How the P&C industry should shift its thinking about climate risk

Canada’s P&C insurance industry needs to adapt its climate risk business model to focus more on loss prevention rather than indemnity, a speaker says Thursday at an industry event. And pricing needs to be forward-looking rather than based on historical events.

Although resorting to historical data for pricing, and paying out for Cat losses (i.e. indemnifying after the fact) will still be part of the toolbox, the industry needs to figure out ways to expand that toolkit for climate risk, says Lisa Guglietti, executive vice president and chief operating officer of P&C manufacturing with The Co-operators Group.

Industry professionals also need to educate and empower customers to help them make informed choices.

“I think one of the most important things that we do for our clients is to send them signals about the risks that they’re facing,” Guglietti says during the State of the Industry 2022 panel at CatIQ Connect. “I can tell you this because I’m an actuary — for the most part, we like to hide those signals in our price in our proprietary risk models, which really leads to a problem of asymmetric knowledge. We know more than [our clients] do.”

By making the risks to clients concrete, clients understand what their risks are so they can do something about it. “If we really want to help our clients, our businesses, our communities adapt to the current new climate risks, we’re going to have to start thinking about how we pull that story out of the package pricing, pull it out of the exclusions and do that hard work of really having those conversations with [clients] about risk, so that they can make those informed choices.”

Panel moderator Don Forgeron, president and CEO of Insurance Bureau of Canada, asked how much of long-tail risks — whether pandemic, climate, cyber or earthquake, for example — can the industry realistically protect against. How has the COVID-19 pandemic changed the way the industry and individual organizations view and write risk?

Panellists speaking at the State of the Industry 2022 panel at CatIQ Connect.

Guglietti notes after the 2009 H1N1 pandemic, there was lots of talk within the industry about pandemic risk and how it would affect business models and capital testing. “And I dusted off that work over the last couple years, given the situation we’re in,” she says. “What was really interesting is when I looked at the kind of assumptions that we have built around what a pandemic looks like, we weren’t that far off.”

For example, assumptions indicated operations would be impacted, “there’d be a period of reduced frequency followed by significant inflation boom,” increased material costs, and increased operational/human capital costs.

“All with a really healthy side serving of significant economic market volatility,” Guglietti says. “Where we were likely off was to predict the scale — so it being global, and then the duration, so two years and still running.”

The pandemic did reveal “there’s still a pretty large knowledge gap when it comes to the broader risks that our society is facing,” she says. “Perhaps what’s new for us is how far out on the probability curve we ended up in this particular instance.”

Claus-Ulrich Kroll, president and CEO of Munich Reinsurance Company of Canada and Temple Insurance, agrees pandemic is not a Black Swan event, it’s a global systemic risk. “There are risks we know, and the pandemic was one of them,” Kroll says. “And SARS is not as far away in time that it was, for example, the Spanish flu. So, it was tangible.”

Matt Wolfe, president of reinsurance solutions (Canada) with Aon, paraphrases an infamous quote from former Secretary of Defense Donald Rumsfeld: “There are known unknowns, but there are also unknown unknowns.”

For Wolfe, the pandemic made him realize how increasingly interconnected and unpredictable the world is. “We kind of learned that on an economic basis during the Florida real estate crisis, where all of a sudden Florida real estate goes down by 50% and Icelandic banks go broke,” Wolfe says. “[When] we think of insurance, and reinsurance in particular, it works because it’s diversified. But… there are exposures that are global. Look at the supply chain issues and challenges that we’ve seen.”

Feature image by iStock.com/courtneyk