Nick Thorpe follows the discussion
“Readiness is achieved by thorough and sufficient planning.” This was the main message from Tom Larsen, senior vice president at EQECAT. Larsen was speaking on the panel on incorporating climate change into underwriting strategies in company with Dr Olaf Novak, head of natural catastrophe team at Allianz Re, David Williams, claims director at AXA Insurance and Dr David Brown, chief actuary at HBOS.
Larsen went on to suggest a range of perspectives that underwriters could utilise when incorporating possible climate change into their business plans: the “tactical” perspective (1-2 years); the “strategic” perspective (2-5 years); and the “long term” perspective (5+ years). He pointed out that it was very difficult for underwriters to work on a “tactical” or short term basis due to the extreme volatility of weather systems.
David Williams, meanwhile, used his time at the lectern to highlight his concerns with the growth of vulnerable property. “We are continuing to build in the wrong places.” He said that 11% of new homes built in England since 2000 have been built in flood hazard areas and that 90% of houses in the Thames Gateway would be at risk of flooding. In his opinion, an abundance of cheap flood cover in the UK, which is only of only three countries in the world to provide comprehensive flood cover, enabled flood plain development. The result was “the increasing number of properties built in the floodplain without adequate defences.”
Given the popularity of block policies, Williams also pointed out that it could be difficult for underwriters to spot high risk properties. “It is very easy to build houses and business in unsuitable areas without underwriters being aware,” he said. “If you are going to have a viable underwriting strategy in relation to climate change then you need to be aware of all the factors.”
Rather than directing efforts toward big corporations, Williams suggested the future of reducing climate change risks could rest with small and medium sized enterprise (SME) sector: “While the big corporations can absorb the costs of business interruptions and/or climate change-related costs,” he said, “SMEs are yet to take the threat posed by climate change seriously enough.” Latest research from AXA shows that the average cost of business interruption has soared in the last four years to £35,000, a figure that would be potentially devastating to small businesses.
David Brown, chief actuary at HBOS, used the example of Hurricane Vince in 2005, which was the first hurricane to hit Spain and Portugal, as a sign that the climate rules were changing. “The rules said this shouldn’t happen,” Brown said. “Now there is a new rule – there are no rules.” Brown finished with a rousing call to arms: “We are entering the climate revolution – risk is increasing and demand for protection is increasing. This is our opportunity to drive the adaptation agenda.”
The Q&A following the presentations was immediately livened up by a barrage of questions from audience member Piers Corbyn, founder and managing director of the forecasters Weather Action. Corbyn challenged the panel to explain why, as shown through his research, global temperatures showed no signs of rapid increase and, in fact, have been falling since the mid-1990s.
Novak replied that in his opinion we need to look at the 50, 100 or 1,000 year long term view, rather than the very short term period of the last 15 to 20 years. Williams provided some debate by saying that the 1,000 and 10,000 year view did not matter him as an underwriter when “wetter winters and warmer summers” were having an effect now.
Larsen, facing the usual barrage of questions about model accuracy, closed the session saying, “I appreciate that people find it hard to accept a 1-in-500 year prediction when we only have 50 years worth of data. However, it’s about evaluating data and coming up with a useful realistic scenario. It’s not just one thing – there are many pieces to this puzzle.”
Nick Thorpe is senior reporter at Global Reinsurance