<p><strong>Speaker 0</strong>: <span>to discuss managing transition risk. I'm joined here in the studio by Greg Lowe. He is director sustainable finance at Deloitte. Greg, thank you so much for joining us, uh, to start off with, tell us what is transition risk and why does it matter?</span></p> <p><strong>Speaker 1</strong>: <span>Well, it's a great question. And before I introduce transition risk, it might be helpful to set some context around the three types of climate risk that get talked about in the market today. Um, we have transition risk, physical risk, um, and liability risk, which is kind of AAA growing topic.</span></p> <p><strong>Speaker 1</strong>: <span>Um, if you think about the physical risk of climate change, I think that's what insurers um and the insurance industry have probably felt most comfortable with. That's very much thinking about, um, the changing profile of a lot of natural catastrophe type risks and how they impact, um, balance sheets. Um, transition risk is a little bit different. It says, Um, what is the financial impact of changes to the make up of the economy</span></p> <p><strong>Speaker 1</strong>: <span>if we are to decarbonise, um, the entirety of the economy, the economy, um, and meet a lot of the net zero commitments that companies and governments have made globally. Um, so that's in a nutshell. Sort of transition risk and liability Risk is interesting because liability risk can kind of originate from either physical or transit transition risk. Um, but essentially liability risk is any of the</span></p> <p><strong>Speaker 1</strong>: <span>litigation, um, and legal liabilities that come from perhaps not addressing transition or physical risks in the business planning process.</span></p> <p><strong>Speaker 0</strong>: <span>So have you got an example of transition risk?</span></p> <p><strong>Speaker 1</strong>: <span>I think the most common example that tends to be used, um, are the issues of stranded assets where carbon intensive sectors might be involved. Um, oil and gas comes up quite commonly, Um, but you can think about this from, um steel, cement, agriculture as well. I I think the essential question is, um if you were to have zero emissions by a particular date,</span></p> <p><strong>Speaker 1</strong>: <span>Um, what does the value of that asset actually become? Um, at that point in time, um, you know, so this often comes up in the in the context of, uh, fossil fuel reserves. Um, but it's a whole range of topics. I think if you look at the automotive sector right now, some uh, organisations are being said to, uh, move to electrification or zero emissions vehicles faster than others. That, indeed is also transition risk. So you you</span></p> <p><strong>Speaker 0</strong>: <span>talk about</span></p> <p><strong>Speaker 0</strong>: <span>some quite long term developments there to get to net zero, but specifically what's coming down the line from regulators or perhaps even professional bodies in the shorter term that's going to have an impact on the insurance sector. Well,</span></p> <p><strong>Speaker 1</strong>: <span>I think, um, it's quite a a large agenda, actually, Mark. So, um, let's take kind of AAA step back, um, and and start from that longer term horizon that work our way backwards.</span></p> <p><strong>Speaker 1</strong>: <span>So we have over 70% of global GDP have committed to net zero by 2050. Um, some countries are a little bit either side of of that goal. Um, but in the UK, that means that there's a lot of requirements for UK government to, um to meet to to be able to kind of get to that goal. So there's regular check ins with the climate Change committee to see how the</span></p> <p><strong>Speaker 1</strong>: <span>UK is doing, um, as part of that net zero commitment, um, at Glasgow, uh, cup 26 just, uh, 18 months ago, there was a commitment to make the UK the first Net zero financial centre and that involved, um, a variety of different requirements. Um, some of them, the industry is already, uh, have been has been dealing with. So we've seen a</span></p> <p><strong>Speaker 1</strong>: <span>Visy statement from the PR A That's in affected, um, much of the insurance industry. That was to look at, um, climate change, um, as a risk topic and to embed that in the risk management structure of, um, not just insurers, but also asset managers and banks. Um, in addition to that, we had, um, climate change stress tests. Um, that,</span></p> <p><strong>Speaker 1</strong>: <span>um, the PR a asked, um, insurers, um, banks and asset managers, at least some of the major ones to, um, conduct also again about, um, 18 months ago.</span></p> <p><strong>Speaker 1</strong>: <span>So we've already had some of this in place. I think, um, you know, one of the the big um asks that's been sort of evolving has been climate risk disclosure. Um, so we have, um, over just about 90% of, um PR, a regulated insurers covered by climate risk disclosure aligned to something,</span></p> <p><strong>Speaker 1</strong>: <span>um called the task force on climate related financial disclosures, which is a framework on how to disclose climate risk. It's not new. It's been out for about, um, eight years. Um, that's come into force this year. Um, but then there's also additional requirements around, um, climate risk, but also, um, some some broader, um, e s g type disclosures, um, covered by, um bay. Um, so this is also t c f d. Aligned.</span></p> <p><strong>Speaker 1</strong>: <span>Um, this will kind of capture parts of the market. Um, that may not be entirely captured at the moment. Um, those who aren't PR APR a regulated. And then I think, aligned to a lot of the, um the activities around T c f D. Will be seeing, um, transition plans as a part of that requirement. So the UK set up a transition plan. Task force, Um, off the back of of cop 26. Um, so we'll be getting at some of</span></p> <p><strong>Speaker 1</strong>: <span>the final recommendations on what a gold plated, um, transition plan actually looks like a little bit later this year. Um, and as part of, um, you know, t c F D requirements, um, insurers will be required to disclose what their transition plan looks like. Um, aligned to that, um And then finally, there's something called the international, um, sustainability standards board the I s S B um, that was set up to</span></p> <p><strong>Speaker 1</strong>: <span>they kind of consolidate or a lot of the best practise around climate, um, and wider sustainability reporting. Um, it's there to try and consolidate a lot of different frame frameworks that sort of been popping up and emerging over the years. Um, and the UK will align to something, Um, kind of like what you've seen with with I f. R s. You know there are, there's a kind of a global standard, and then there's sort of a national interpretation of what that means.</span></p> <p><strong>Speaker 0</strong>: <span>But putting some of those themes together, There's obviously a lot going on out there in the world of of, of policy and regulation that's coming.</span></p> <p><strong>Speaker 0</strong>: <span>Um, what do you think that's going to mean for a big insurance company and say, 35, 10 years time? Will there be parts of the business they don't want to get involved in? Will they have to go and reprice all the risks they look at? I'm just trying to sort of work through what? How that sort of works its way through the system and perhaps then ends up with a an insurance broker and the policies that firm can or can't offer its clients.</span></p> <p><strong>Speaker 1</strong>: <span>Um, I don't think there's sort of a hard and fast answer in terms of what people can or cannot do. Um, and I don't think there's any sort of</span></p> <p><strong>Speaker 1</strong>: <span>there. There's not, um, a regulatory discussion around, um, prohibiting or mandating particular activities. Um, I think particularly in,</span></p> <p><strong>Speaker 1</strong>: <span>um, the UK there's very much a principles based approach, um, to say, let's think about, um, the risk and understand how some of the changes in the economy, um, might impact your organisation. Um, so absolutely. You'll have to think about, um, you know how changes in the make up of the economy, how different sectors are transitioning on that journey to net zero. What that might mean</span></p> <p><strong>Speaker 1</strong>: <span>for their demand for different types of of products and services. Um, and how you make sure that you're meeting the expectations of of of some of those changes Now, I think there is a question, um, that each insurer faces Do we want to get ahead of where some of the government mandates are around. Net zero. Um, do we want to kind of go faster? Um, in the journey. Um, around the transition. Do we wanna kind of</span></p> <p><strong>Speaker 1</strong>: <span>slowly kind of track where general market activity is, or do we actually want to go a little bit slower? Um, and see where things go. Um, and I think you see all three approaches, um, being, um, taken by insurers in the market at the moment, Um, for very different reasons. Um, I think the key message is this is a very dynamic and fast moving environment. Um, so you know, if you are taking a particular strategy at this point in time, it's important to continue to assess, um, you know, data.</span></p> <p><strong>Speaker 1</strong>: <span>Which is why we have all these disclosure requirements to ensure that strategy is accurately reflecting the information that an insurer has at the moment.</span></p> <p><strong>Speaker 0</strong>: <span>Well, I mean, just one example of that. I mean, how good are insurers in the round of measuring the emissions that are coming off their underwriting portfolios?</span></p> <p><strong>Speaker 1</strong>: <span>But I think you know very much. I think it's the stage where the insurers that are looking at this are conducting pilots. Um, you know, the data challenge remains significant. That's not unique to insurance. I think that's very much the case across the financial</span></p> <p><strong>Speaker 1</strong>: <span>services sector. Um, but insurance is a little bit further behind in terms of the methodology that's been out in terms of measuring what in other parts of of the financial services sector would be called Finance Commission. So banks have done this for, um, lending portfolios. Asset managers doing it for investment portfolios and insurance is really kind of the last sector to be covered by this type of methodology.</span></p> <p><strong>Speaker 0</strong>: <span>But do you in terms of softening the impact on the insurance sector? If I look at asset management, there's a couple of things people have done. They've said Well, for example, we're in fairly dirty industries in terms of the amount of carbon they throw off. But if we engage with them, that's much more productive. So that, you know, if you're a sceptic, you'd say, Well, that's bought them a few more years of doing what they've always done,</span></p> <p><strong>Speaker 0</strong>: <span>and the other is this idea of offset. Yeah, they don't do great things, but we'll go and plant. I mean simplistically put loads of trees over here, and that will offset the amount of carbon that's coming out from something else. Um, do Do you think the insurance industry will go down those paths? Or do you think there's a point where that's not seen as purest enough? And that's a That could be a, um,</span></p> <p><strong>Speaker 0</strong>: <span>that might look superficially attractive for an insurer, but on a 5 10 year view that might be seen as quite poor behaviour.</span></p> <p><strong>Speaker 1</strong>: <span>Well, let me try and break that question down into to to to different, different components. So I think you know, there are, um what? What I often call the the three e um, that the levers that insurers</span></p> <p><strong>Speaker 1</strong>: <span>can pull, um, to steer their portfolio in a particular direction where it comes to, um, decarbonisation. Um, and those cover, um, engagement as as you. So, um, you know, you you put that very well. Um, so there's there's definitely engagement, and and certainly, um, you know, the asset management space there's been, um I think a long standing culture of, of engaging, um, you know, companies as as as shareholders, um, might be a little bit of a different situation. Uh, for for insurers. I think that might be a</span></p> <p><strong>Speaker 1</strong>: <span>a a newer discussion. Um, but certainly insurers, um, and brokers speak to um, you know, their insured all the time about, um, you know, changing risk profiles, et cetera. So this is just a new dynamic, um, to that conversation, Um, I think the important thing to net with engagement is</span></p> <p><strong>Speaker 1</strong>: <span>is, um, it can't just be sort of an endless, um, journey of of talking without, um, any kind of consequences. Um, there do need to be. I think decisions made around if we are engaging in something is not really changing. What's our next step? Um,</span></p> <p><strong>Speaker 1</strong>: <span>now, that might actually be through, um Enablement. So maybe there are products that, um, an insurer isn't currently offering that it could offer. Um, that actually helps. Um, take that client on their their, uh, journey to decarbonisation.</span></p> <p><strong>Speaker 1</strong>: <span>Um, and then finally, there are, um, exclusions. And we have seen some insurers, um, you know, implement exclusions typically around court at the moment. Um, you know whether that will expand? Um, it's hard to say. Um, but, you know, I think there's going to be a different appetite in terms of that range of, of of levers to pull</span></p> <p><strong>Speaker 0</strong>: <span>and finally bring this back to insurance brokers. As we've said, a couple of times. There's a huge amount going on here, but what are some of the opportunities and what are some of the threats that insurance brokers need to think about?</span></p> <p><strong>Speaker 1</strong>: <span>So I think, um, I think insurance brokers actually tend to be quite good at focusing on the opportunities. Um, so, you know, several brokers have set up, um, you know, bespoke, um, climate teams who are really looking at, um what are the next set of products and services we can offer? Um, our,</span></p> <p><strong>Speaker 1</strong>: <span>our our customers are insured. Um, you know, whether that's sort of on renewable energy, whether that's on things like Parametric. Um, you know, there have been, um, a variety of of research topics done by the, um, industry that have kind of looked at, um how do you innovate, Um, on the journey to net zero.</span></p> <p><strong>Speaker 1</strong>: <span>Um, I think when it comes to some of the risks, that's been a harder discussion. Um, for, um, I think brokers to kind of engage on um but I think the important thing to remember is brokers are serving two sides of the equation here. So many of their own, um, customers, um, are on this same journey So there is a huge opportunity</span></p> <p><strong>Speaker 1</strong>: <span>to think about, um, how they can help, um, their customers on that journey to net zero. They have a unique capability to understand, um, how physical risk might impact, um, some of their customers. Um, so in addition to the product innovations, they can help, um, their customers think about physical risks.</span></p> <p><strong>Speaker 1</strong>: <span>Um, and then they also have obviously what insurers are doing on the other side of the table. So matching, um, their customers that have, um maybe more ambitious climate commitments or goals with insurers that are also looking to achieve something similar, Um, I think is a is a is a great opportunity there. Um and I think on the risk side, it's really much, very much thinking about, um, you know, potentially some of the reputation</span></p> <p><strong>Speaker 1</strong>: <span>risks, um, potentially impacts on, you know, capacity of of capital. Um, do you want to kind of try to to find, um, you know, alternative vehicles? Um, for industries that become more challenging to ensure, um, there's not a right or wrong answer to that, but there can be, um, reputational impacts. Um, and then finally, um, you know, if if you are, um,</span></p> <p><strong>Speaker 1</strong>: <span>exposed to, um, maybe a sector that will have a more challenging time during the transition. Um, how are you going to replace some of that revenue? Um, so you have to kind of think about both sides of the equation.</span></p> <p><strong>Speaker 0</strong>: <span>If I had to say to you pick one</span></p> <p><strong>Speaker 0</strong>: <span>risk out of transition risk, which is the biggest one facing the insurance industry in the round. What would it</span></p> <p><strong>Speaker 1</strong>: <span>be? Well, I would actually answer that by saying it's getting on the journey to understand, um, transition risk and indeed, all climate risks. I think, um, the industry has started on its journey in doing scenario now</span></p> <p><strong>Speaker 1</strong>: <span>process, Um, which is what? A lot of the disclosure requirements. Um, we discussed earlier cover. Um, but I think the maturity of the industries still has a long way to go, and particularly in the broken space. Um, the better. You understand these risks? Um, you know, the more you're gonna be able to actually answer that question yourself as a broker.</span></p> <p><strong>Speaker 0</strong>: <span>Greg Lowe. Thank you for joining us. Thank you.</span></p>