Canadian Underwriter

How reinsurers are helping banks to assess their climate risk

February 24, 2022   by Alyssa DiSabatino

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After Canada’s solvency regulator said the financial sector must better respond to climate-related risks, one Munich Re executive says the global reinsurer is working closely with banks and other federally regulated financial institutions on their climate risk approach.

Banks, he said, are “passively accepting” climate risk. 

“The major investors in the world are encouraging corporates, banks, insurance companies and reinsurance companies to start taking action,” Chris Gottardo, Munich Re’s head of global business development, financial institutions and climate change solutions, said during a CatIQ Connect event in early February.  

This follows Superintendent of Financial Institutions Peter Routledge’s speech in late 2021, when he stated Canada’s banking regulator OSFI has an obligation to ensure Canada’s financial sector and federally regulated pension plans are ready to manage the risks that will come as the economy shifts to “net zero” greenhouse gas emissions by 2050. 

“Getting to net zero by 2050 will mean Canada’s economy will have to adjust,” Routledge said. “Canada’s financial system will be a critical enabler to that adjustment and OSFI has an obligation to ensure that FRFIs and federally regulated pension plans (FRPPs) are fit to manage the risks that will accompany that adjustment. We will innovate and adapt our regulatory practices, and that innovation begins now.”  

Gottardo said that Munich Re is helping banks to better understand, identify and respond to the physical climate risks in their portfolios.

“As any good insurer would do, [we are] trying to find your peak exposures in your portfolio,” Gottardo explains. “That’s new to banking, they’ve never looked at this before. Once you understand your peak exposures and your areas of concentration, try to put a financial impact on that. ‘What happens if…?’ Once you’ve got an idea of where the risk is located, what might the size of the impact? How are you going to manage that risk?” 

Munich Re’s approach is to identify and measure the impact, and then “manage” the risk for banks, he explained. 

Gottardo presents a slide on how Munich Re approaches physical climate risk with banks.

Gottardo presents a slide on how Munich Re approaches physical climate risk with banks.

When it comes to risk management, Gottardo said many banks are “passively accepting” risk. “For the studies we’ve done, we’d say between 15% and 20% of banking portfolios had some form of higher physical climate risk,” although it varies by country, he said, citing a rough estimate. 

Gottardo listed four risk management approaches that banks can take: accepting risk, avoiding risk, adapting to risk, or transferring identified risks.  

Gottardo presents a slide on four potential risk management approaches for banks.

Gottardo presents a slide on four potential risk management approaches for banks.

Gottardo said “avoid” is a rarely used approach, whereas risk transfer is more common.  

“Just like the banks that hedge their interest rate risk…[and] their currency risk, at some point it will come to the point where [banks are] just going to trade [their] climate risk,” Gottardo predicted. Where it moves from identifying [and measuring] the risk…to, ‘What are we going to do about the risk?’ Munich Re’s got the capital and the know-how to say, ‘We’ll take that risk from you at a price.’”  

Gottardo said Munich Re helps banks assess their exposure to climate risk in “numerous” ways, including through: 

  • Climate financial impact metrics, ready to be embedded into climate risk models  
  • Climate scores available, live through API, ready to be integrated into existing loan origination process  
  • Climate portal to visualize exposure to natural disasters, enabling financial institutions to identify key concentration areas 
  • Climate report to disclose instant exposure to physical climate risk  
  • One-off assessments to provide insights on individual assets-and-surroundings exposure to natural disasters.