time and a
GCF readiness efforts in the Caribbean: Learning from Practice
By Acclimatise News
A new learning paper by Acclimatise provides an insight on the
lessons learnt from implementing Green Climate Fund (GCF) Readiness projects in
the Caribbean and aims to inform future Readiness efforts in the region or
New report: Protecting low-income communities through climate
By Will Bugler
Since 2015, the InsuResilience Investment Fund (IIF)
has worked to build the climate resilience of poor and climate-vulnerable
households as well as micro, small and medium enterprises, by increasing
climate insurance coverage. A new report “Protecting low-income communities through climate
insurance”, takes stock
of its experience and achievements to date.
de-risking nature: The next frontier for financial institutions
Nature and biodiversity have gained the spotlight this year,
becoming the next frontier for financial services. Earlier this year, the Task Force on Nature-related
Financial Disclosure (TFND) was launched under
the leadership of the Global Canopy, UNDP, UNEP and WWF, aiming to redirect
financial flows towards nature-based solutions and nature-adding activities.
2021 will see a continued focus on climate risk analysis in the private sector, in the lead up to the 26th Conference of the Parties to the UN Framework Convention on Climate Change (UNFCCC). COP 26 will be held here in the UK and is set to have a strong focus on private sector finance. Mark Carney, special finance advisor to the UK Prime Minister has made clear that the objective for the private finance work for COP 26, is to “ensure that every financial decision takes climate change into account”. Finance is also one of five campaigns of the UK COP 26 presidency.
As 2020 comes to a close, this article summarises major developments expectations for corporates and financial institutions on climate risk analysis and disclosure in the last quarter of this year. Other reviews of progress in this space – and there has been a lot – are available here and here.
US Federal Reserve, Treasury Department, and the Securities and Exchange Commission have all indicated in various ways that they are on-board with their counterparts in other countries, who have long since been making progress toward mandating climate risk analysis and disclosure. (e.g., the dozen or more central banks and supervisors around the world who are undertaking climate-related stress testing.). This is no doubt in part due to President-Elect Joe Biden, who has made climate one of four priority areas in his Administration. The US is also set to re-join the Paris Agreement, and the expectation is that the US Federal Reserve will soon join the Network (of Central Banks and Supervisors) on Greening the Financial System (NGFS) (more information is available here and here.)
Importantly, there is ample
evidence that President Biden and his Administration may not need
congressional approval for any further climate-related laws or regulations,
which would not be likely, given the Republican stronghold on the US Senate.
There is, however, a growing call
by some Republicans to take climate action, which represents an important
There are now 75 central banks
covering 60% of global emissions who are members of the NGFS. Members are
already taking action, with central banks now requiring climate stress testing,
e.g., Bank of England.
To celebrate its three year anniversary in
December 2020, the NGFS published two reports on 15th December:
A progress report
on sustainable and responsible investment practices by central banks; and
The findings of a
survey on monetary policy operations and climate change.
The guide explains how the ECB expects banks to prudently manage and transparently disclose such risks under current prudential rules. The ECB will now follow up with banks in two concrete steps. In early 2021 it will ask banks to conduct a self-assessment in light of the supervisory expectations outlined in the guide and to draw up action plans on that basis. The ECB will then benchmark the banks’ self-assessments and plans, and challenge them in the supervisory dialogue. In 2022 it will conduct a full supervisory review of banks’ practices and take concrete follow-up measures where needed.
A new alliance between 30
international asset managers with $9tn in assets under management (AUM) has
formed, setting net-zero emissions targets. The group of asset managers pledges
to support investing aligned with net-zero emissions target by 2050 or sooner.
More asset managers are due to join in the coming months. More information is
This new initiative complements
the Net-Zero Asset Owner Alliance, an international group of 33 institutional
investors delivering on a bold commitment to transition investment portfolios
to net-zero GHG emissions by 2050. More information is available here.
The International Financial Reporting Standards (IFRS) Foundation released a Consultation Paper on global sustainability standards, including climate risk reporting, open for public comment until 31 December 2020. More information is available here.
The TCFD is holding a public consultation on decision-useful, forward-looking metrics to be disclosed by financial institutions. The Task Force’s 90-day public consultation solicits input on forward-looking climate-related metrics for the financial sector. The consultation asks questions about the usefulness and challenges of such metrics and what may be necessary to enhance their comparability, transparency, and rigour. The consultation is open for public comment until 27 January 2021.More information is available here.
The UK’s Financial Conduct Authority (FCA) announced that it is going to be consulting on rules in early 2021, which would introduce TCFD obligations for asset managers, life insurers and pension providers by 2022. These extended rules would build the FCA’s new requirement that by 1 January 2021, premium listed companies will be required to disclose how climate change affects their business, consistent with TCFD, or explain why not.
The European Insurance and Occupational Pensions Authority (EIOPA) published a consultation on the use of climate change risk scenarios in the Own Risk and Solvency Assessment (ORSA) in the form of a draft supervisory Opinion. EIOPA invites stakeholders to provide their views on the consultation paper by filling in the survey by 5 January 2021. More information is available here.
Many banks, asset managers, asset owners, insurers, and at very least listed companies are already getting out ahead of the curve of emerging climate risk reporting. Acclimatise has now been acquired by WillisTowersWatson, where we offer joined up services on both physical and transition risk-related analysis. Please contact Robin Hamaker-Taylor (r.hamaker-taylor at acclimatise.uk.com).
Over the course of 2020, leading
international think tank of the insurance industry, The Geneva Association, released
a set of country-based reviews of flood risk management. Covering five
countries, reports are available for the United States, Germany, England,
Australia and Canada.
“Floods are the costliest weather-related event globally, and climate change is likely to increase their frequency and severity. The impacts of weather-related events such as floods are a special threat alongside COVID-19, with government resources for emergency management and socio-economic recovery already stretched. We hope our findings effectively guide the public and private sectors in protecting society from this growing risk”, said Geneva Association Managing Director Jad Ariss.
Flooding is a persistent and expensive challenge to businesses and communities, and will continue to be so if preventative measures are not put in place, and ex-ante risk assessments are not made. At the time of writing, businesses, citizens, investors and insurers are set to see losses from flooding in the next few days in Australia, as heavy rainfall and storms in New South Wales have once again sparked evacuation warnings for many towns in the state. Meanwhile, the total out-of-pocket costs of flooding in Canada were recently estimated at almost CAD 600 million annually. (Swiss Re 2016 in Geneva Association, 2020).
A June 2020 summary report (covering findings from the US, Germany, and Australia) finds that stakeholders are in general reactive to floods. A more forward-looking, ‘all-of-society’ approach is needed. Governments, insurers, businesses and homeowners all have a role to play, and better public and private-sector cooperation is urgently needed to manage flood risk.
Practically speaking, governments, businesses, and individuals need to move toward a ‘risk-informed, anticipatory and system-wide approach to managing disaster risks, as suggested by Geneva Association Director of Climate Change , Maryam Golnaraghi.
These ex-ante efforts should certainly include
investors and lenders, as flood risk can accumulate across portfolios, and
compound with other risks, including shocks from a range of other hazards
(e.g., biological hazards, driving pandemics, or geohazards driving earthquakes
and tsunamis). Put simply, forward looking flood risk analysis is needed, under
a range of plausible climate futures. Investors and lenders should screen for flood
risk (in relevant sectors and geographies), and should aim to consider a
systemic approach, where the combination of flood and other hazards are
considered. This could be at the point of transactions, and in the management
of portfolios and lending books.
The Geneva Association
flood risk management reports aim to encourage better exchange between
investors, businesses, insurers and businesses around flood risk. In
particular, the reports look at the governance element of flood risk management
in detail in the country, reviewing institutional frameworks and the interplay
of different components of flood risk management. Investors and banks could use
these guides to better understand the flood risk situation during security
selection, or during engagement activities.
The main set of recommendations from the June 2020 summary
report (of US, England, and Germany) are as follows (named stakeholders in bold):
Recommendation 1: Governments should
develop a clear national strategy for FRM, with an anticipatory, cohesive and
systems-based approach to building flood
Recommendation 2: The insurance industry
should further step up their proactive engagement with governments and their
customers, as risk advisers, risk management experts, risk underwriters and
investors, to support the implementation of FRM systems to strengthen
resilience to floods.
Recommendation 3: Businesses and households
should proactively seek flood-risk information; understand and take
responsibility for managing their flood risk; and make risk-informed decisions.
Recommendation 4: International
organisations, academic institutions, professional and executive education
programmes could utilise this study in their awareness-raising campaigns
and educational programmes targeted at government officials, policy makers,
businesses and the general public, promoting the need for a risk-based,
anticipatory, cohesive and systems-based approach, which takes climate change
into consideration for building flood resilience.
Recommendation 5: Government officials, the
insurance industry and other stakeholders responsible for FRM in these
countries [U.S., England and Germany in particular, but also in Australia and
Canada] should come together in their respective countries, review and discuss
the gaps, challenges and weaknesses identified in our review and find effective
ways to work together to enhance their FRM system towards a more cohesive,
systems-based and forward-looking approach.
reports are available here:
Canada (published in
partnership with Intact Financial)
By Will Bugler (Acclimatise) & Andrew Eil (Climate Finance Advisors)
Since 2015, the InsuResilience Investment Fund (IIF) has worked to build the climate resilience of poor and climate-vulnerable households as well as micro, small and medium enterprises, by increasing climate insurance coverage. Today, at a side event of the InsuResilience Global Partnership’s 4th Annual Forum, it has launched a new report “Protecting low-income communities through climate insurance”, which takes stock of its experience and achievements to date. As the first fund of its kind to raise private capital to invest in climate insurance markets in developing countries, IIF’s report shares valuable lessons relevant tor impact investors, insurers, policy makers and other relevant entities involved in building resilience using insurance and disaster risk finance.
Authored by Acclimatise and Climate Finance Advisors, the report is based on an analysis of reporting data, interviews and survey responses from IIF’s investee companies. It shows how IIF has developed a unique model that allows it to invest in companies across the entire insurance market value chain, helping to build new networks that support climate insurance market growth in developing countries. In its first six years, the IIF has extended climate insurance cover to 25 million poor or climate vulnerable people in developing countries.
to climate resilience
The report begins by placing the IIF’s work in the context of the wider challenges of closing the climate finance gap and increasing insurance market penetration in developing countries. Climate-driven extreme events have doubled from an average of under 300 events per year in the 1980s to over 600 per year since 2010. This has continued to drive economic losses, affecting practically all sectors. According to Swiss Re, the last decade has been the costliest on record with economic damages from natural disasters totalling over USD 2 trillion. However, as the report notes, current investments worldwide are insufficient to prepare for such impacts. In fact, according one UN estimate, climate adaptation finance totalled an average of $30 billion in 2017-2018, well below the $210-300 billion needed per year between 2010 and 2030.
As noted in the 2015 Paris Agreement, insurance can play an important role in building resilience to climate change and it impacts, allowing people to withstand the financial impacts of disasters and invest in adaptation measures. However, the majority of economic losses generated by climate-related extreme events are not covered by insurance, resulting in a substantial protection gap of $280 billion in 2017 and 2018. Whilst this gap has narrowed in recent years in upper-middle and high-income countries, there has been little progress in lower to middle-income countries, where the protection gap persistently exceeds 95 percent (see map below).
To close the
adaptation finance gap and increase access to climate insurance products in
developing countries, private sector investment is crucial. The IIF uses a
blended finance approach, raising public capital with high risk tolerance
complemented by grant resources, and leveraging it to attract private
investors. So far, the IIF has raised $166 million (approximately $100 million
of which in private capital) and invested $133 million in 21 companies around
barriers to climate insurance penetration
by BlueOrchard, was initiated by KfW, the German Development Bank, on behalf of
the German Federal Ministry for Economic Cooperation and Development (BMZ). It
has a mandate to improve access to and the use of insurance in developing
countries and, in so doing, reduce the vulnerability of MSMEs and low-income
households to extreme weather events. To achieve this, IIF’s investee companies
must overcome several important barriers such as high transaction costs of
delivering climate insurance, difficulties distributing products to large
numbers of poor and climate-vulnerable clients, low levels of awareness of and
trust in insurance, and regulatory challenges associated with earl-stage
climate insurance markets.
these challenges, IIF’s innovative blended finance approach combines aspects of
a conventional investment fund with traditional donor grantmaking and technical
assistance programmes. It has established a unique model that promotes a
whole-value-chain approach to investing, careful selection of investee
companies, and a high level of technical support provided by the Fund itself. It
does this by operating two sub-funds: A Debt Sub-Fund and an Equity Sub-Fund.
The Debt Sub-Fund invests in companies that distribute climate insurance
products, such as micro finance institutions, whilst the Equity Sub-Fund
invests in climate data and service providers, insurers and reinsurers.
whole-value-chain approach to investing recognises that a thriving ecosystem of climate insurance entities
is essential for long-term climate insurance market development. Service
providers cannot exist without insurers and aggregators to buy their products,
insurers in developing countries require a healthy pool of distributors to
extend insurance to low-income communities, and new technologies from data and
service providers underpin the market and are essential to take climate
insurance products to scale. Climate insurance entities also interact with
financial institutions such as retail banks and reinsurers in critical ways;
these interactions are reflected in the business models of many of IIF’s
investees and contribute to the development of the climate insurance ecosystem.
Other elements of IIF’s support for its investees to launch and
grow climate insurance products are the Technical Assistance Facility (TAF) and
Premium Support Facility (PSF). Through the TAF, IIF has undertaken 25
technical assistance projects supporting companies with activities ranging from
business planning, and corporate structure, to product development and
marketing. To help climate insurance products gain a foothold in the market,
the IIF also provides temporary subsidies for insurance premiums through its
PSF, making its investees products more affordable.
and surveys with IIF’s investee companies have shown that the Fund has
delivered significant benefits to their companies. Investees reported that
IIF’s involvement has helped them to: develop new and improve existing climate insurance
products, tailoring them for specific clients; scale their operations, allowing
them to expand into new markets and reach more clients; reduce transaction
costs by making capital investment in new technology and strategic planning; and
improve business governance and reputation which has enabled them to access new
Many of IIF’s
investees are yet to launch or have only recently launched their climate insurance
products. This status, coupled with the challenges they face when scaling
products in developing countries, serves to explain why reaching large numbers
of IIF’s target beneficiaries takes considerable time. Despite the long runway
to large-scale impact, IIF has already demonstrated that its investments
increase access to climate insurance for poor and climate-vulnerable people. At
the end of its first year of operation in 2015, the IIF had approximately 1,700
beneficiaries, a number which had grown to 25 million by September 2020.
model now well established, the Fund expects to make a further 12 to 15
investments in companies in the coming years. Through these new investments and
the further growth of its existing investees’ climate insurance offerings in
maturing markets, the IIF expects to reach between 90 and 145 million
beneficiaries by 2025.
The report also features evidence that the climate insurance products released by IIF’s investees have had a positive impact on the lives of its beneficiaries. Eight IIF investees reported paying out a total value of $4.75 million to clients, from over 18,000 claims, since 2015. The report found that access to climate insurance allowed beneficiaries to recover more quickly from climate related shocks and gave other benefits including improved access to credit in order to invest in their businesses. Interviews conducted by impact measurement company 60 Decibels, with 120 beneficiaries of one of IIF’s investees – Kashf Foundation – found that claimants were over twice as likely to have recovered to their pre-shock levels of welfare compared with those who did not make a claim.
Overall, the report finds that IIF has successfully
established a model that can raise both public and private capital, provide
investor returns, and achieve real benefits for poor and climate vulnerable
communities. Ultimately, IIF’s successes are founded on the quality of its
relationship building with its investees and with other institutions in its
target countries. Whilst this approach is not quickly
scalable, it does provide a real and lasting impact in
building resilience through climate insurance.
The insurance sector has been at the forefront of managing the impact of climate-related risks for many decades. Insurers are well placed to seize the structural opportunities ahead and become stewards of an orderly, whole economy transition to a net zero and climate resilient future. But doing so will require a pro-active and creative approach – a 7-step framework for a strategic climate response. Fortune will favour the risk-adjusted.
In a relatively short time, climate change has moved from an underwriting focused concern of property re/insurers, or matters of corporate social responsibility, to a mainstream set of issues relating to prudential safety and soundness and financial stability across the financial system.
While increasing attention to ESG (environmental, social and governance) factors, reputation concerns and changing consumer sentiment have undoubtably played their part, the system-wide and structural integration of climate-related risks into financial regulation is now the primary driver and moving in only one direction.
The insurance sector has already played a key role in shaping the global regulatory landscape that has now emerged on climate, including leading a revolution in climate data and analytics, responding to Solvency II and supporting the development of a formative framework for climate-related financial risks.
There is a strategic opportunity for insurers to continue to lead. But doing so will require the industry to up its game even more and embed a strategic approach; one that not only integrates climate-related risks into day-to-day risk management but also seeks to steward a whole economy transition to a low carbon and resilient future.
Before diving into how insurers can embrace a stewardship role, let’s start with a reminder of three key inflexion points in the rising tide of climate-related financial regulation. And the leading role the insurance sector has already played in the fundamental reshaping of finance now underway.
The 1990s: An industry in crisis – and a revolution in climate data, analytics and regulation
As many may remember, a series of events in the late 1980s and early 1990s, culminating with Hurricane Andrew in 1992, presented an existential threat to the insurance industry. With losses of over $15bn, Andrew was responsible for the failure of at least 16 insurers between 1992 and 1993. But with crisis comes opportunity. Under pressure from their investors, the insurance industry responded with an analytical revolution in models, methods and metrics to better integrate what has become known as physical climate risks into the heart of pricing and decision making. The catastrophe risk models the industry has pioneered, marrying engineering metrics and actuarial science with human and physical geography, are providing a key analytical building block of the climate-related risk gear box now being employed across the financial system.
As discussed further in Matt Foote’s and Adhiraj Maitra’s article: Insurers can draw on their Solvency II experience to integrate climate risk and resilience, the insurance sector has also been at the centre of one of the first inflexion points in climate-related financial regulation. The introduction of requirements for modelling 1-in-200 year natural hazard scenarios via Solvency II and other regimes around the world, reinforced by insurance credit rating agency requirements, was an early front-runner to the climate stress tests that are now being introduced across the financial system.
It is therefore no surprise that a second pivotal inflexion point had its roots in a prudential climate review of the UK insurance sector, setting the foundation for a financial sector wide approach.
2015: Physical, transition and liability risks and enhanced climate disclosure
In response to a request under the UK Climate Change Act, the Prudential Regulation Authority’s (PRA) 2015 review of the impact of climate change on the UK insurance sector set out the formative framework for climate-related financial risk. The review identified three primary channels; physical, transition and liability as shown in the boxes below. Published alongside a seminal ‘Breaking the Tragedy of the Horizon’ speech by former Bank of England Governor, Mark Carney, at Lloyd’s of London in September 2015, the PRA’s review has helped to catalyse the mainstreaming of climate-related risks as a core financial and investment issue. With an ever more powerful chorus reinforcing the same message, including, for example, BlackRock’s Larry Fink in his annual letter to CEOs, it’s a transformation that is here to stay.
Physical, transition and liability risks from climate change
The introduction of transition risk has been particularly noteworthy, broadening the financial risks from climate change from primarily an insurance sector issue to a market-wide concern. The notion of transition risk has also played an important role in establishing the global, private sector Task Force on Climate-related Financial Disclosures (TCFD). By improving transparency in financial markets, enhanced climate disclosure is helping to address financial stability concerns of a future ‘climate Minsky moment’ – a sudden and abrupt re-pricing of assets from a disorderly transition.
TCFD is also transforming the private sector’s response to the financial risks and opportunities that climate change presents. We explore this further in a related article: TCFD: coming, ready or not, including emerging insights of a recent survey of TCFD readiness among UK premium listed companies as the UK moves towards mandatory climate disclosure. As the article discusses, there is now clearly a co-ordinated, cross-sector approach to embedding climate-related risks across the UK financial system and globally; one that will only accelerate ahead of the next major climate change conference, COP26, towards the end of next year.
A new horizon: Climate stress tests to 2050, supervisory expectations and ‘Dear CEO’ letter
The last two years have witnessed a further acceleration in the climate-related financial regulation landscape. This includes the mainstream recognition that climate change not only presents financial risks, but that these risks have distinctive elements (see below), present unique challenges and require a strategic approach.
It is with these challenges in mind that financial regulators are once again raising the bar. For example, developing climate stress tests to determine the viability of banks and insurer’s business models out to 2050 and beyond and requiring firms to assign individual senior manager accountability for managing the financial risks from climate change.
The PRA’s ‘Dear CEO’ Letter published in July this year could well be remembered as a defining moment; one that requires all UK banks and insurers to ‘fully embed their approaches to managing climate-related financial risks by the end of 2021’.
And while the UK is clearly at the vanguard, it is certainly not alone. The mainstream integration of climate-related risk has become a global endeavour for insurers and across the entire financial sector. For example, since the beginning of September this year:
The European Insurance and Occupational Pensions Authority (EIOPA) has published a consultation on the use of long-term climate scenarios within firm’s Own Risk and Solvency Assessment (ORSA) as part of Solvency II;
The International Association of Insurance Supervisors (IAIS) has published its draft Application Paper to support supervisors around the world in their efforts to integrate climate-related risks into supervisory frameworks, including those relating to supervisory review and reporting, corporate governance, risk management, investments and disclosures;
In a similar vein to the PRA’s letter, the New York Department of Financial Services has written to insurers requesting firms to integrate climate-related risks into governance frameworks, risk management processes and business strategies.
And, more broadly, the Central Bank and Supervisors Network for Greening the Financial System (NGFS) continues to go from strength to strength, expanding from eight founding institutions in late 2017 to now over 80 participants across five continents.
When considered together, these latest developments define a third inflexion point – the mainstream implementation of strategic, Board level responses to the financial risks from climate change. Importantly, this third phase will require firms to not only demonstrate they are pro-actively managing near-term climate-related risks but are also taking action to pre-emptively reduce future financial risks, including those that may not fully crystallise until the second half of the century.
This third phase represents an important shift; responding to climate-related risks can no longer be considered as a spectator sport. It requires a much more participative, strategic and creative approach, one that seeks to steward a whole economy transition to a low carbon and resilient future.
Stewarding a whole economy transition
While there’s clearly overlap between embedding the near-term physical and transition risks into every day financial risk management with those required to manage future financial risks today, there’s also some important nuances. For example, insurers can manage their near-term risks by reducing their individual exposures, such as divesting carbon intensive assets to reduce transition risks. Pre-emptively reducing future financial risks requires a wider lens and a more strategic approach. As highlighted in a speech by Sarah Breeden, Executive sponsor of the Bank’s climate work, published alongside the PRA’s Dear CEO letter: ‘given the scale of change required, we will simply not be able to divest our way to net zero’.
While recognising climate as a financial issue and embedding, and disclosing, near-term climate-related risks and opportunities (steps 1, 2, 6 and 7 shown by dotted blue line) is clearly important, a strategic approach requires a deeper shift (steps 1 through to 7 shown in purple).
This includes assessing the impact of long-term climate scenarios, out to 2050 and beyond, and considering the unique system-wide challenges that climate change presents (step 3). Adjusting time horizons to the long-term provides an opportunity for Directors to reflect on the Board’s responsibilities to manage future financial risks today and to set a strategic ‘climate intent’, such as agreeing to align a firm’s strategy with the goals of the Paris Agreement, or committing to a Net Zero target (step 4). This, in turn, can inform a more strategic, pro-active and creative approach; one that embraces the need for stewardship of a whole economy transition to a low carbon and resilient future (step 5).
While the PRA’s letter, and our own recent TCFD readiness survey, clearly flag multiple areas where additional progress and capabilities are required, many financial firms are already starting to embrace a more strategic, pro-active approach. The PRA/FCA convened Climate Financial Risk Forum also evidences the strong appetite for cross-sector collaboration to advance thinking and practice. With this in mind, we are delighted to be supporting the Forum’s scenario analysis working group and helping to facilitate cross-sector dialogue more broadly. For example, through recent events bringing together financial regulators with senior industry leaders and our international work chairing the Coalition on Climate Resilient Investment.
Clearly solving a collective action problem requires a collective and collaborative approach. While the insurance sector alone will not drive the transition to a low carbon and climate resilient future, with trillions of dollars under management and billions of dollars in transaction volumes, it can certainly influence the outcome, and it is in its own enlightened self-interest to do so.
Fortune favours the risk adjusted
The good news is that a more comprehensive, strategic response has many benefits. It can provide assurance to all stakeholders, including investors, that climate-related risks, and opportunities, are fully understood and are being managed appropriately. It can also help attract and retain talent, particularly among younger colleagues who are increasingly seeking purposeful careers aligned with their values. Indeed, the integration of climate-related factors into talent and reward strategies is increasingly being viewed as an important source of differentiation and advantage.
Perhaps most importantly a strategic approach can also support insurers in orientating towards the transformative and structural opportunities presented by the low carbon, climate resilient transition. Having helped shape the landscape that is now emerging, there is no industry better placed to seize the opportunities that lie ahead.
There is still much to do to manage climate-related risks, and many questions that still need to be answered as methods, models and metrics continue to evolve. Developing a pro-active, strategic and creative approach now will be sure to pay dividends; fortune will favour the brave, well-prepared and risk adjusted.
Acclimatise has been acquired by leading global advisory, broking and solutions company, Willis Towers Watson. The move sees the Acclimatise team combine with Willis Towers Watson’s Climate and Resilience Hub (CRH), creating a market-leading centre of climate adaptation expertise with over fifty technical staff. The combination significantly expands the capacity of the CRH to meet growing demands for climate resilience services.
CRH is the focal point for WTW’s work on climate risk and resilience, helping its
clients to address the challenges associated with climate change across
physical, transition and legal liability risks. Acclimatise and the CRH have complementary
capabilities in financial services, climate risk and vulnerability assessment,
resilience planning and climate data analysis and risk modelling.
“Climate change risk is fast becoming a central
part of government, corporate and financial decision making and planning.
Meeting growing client demand will require increasingly sophisticated
approaches to climate risk assessment and management.” Said Acclimatise CEO,
John Firth. “This is why I’m hugely excited by the potential that Willis Towers
Watsons’ acquisition of Acclimatise brings. I am very proud of Acclimatise’s
achievements and our staff over its sixteen-year history – from kitchen table
to a market leader – and am confident that combining with the Climate and Resilience
Hub is the right move to ensure we can amplify the impact of our work.”
Welcoming the deal, Rowan Douglas, Head of the CRH, said, “By combining Acclimatise’s market-leading climate modelling and adaptation capabilities with Willis Towers Watsons’s deep experience in natural catastrophe modelling, risk management, re/insurance and investment markets we have a unique range of expertise to help clients manage climate exposures, seize adaptation opportunities and build more resilient societies and economies.”
The two companies have collaborated in the past and have enjoyed a strong working relationship. “We have long admired Acclimatise and what John Firth and Dr Richenda Connell have built as visionary leaders since 2004.” Said Douglas, “Our earlier collaboration via the Willis Research Network illustrated a shared market ambition, culture and complementary experience and relationships. This feels like a very natural step for both teams. We are all excited about meeting the resilience challenges for corporates, Governments and financial institutions in the years ahead.”
The deal comes at a time where there is significant momentum behind climate risk services for corporates, Governments and the financial services sector. In recent years, WTW has increasingly mainstreamed climate risk across its business segments. John Haley, CEO Willis Towers Watson, said that the acquisition “is very much in line with our ambition to help clients navigate an increasingly complex world and to achieve climate resilience through the provision of market-leading solutions. Acclimatise’s capabilities and proven success in the area of climate risk, provide significant opportunities for us going forward. I am excited about what this means for Willis Towers Watson.”
Australia’s largest super fund, Rest, has agreed to test its
investment strategies against various climate change scenarios and commit to
net-zero emissions for its investments by 2050, after a legal case brought by a
25-year-old man from Brisbane. Mark McVeigh sued Rest in 2018 for failing to
provide details on how it will minimise the risk of climate change. The
landmark case represents the first time a superannuation fund has been sued for
failing to consider climate change.
Mr McVeigh alleged Rest had breached Australia’s
Superannuation Industry Act and the Corporations Act, after it failed to
provide him with information on how it was managing the risks of climate
change. These risks include physical climate risks that threaten Rest’s
investments, and also transition risks which arise from the decarbonisation of
the global economy.
Climate change is a ‘material, direct and current
Australian law requires trustees of super funds to act with
“care, sill and diligence to act in the best interest of members – including
managing material risks to its investment portfolio”. In its settlement Rest
agreed that its trustees have a duty to manage the financial risks of climate
In Rest’s statement about the settlement it said: “The
superannuation industry is a cornerstone of the Australian economy — an economy
that is exposed to the financial, physical and transition impacts associated
with climate change.” and went on to emphasise that “climate change
is a material, direct and current financial risk to the superannuation
Rest also agreed to take immediate action by testing its
investment strategies against various climate change scenarios, publicly
disclose all its holdings, and advocate for companies it invests in to comply
with the goals of the Paris Agreement.
The latest cases in Australia are part of a global movement towards stricter regulation governing the financial risks posed by climate change (see Acclimatise’s timeline charting the rise of climate law). In 2015, for example, France introduced laws mandating climate disclosure for institutional investors and asset managers and in 2017 the Financial Stability Board’s Taskforce on Climate-related Financial Disclosure published recommendations for corporate climate disclosures. In 2019, National Instrument 51-102 Continuous Disclosure Obligations set out new requirements for firms reporting in Canada to disclose material risks in their Annual Information Form.
The implication of landmark cases such as the Rest settlement, is that super funds, pension funds, banks and other investors will increasingly require companies to understand and manage their climate risks. Earlier this year, Acclimatise worked Working with Asia-Pacific’s largest law firm, MinterEllison to produce a primer on physical climate risk aimed at Non-Executive Directors. The primer was published by Chapter Zero a global voluntary programme that connects and supports Non-Executive Directors to improve oversight and action on the issue of climate change.