ESG Conference | 29 June 2023 | Virtual Conference

Submitted by [email protected] on Thu, 06/29/2023 - 11:00

Featuring: <ul> <li>Mark Dunham, Head of Commercial Lines Underwriting, Aviva</li> <li>Marc Wanless, Head of Motor, Commercial Lines, Aviva</li> <li>Greg Lowe, Director, Sustainable Finance, Deloitte</li> <li>Dr Ian Bartholomew, Co-founder and chief underwriting officer, FloodFlash</li> <li>Dr Viktor Roezer, Research fellow, Grantham Research Institute</li> <li>Jonathan Evans, Founder, Sustain Insurance Brokers</li> </ul>

Video Image

Duration

2023 - 01:27

Recorded Date

Thursday, June 29, 2023

Transcript

Speaker 0: Hello and welcome to insure T V's ESG Master class with me, Mark Colgate. Today we are focusing on the E of ESG, in particular climate change and what that means for insurers and insurance brokers to discuss that I'm joined here in the studio by Mark Dunham. He is head of commercial lines underwriting at Aviva. We are also joined today by Dr Ian Bartholomew, Co-founder and chief underwriting officer at Flood Flash, and Jonathan Speaker 0: Evans, founder of Sustained Insurance Brokers. Let's get things underway, Mark, if I can start with you, tell us a little bit about how you're thinking about climate change as an insurer, Um, because these are some very long term trends that are taking place, but you've got to create products that I guess are sold for the year or a couple of years ahead. So if we think climate change and we take it down a route where we take no action, Speaker 0: then we get to a point where our customers can't afford the insurance products that we write. Speaker 0: So we think in terms of making sure that we are going to be here for now and for the future, Speaker 0: and that's balancing the products we sell the cover that we offer and helping our customers to manage that risk through the provision of risk management. Speaker 0: And how much of that, then, is the pure insurance policies themselves? And how much of that over time do you think is going to be the other ancillary services that you can provide or connect people in with? I think it's going to vary depending on who the customer is and where they are, because climate change isn't going to affect everybody to the same degree. For those people who are at high risk, then there's going to be an increasing need for them to focus on risk management, either individually or collectively as a community. Speaker 0: But can you tell us a little bit about how you're finding climate change in the EEG is affecting your business as flood flash? Um, yeah, I mean, it faces us on on a day to day basis, and it's part of the reason we're here is here as an organisation, um, our product exists to make customers more resilient, and so climate change just increases the need for that. But obviously it creates huge challenges for us in terms of pricing. Um, how much? Speaker 0: How much should an insurance policy for for flood costs these days? How much is the likelihood of a river flood going up? How much is the likelihood of rainfall? Flooding going up? How much more likely is a is a sort of coastal search event. So that is, you know, creating challenges for us, you know, both in the short term and looking out over over several years. Now, Speaker 0: I suppose that a lot of your business model is is is data which must be constantly building up. So, I mean, how how much confidence do you have in the data? You you You know, I guess data tends to be backward looking. How much confidence can you have? You can take that and apply that to the future or yeah. I mean, data very much is backward looking and and the way that a lot of insurers work is you use data from the past 10 years, 20 years, 50 years to try and tune your prices and your models to that. Speaker 0: That's still important and valuable data. But perhaps some of the sort of rules of the games have changed. So in our pricing process. We try to we try to take account for that. We look at sort of recent events. We try to load up pricing to to reflect processes that we that we know are going on and things that are sort of starting to be reflected in in data from very, very, very recent events. Speaker 0: I guess in some respects it's an analogy I might use is sort of, you know, civil engineering. You you build a bridge and you work out how thick your concrete needs to be. Um, but you add a bit just to make sure that when the first trucks go over or the 1000th truck or the millionth truck goes over, it still works. And I suppose that is the The the trick that we've got to work out is getting that balance right between charging enough to make sure we can cover all the risk and the increasing levels of risk, but making sure we can still be competitive and offer something that really does have value for our customers. I describe it as a tight rope, Speaker 0: thank you, and and Jonathan tell us a little bit about sustain insurance brokers because a lot of your clients are in the ESG game itself. Yeah, that's quite right. Um so sustains a purposeful business. It was established to support pro ESG organisations through the use of insurance and and reinsurance products. Uh, primarily commercial. Speaker 0: Uh and we are seeing an unbelievable amount of engagement both from these pro SESG businesses, but also other organisations that are looking to understand how they can have a more positive impact on on the world through their processes. Speaker 0: Um, ESG is obviously quite a broad landscape. So could you tell us a little bit about what? Typically what are those businesses like or what sort of areas are they are they in? Speaker 0: It's a huge range. We've at one end of the of the spectrum, we've got organisations that are purely purely exist to focus on things like climate change. So, for example, renewable energy providers uh, they they may be, um uh providing solar farms, for example, and on all the different elements of of of those solar farms, whether it be the provision of the of the panels or actually operating them or or the investment managers that that fund them Speaker 0: at the other end of the spectrum are organisations that really one would say have a very little, um, direct impact on on sustainability. Um, for example, a restaurant however, they may choose to operate in an entirely sustainable manner. So nose to tail dining, for example is is a great concept. Uh, no waste. Um, that sort of thing sustainable sourcing of products and Speaker 0: Mark Aviva in the round is trying to be net zero. I think, by 2040 I think most people are trying to get there by 2050. Um, how does that affect what you're up to? What you're thinking about what you offer clients. So we think it's really important to be leading in this space and setting an example. If we set a target of 2050 then there's a risk that we procrastinate and we sit on our laurels and we don't do anything. And by setting a target that's closer to home Speaker 0: means that we are going to start taking action now. So we've already made clear that we will move away from high intensity fossil fuel insurance so things like coal mining or fossil fuel extraction and then we've focused on our operations to make sure that we can start to make them more sustainable Speaker 0: and then working with our brokers to help them to understand their businesses and how they can change their processes. Now, if we sit there and we wait, we run the risk of not achieving what we need to achieve. Speaker 0: And is there anything in the round that you've learned as you put your own business through through or start to put your own business through hitting this deadline of 2040 that you sort of thought, God, that's gonna be really useful. We need to get We need to have the you know, we can see why this issue with us is going to be an issue for clients as well. Speaker 0: I think what struck us is that actually, a lot of what insurers and risk managers have been doing for decades is transferrable into the into the into the climate space in terms of making sure that we are resilient, that we understand what impacts climate can bring and how we can then mitigate that. Be that through changing how we do things or where we do things or just protecting our assets, Speaker 0: OK, thank you and I in terms of your business. I mean, are there types of client you won't insure or tell us a little bit more about how you know you You think around this whole issue of great question, I suppose, from a from a pricing perspective. So flash offer something called Parametric Insurance Speaker 0: where the the insurance payment is just a function of the event that happened. So how deep is the flood? Or, you know, if it was wind, How fast is the wind or something like that? So from a sort of loss perspective or from a product perspective, we, the customer themselves, sort of is, is not relevant to the pricing. That said, we find that we are sort of, you know, we do well in certain sectors, So we are very much aligned with sort of customers who have a lot of sort of Speaker 0: physical assets, things you can't move people who can't just sort of up and get all of their their people to work from home or can't go and move to another store or or or something like that, Um, Speaker 0: in the round there. And there aren't customers that we that we wouldn't cover other than you know, for lots of reasons that you might not might not offer someone insurance. We write a lot of our business through Lloyd's and a lot of our policies are aligned with with with Lloyds around the sort of the businesses and the industries that that that we were right. I think the the key point for us is that our product is very aligned with customers who are Speaker 0: concerned about the environment who are concerned about being sustainable because it's a it's a longevity type product. It's the kind of thing that that increases our customers resilience, and so they tend to be customers who are minded that anyway. But we don't have any sort of specific exclusions. It's definitely case by case basis and out of interest. How often do you find you're paying out? Because I don't know the river was a certain, Speaker 0: but actually it didn't cause a negative knock on effect. I mean, I just I want to get a sort of sense of how so, Yeah, that's almost never happened. Um, which is really interesting for us because that's one of the challenges. So we agree with the customer a depth of water and amount of money. We put a sensor on the outside of the property, and And if the flood comes and the sensor tells us that has happened, our contract is that that we will pay. Speaker 0: Um And so one of the big challenges is to to get that right. So how well does a customer or their or their broker understand? What does 20 centimetres of flooding mean or 50 centimetres of flooding? Um, but we've actually found that something that customers in particular sort of know very well. Speaker 0: Um, and I suppose the value that they're getting from our product is not just the sort of pound for pound or now we're the US dollar for dollar replacement of sort of stock or contents, or or or building damage or whatever it is. It's actually the the speed of payments, the ability to reopen very, very quickly, which is what makes people more resilient. Speaker 0: So I suppose we have found, somewhat to our surprise that that that focus was really, really important. That's a big part of the discussion in the lead up to sort of someone taking out a flood flash policy, but in in the claims process. Um, I guess speech is trumps all in in in that respect. And so we've not really had any cases where there's been a sort of huge, huge mismatch. Speaker 0: And Jonathan, you were mentioning at the start that you've got a broad spectrum of clients, everything from restaurants at one end through to people building or operating solar farms. Um, some of these must be businesses in quite new areas. Is it easy to get insurance for them in the in the round? Sadly not, Um, and that really was was one of the reasons that that I set up to stay. Speaker 0: Insurers have Speaker 0: generally speaking a a tendency to follow the path of least resistance. And so if there is a new technology that's released into the marketplace, it's very difficult for clients to have insurers adopt that technology Speaker 0: and what we're seeing, uh, particularly in the SME space, which is primarily where where we operate between 1 to 250 employees. Speaker 0: A lot of innovation is occurring there, but insurance is a blocker. Uh, every week we we are receiving inquiries and and and more so more so now as as we start to increase our our exposure, our footprint. But we're we're receiving inquiries from organisations that have have have gone through a rigorous testing phase and are seeking to bring products to market. They're well funded, uh, and they're unable to get insurance. Speaker 0: And for me, it's a really sort of sad position that we're in when the climate crisis is is is so significant. And so that's something that we're we're we're trying to change. Speaker 0: And you said you because this was a problem. You wanted to set the business up. So it sounds like you You certainly set yourself a challenge there. But how do you How do you get cover in cases like that? I mean, do you go with the Parametric insurers and say, as long as there's money behind it and the river doesn't get, you know, Well, you know, I I'm I have great respect for, for for what I and the guys at have done, I think it's a fantastic, fantastic product. Um, Speaker 0: and I and I think absolutely because, um, as you you've kind of already posed an interesting question that a little agnostic as to what's going on there. Um, that's actually great for, um, the clients that are doing new things because, Speaker 0: you know, it's driven by the weather and the location, So really, um, from their perspective, it's, uh it doesn't matter. And so they're receptive. I think, um, the key for us and and where we've had success is taking that time to properly understand and properly present information to insurers. It's education, you know, and and and I don't I don't claim to be the the world's leading expert on on any, um, Speaker 0: uh, practises that might enhance sustainability, paralysis or or methane extraction, whatever it whatever it may be. But it's amazing how much you can learn if you put a little bit of effort in. And and I think establishing a business which UM, which is not driven by volume and is not driven by, um, rapid processes that can afford to take the time to learn and that can afford to take time to educate insurers and work truly in partnership, Speaker 0: is where we've seen some some really good results. Because, um, it's amazing how people can get enthusiastic about these, um opportunities when they're given the right information. Speaker 0: Well, can I get your thoughts on that first and then I'll bring you in. But I mean, from your side of doing Parametric insurance, is it a very transactional relationship? Or from what Jonathan was saying, Do you think over time Yeah, actually, we could kind of build a much broader, deeper relationship with clients. I mean, I think I wouldn't describe it as transactional at all, I think, particularly in the sort of in the build up to Speaker 0: to build, creating a policy for our customers. You know, you really work closely with the brokers to understand their business. Why have they come to us? And sometimes it's because the, you know, traditional insurance market can't serve somebody or won't won't serve somebody. But sometimes it's because they sort of, you know, see value in our products. And it's realigned with what what their business is trying to do. So Speaker 0: so certainly in the build up to sort of selling a policy to an individual client, you actually end up knowing quite a lot about them and what what their needs are. And then, you know, we work. We sell retail brokers in in the UK. There are sort of, you know, most important partners. And so we we end up spending quite a lot of time working with those. You know, our biggest team is dedicated to to the success of our our our brokers, um and then, you know, in in the sort of in the claims scenario, which is obviously a much smaller proportion. But but But again, Speaker 0: maybe that is more transactional. But that's the point. It's a really fast transaction, and that's what we're aiming. That's what we're aiming to do. But no, certainly we we feel like we know our customers. Quite Wellmark. What are your thoughts on that? I mean, is there a danger that in the underwriting process, you look at it? Think that's quite interesting? But I don't know. Well, let Zurich underwrite that for a few years, and if it seems OK, we we'll we'll come in. It's it's a great idea, but you know, not quite right for us yet. There's a business risk attached. Speaker 0: Certainly as underwriters, we need to understand the risk that we're writing and the risk it brings so that we can charge an appropriate premium, Um and with that provide the right advice and risk management that goes with it. And there are certain areas where I think the insurance industry and Avi have made strides. So if you look at renewable energy, which is one of the points you touched on, uh, in 2019 we launched a dedicated renewable energy team and we now write wind, solar Speaker 0: battery, energy storage. We've just moved into offshore wind, and we're gradually building out our propositions, as we better understand, and we have the capability to service those customers. There are other areas that are and continue to prove really challenging, Speaker 0: So ensuring large scale timber buildings is a is a real challenge for us. And and we're working really hard to try and find ways to balance the desire to use environmental materials with our appetite to provide cover for risk. And there are some really useful Speaker 0: tools out there that the risk authority published a white paper on how to ensure large scale buildings with sustainable material by using a hybrid approach where you use conventional materials for elements of the building and sustainable materials for other parts of the building. So you create a compartmentalised solution that allows insurers to understand the loss potential and therefore provide the insurance. Speaker 0: I want to come back to some of those issues around, UM, materials a bit, but just in broad terms, coming back to this idea about providing insurance or underwriting to businesses that are helping to solve vs G issues. Let's call it that, Speaker 0: I mean and you can't form your policy on the basis of a conversation. You know, something that's being held in your TV. But I mean, could you see yourself in a position saying at some point in the future, I don't know, 2% of underwriting portfolio will be in things that we have no idea quite what the risks are. But we know that somewhere in the middle some good things will come out of it, and that's part of our commitment as Speaker 0: a big insurer with a broader responsibility to be out there doing the right thing. Some of this will go wrong for us. Other bits will be great. We can't pick the winners. We've got a portfolio of these businesses, so I think we already do that to a degree where we see that there is a need and an opportunity. We're not going to go from zero to throwing the kitchen sink at something we will learn and incrementally build out our capability and our offering over time. Speaker 0: So we see this as a constantly evolving journey that we'll have to work on, and and I don't think we would ever willingly underwrite something that we don't understand. But we'd certainly work in partnership with people to understand things and start to develop solutions that met the customer's needs. I want to get some thoughts. Um, Jonathan, are there anything I mean again? You've got a broad range of of clients you work with, but are there things that if you look at it, you think you know, as a rule of thumb, this just gives insurers or mjs the B GB? Speaker 0: And until we were able to sit down and chat through what's going on II I mean, look, the the there are lots of there are lots of examples. Um, that that that I could give you But I. I think the overarching issue is coming back to the point I made before about education and large and and largely what marks saying It's about understanding, um and and and and I would be Speaker 0: no surprise on on on the side of your proposal. Uh, and I think, you know, to a certain a a certain element of, you know, I wanna you know, some some of the market have done a similar thing. They call it in. Um, the the problem that I see with that is it's it's innovation, but it it it's still, Speaker 0: uh, provides limited access to the types of clients who I think need to be served. So the SME S, uh, it's innovation, but as long as you know, a global entity is doing it, because then they can support the business case by the, uh, 30 million quid premium that they're receiving from from the other side of the of the coin. So I'm not sure it's entirely genuine. Um Speaker 0: uh, to give you an example, uh, of of some of the types of risks that, uh, that we'll find it difficult to place, um, or that we find difficult to to go and cover, uh, three D printing of, uh, of of concrete structures. Um, Speaker 0: uh, I've talked about paralysis already. I think when we talk to insurers about anything that includes the word reactor uh, they have some sort of meltdown, Um, and and really, you know, processes that the the that one would expect to cause a raised eyebrow where things like heat, uh, is involved or, you know, or or or combustible materials, Um, Speaker 0: that that that's where I would say a problematic. I suppose so far a lot of our conversation has been around what insurers MGAS and brokers themselves and their businesses can control. But I suppose there's another big player in this, which is the government. So without chucking it all on to a completely different authority. But are there any things? Where do you think that sort of boundary lies? And where should it lie between what the industry itself can actually solve around issues like climate change? And actually, where there's a point we say, guys, Speaker 0: you know, there's some other people that have to be in the room that will set the parameters that will direct the capital that will set the regulations. There are things we cannot do. Yeah, thanks so much for the question. Um, that's that's a really, really difficult question. I you know, I can give you Speaker 0: my personal opinion on that which is that the the government sort of effectively sort of creates the environment and the incentives to to sort of do the right thing. But ultimately there's. There's a lot of power in the insurance industry to to make a difference. I suppose Flood is a really good example of that. It is an is an insurance industry solution, but the conditions for it to exist were sort of, you know, put in place at the start. It's got to be a balance between the two things Speaker 0: mark to do. Do you get a sense of the moment? Um, it's not asking to have a view on political parties, but I mean, we've, uh I think it's fair to say the current government is, uh, probably going through a little bit of turbulence at the moment. It's got quite a lot in its mind. Um, the Labour Party is in an interesting place as well. I mean, just how much bandwidth in general do you think the politicians have got to be thinking about this as a Speaker 0: as an issue and to be working in partnership? I mean, what what sort of feedback do you get? Whether you're talking with them. A Viva is talking with them directly or via the A B I or various trade bodies and associations. Speaker 0: I think there's there's a real challenge in getting some of the topics that we believe are key and important to drive. The environmental agenda forwards onto the top of their list because, as you say, they've got 100 and one other things that they're prioritising and be that their own political views or our relationship with Europe or Speaker 0: how things are going more globally. They're all key and important things, but we need to try and work with them in a partnership to develop solutions that are long term, be that Speaker 0: better and more considered planning so that we develop properties that aren't at risk of things like flooding or when we build buildings that we consider that they may be around for 50 or 100 years, and we need to design them so that they're suitable to be used at that time. Uh, you mentioned I want to come on to that as a specific example, because we we've heard a lot about flooding the news and then, you know, periods of extreme hot weather I mean, both around the world and also in the UK. I mean, can you give us some sort of sense of Speaker 0: where that sits as a topic at the at the moment? I mean, as you look at it, I mean, what sort of laid out? I mean, how much of the UK housing or built environment is in danger of flooding at the moment, If things continue as they are, what would that number look like in 5, 10 years? I just want to get a sort of sense of, uh, it is a problem. So if you look at the E a the E, a quote a figure of just over 5 million homes as being exposed to either flooding or surface water flooding. And under our current Speaker 0: development plans, we continue to build properties in flood plains, so the problem is only going to get worse. And whilst we have flood re in place to help mitigate the cost of insurance for some, it doesn't cover new properties that are built in flood plains. So we're storing up a collection of customers who potentially might not have access to affordable insurance in the future Speaker 0: and on the I mean, I know we're focused on the environmental side, but the S side of this, I mean, is that gonna be a social problem down the line and because my Speaker 0: call me a sceptic. But my guess is that the people who are going to end up in new housing on the floodplains will probably not be from the richer parts of society Speaker 0: potentially, but you only have to look around. Uh, most large cities, the buildings that sit right on the river are normally the most expensive. So I don't think it is just a a social piece. And what we need to be focusing on is building properties that are appropriate. And and we put the right building in the right place using the right material so we can use timber to build properties, but don't build in the flood plain with timber Speaker 0: or raise the timber out of the flood plain by using some other material on the lower floors of the property. Speaker 0: And I that's I don't know, but let's let's assume you've you've provided some insurance to somebody who's whether it's a business and they've got a A factory on a floodplain and Speaker 0: the inevitable happens. At some point, it gets flooded. What do you do afterwards? Do you think we'll never we'll never insure them again? Or we will. But they have to put the following things in place to, you know, So they are fundamentally building back Better. Yeah, absolutely. And that is something we've had to deal with. And there are There are some really different scenarios because there are businesses. There are homes that have been sort of near the rivers for for for centuries, and and we'll find it very, very difficult to to relocate. And then there are sort of new builds who which have been Speaker 0: effectively forced to build on on floodplains and marginal lands. And, yes, we have a sort of planning process around it. And there's lots of sort of considerations about how likely is this to flood and how has it been built? But your point about the the the sort of relative priorities is that, you know, there are other considerations around home building in this country as well. Which means that a lot of this stuff sort of sort of gets through. Um Speaker 0: and you know, you you reference build back better, which is a great scheme, and it flood. We have sort of aligned with this, which which basically, after an event, provides extra funding for someone to make themselves more resilient against the next flood, which is which is fantastic but obviously only thinks about customers who have just flooded. It'd be great if we could do something for people who haven't haven't flooded. Yes, yes. Um, Speaker 0: for us, it's very interesting Is we have a, I think uniquely in insurance. We have a really strong alignment of incentives with the insured because we we pay cash when water reaches a certain depth. And one of the extensions of that is it should always be cheaper to buy a policy from us for at a higher depth. Um, and it will always be cheaper to have a sort of a lower payout. So, you know, a £10,000 payout at one metre of flooding should cost less than a £50,000 payout at 50 centimetres of flooding. Speaker 0: Um, which means that if a customer can make themselves more resilient, So by putting in some sort of property level protection or whatever it might be, um and they can increase that that depth at which they get paid or reduce the amount of money that they need in a disaster. They'll see that reflected almost immediately in their insurance premium, which is unusual. I think that's a you you will know. This is a really, really difficult thing to do, to sort of Speaker 0: take it on spec that the measures that somebody has taken will make them more resilient and therefore less likely to claim. And so for us after her to go back to your original question after a claim that that is the conversation, it's like, How did the product perform? What could you do better next time? Do you need the same thing? Is there something we can do to make it more resilient? And the result of that will be your Your next insurance policy should be cheaper. You mentioned there about sort of the cost of insurance as the um, Speaker 0: if you like the river, the river level keeps rising. But do you get anyone that just think of the other side drought. Do you get anyone where you're running a policy saying If it drops below a certain level, this could be a problem. We're all on clay soil. You know, the foundation. Start cracking. We don't We don't do that. But I mean that that kind of insurance does exist. Um, I know of examples in sort of continental Europe, for example, typically focused on the type of industries which rely on Speaker 0: rivers for transport. So if rivers get in Europe, get too low and you can no longer transport your goods down that river, Then you're stuck with it, or you have to pay to transport it over land. Then your costs go up. So there are sort of contingent type policies of that kind. Um, we don't yet have a UK flood policy. Fair enough. Thank you. But I would get your your thoughts. I mean again Speaker 0: with you, with your clients. I mean, is there anything you see insurers doing well or you would like to see an insurers and MG a is doing after an event to to help create greater resilience in built environment? Yeah, I think so. I mean, the the point that you made earlier was you know, what can the government do? Where can all the money come from to fix the problem? Actually, I think there's an awful lot of money that we could better deploy here at the a. B, I quote somewhere in the region of £15 billion a year spent by insurers on property damage claims. Speaker 0: And so if if we could consider as insurers or as the insurance industry deploying some of that money in ways which give more consideration to ESG elements, Speaker 0: then we're going to be making a pretty good impact on the problem anyway. So so? So I think things like green clauses in policy wordings, considering the removal of betterment issues that allow insurers to to to spend the money Speaker 0: in a way which, yes, it it it's giving a better end product. But you know what? It's for the benefit of everybody. Uh, and of course, one's got to manage the moral hazard on that. But I think, um, it's it's probably less of an issue when it comes to, uh, environmental and sustainability repairs than it does to line in someone's pocket. So So I think all those things are very are very doable. Speaker 0: But is there? Do you see a long term payout? And the critic might say, If I was watching this and I'm driving. I think he's been very free with my capital. Um, you know, are you asking me to take a bit of a haircut for a few years? What? What's the long term benefit to me? I mean, Speaker 0: there is a huge benefit in my in my opinion, um, I I'm a massive believer in those organisations that have positive sustainability credentials being better risks. Um, there was a There was an interesting survey carried out between Howden and Fidelis on 30,000, uh, policies, which which demonstrated significant improvement over and above a standard risk for those organisations that do have, um, clear, um, Speaker 0: sustainability plans and sustainability credentials, Uh, particularly on property damage. Actually that that was where they saw the biggest, the biggest benefit. And so I think if we as brokers can start to educate our clients on sustainability, Speaker 0: show them how they can capture information which is relevant to to their sustainability performance and share that with insurers in a consistent manner. Insurers can then start to use that data to to prove prove that point and and you know what? If insurers are not doing it to do the right thing. They're doing it to make more money. But great. So what? We get to the same result, which, which is the right place we need to be. Speaker 0: I don't know if you look at individual businesses that you're thinking about doing business with and sort of work out how seriously they take ESG in the round and therefore whether they are Speaker 0: better at quantifying risk in their own business than others. So it's not something we do? No. I think that we probably find that the businesses that we work with probably are more committed to EG or think very much about their sort of their recovery Speaker 0: recovery plans in in the aftermath of a disaster. But but no, that is the Parametric insurance model We are. Our underwriting is less influenced by what the customer does and what their property is made of, and much more influenced by where they are and how likely they are to suffer. Suffer an event. Speaker 0: Um, what do you think the next um, key development will be in Parametric? Sure. I mean, you know, because everybody's business model evolves. What? What? What do you think the next one will be for you. I don't know what the next one will be, but the most important one is making sure getting it established and making sure it works for the customer. So I found on quite a lot of panels about Parametric insurance, and they're usually sort of insurance industry ones. And everyone is sitting around saying What a fantastic idea this is. It works really well for the insurer. It works really well for the customer. Speaker 0: I suspect 90% of the people who are at those panels haven't ever tried to sell a Parametric insurance policy. And, you know, there there's there's much less precedent for it, um, which means it's new, and it takes work and time for brokers to understand it and for customers to understand it and get comfortable with it. Which means that every sort of piece of uncertainty around it comes with some questions and the kind of questions that might be equally legitimate on Speaker 0: traditional insurance policy. But everyone's bought that for a long period of time, so it's kind of fine because if you're doing the same thing as other people, that that's great. So so you know there are There are plenty of bits of technology that will make Parametric insurance better, faster, more accurately price all of these things. But the most important thing is that if it is going to grow and become as big and as important a tool as we think it should be, um, to help people, customers, businesses become more resilient in sort of Speaker 0: in in in the midst of the climate crisis. It's actually that communication piece making it part of the mainstream, making it part of everybody's armoury. That is the thing that will will need to happen. The rest of it is icing on the cake. OK, um, Mark, just coming back to the end, say, consumer or the client, Let's stick with this issue of what? What can people do to, um, if you, like, reduce the risk to themselves? I mean, is it capital outlay is it Speaker 0: is about floodgates. What are what are some of the things that you can do that will mean you're less likely to suffer from something like flood, and even if you do, you're less. It's going to take you less time to recover from it. So we've already touched on the build back, better piece. And so when customers have a claim, we need to think about how we reinstate or repair that damage in a way that makes them more resilient, Speaker 0: either using different materials or simple things like raising the electric out of the flood plain. So you may, instead of having your flood your sockets on the floor, have them halfway up the wall might not look good. So good, but actually means that we haven't got to dry the electrics out. Um, from a business point of view, there's some real simple things they can think about, how they store their stock and and whether they can lift the stock to a level that protects it from flooding. Speaker 0: They can move critical machinery, place it on the first floor. Don't put your computer servers in the basement. But the one that I'd come to as an absolute must is business continuity. Planning. Be prepared, understand the risks that you are facing and work out. What are you going to do when the worst happens to actually keep your business going and recover quickly? Because if you plan beforehand, Speaker 0: you actually you're prepared, and it will work far better than if you're trying to make those things up on the hoof when your property is already damaged Speaker 0: in your experience, Are people good at thinking about worst case scenario? I just think from my own life, the number of times you say What if X happened? People go, Oh, well, it can't happen. And when you ask them why it can't, it's because they really don't want it to. Which is, obviously, doesn't mean it won't. So I think if we go to flood, I think, as insurers or the insurance industry, we're not very good at explaining to people risk. We'll talk in terms of a one in 100 year risk, which most lay people will translate to once every 100 years Speaker 0: flooded last year. I've got 99 years to worry about it, but if you translate that to, you've got a 25 year mortgage and we talk in terms of you've got a one in four chance of your property flooding, same maths sounds an awful lot more scary and actually gets across that they are in a severe risk. So I think it's an education piece and how we, Speaker 0: the language we use to describe what the risk that our customers are facing. I suppose it's not just it's not just the language, it's the framing of it, isn't it? I mean, do you Do you spend much time with sort of behaviour? I mean, certainly asset management. Behavioural finance is a big thing. How How you how you present potential payoffs to people? Um, you can present them the same payoff, but using a different language and they come totally different conclusions. So how much time do you spend on the sort of the psychological side of it in terms of what you say to brokers and how what you can provide them that helps them with their clients? Speaker 0: Probably not enough. Speaker 0: Um, my observation would be in the commercial space. Commercial businesses are focused on getting back in business, and they want to Speaker 0: make money and continue and survive. So that is their focus. Having a conversation around what may happen in the future when they're recovering from an event. Speaker 0: I don't think there is an open to that type of conversation and thank and in just in general terms, we we're talking about what you can do to make yourself more resilient. But How difficult is that as a conversation to have Speaker 0: when we we're in the middle of, you know, very well publicised cost of living crisis. And most people say, Do you know if you if you had this conversation with me four years ago, when I didn't I didn't realise how privileged and lucky I was. Then I would have funded it. But not now. Yeah, quite understandably. It's an incredibly difficult, difficult conversation. People have budgets. And if if the cost of your insurance goes up, you might have an insurance budget, you're not going to buy additional right now. And you might say, I'm gonna defer Speaker 0: making my sort of property more resilient or or making these investments in, in, in in plans and whatever it might be. So I just think we can't escape that that right now it's a It's a really, really difficult time to do that. Thank you, John. What are your thoughts on that as you're talking with your client base, is there II? I think it really comes down to the type of customer that you're engaging with. Um, we are, uh, purposefully working with customers that are receptive to making positive change. Speaker 0: Um, we're business, which is is the leading, Speaker 0: uh, accreditation for sustainability and and so are a lot of our customers. So, um, they get it. They they see they see value in making these investments and, uh, and and generally Speaker 0: call it a coincidence or or or or call it, um call it better business, but but they can afford to do it. I think if you're approaching businesses that that have a, um, slightly more selfish, self centred approach to running their organisations and really, all they care about is the profit, the here and now, Speaker 0: Um then in my experience, they'll generally kick the can down the road and and actually will prefer they'll prefer to make that the insurer's problem. Um, we'll deal with that at next. Renewal? Uh, probably not the types of clients any broker wants to have, because that makes the renewal negotiations very difficult. Yeah, OK, um, we've got about five or six minutes left, so you mentioned a couple of times materials. So what are some of the materials we're not using or not using very much today that you you mentioned timber that you think we'll be making Speaker 0: a bit of a comeback, Speaker 0: so I think the built environment is continually evolving. Uh, there's a phrase that's used modern methods of construction. Um, and that really covers a whole gamut of things. Uh, the things that we see that as insurers, we are more nervous about, uh, large scale timber because of the Speaker 0: not only the fire risk, but also the the problems with trying to repair it when it gets wet. Um, but also things like green walls and blue roofs. So blue roofs capture rainfall. Green walls are living walls. Speaker 0: Um, these are the things we sort of see where they sort of grow plants. Basically, yeah. And you'd think that they they're perfectly safe because they're all plants and they won't catch fire. But the pots that the plants are grown in are quite often plastic. Um, we've seen some industry fire tests that Speaker 0: suggest they're quite similar to some of the cladding issues that we face. So we need to help people understand the risk, help them design in Speaker 0: to the product some resilience that make them safe to be used. We're not going to cross our arms and say, No, you can't do that. you can't build in that way. We want to build in a safe way where the products have been tested. So we understand what will happen if the worst does happen. And I suppose one other element of this is one of the reasons for climate change. Everyone keeps using more and more power. Fundamentally. Um, and the answer. The simplistic answer seems to be stick. I don't know. Speaker 0: Solar panels on your roof, you know, generate it yourself. Sunshine's free. Um, what are some of the things that can go wrong with with that? Uh, you know, if one of these things catches fire, is it Is it the same as convention? Is putting water on it? A good idea or a very, very bad idea. How do you work that one through as it is? So I think as insurance, we need to incentivize people to adopt these local power generation pieces and not put barriers in the way. Speaker 0: But in doing that, we need to educate the manufacturers and the users of the potential problems that are faced. And solar panels on roofs and fires is a good example where Speaker 0: the solar panel needs to be turned off from generating electricity. Otherwise, you put water on it and you get a very unfortunate outcome. So knowing that the fire brigade are more likely not to put water on the on the on the roof because they're putting themselves and people at risk. Speaker 0: So it's around designing those things in such a way that if they do have a fault that they don't Speaker 0: impact the rest of the building. OK, well, we're almost at a time. So we talked a little bit about unintended consequences. I would get some thoughts from the others on the panel. Is there any anything that sort of superficially looks a great idea that, um, you know, as you look down, you think up to up to a point, uh, just the law of unintended consequences on on risks around ESG. Speaker 0: I think Speaker 0: if we if we focus too much on the challenges of of ESG, um, I think we can be guilty of finding ourselves in a position a bit like Y two K where, um, certain people spent an awful lot of money to get to the outcome that they thought they needed to get to other people did nothing. Speaker 0: Uh and the people that nothing sat back and said, Oh, aren't we clever? Because actually, look, there wasn't really an issue here. It wasn't really an issue at the end of the line. Whilst I'm not disputing the fact that of course we need to do something about this. I think being able to put in step changes for people and making it making it OK not to be perfect, but let's let's just find a way to edge forward together. Speaker 0: Um, II, I think, is is is what we really need to focus on and not have this unintended consequence of perfection because we, we we we're not going to get there. I think if we talk too much about EG and we demonise, maybe organisations that that aren't doing quite so well we we risk we risk that which we don't want. We don't get to Speaker 0: I your thoughts on that. I don't think I have any better examples, but I mean II, I completely agree with you. It's that, um you know, we shouldn't let sort of fear restrain progress. Right? So don't let the best be the enemy of the good. Is that fine? You'll hear that said in our offices, quite a lot. Fair enough. Well, let's get so we cover a huge amount of ground and there's a lot more we could talk about. We do have to bring it to a conclusion. So I just want to get a final thought from each of you out of everything we've talked about. One key point you'd want to leave us with. Speaker 0: What would that be? So I can I come to you first? Then I come to you. Jonathan. I'll finish with you, Mark. I think for me, you know, being on the insurer as an MG a the insurer side of this. I think that we we just cannot forget that it's it's all about education and awareness, and that is such a big part of our job and the the the technology advances are fantastic and really important, and we enable will enable lots of things. But at the end of the day, our customers are are people and we're selling via people, and Speaker 0: we have to put at least as much effort into that as we do into any of the the club technology. Jonathan Speaker 0: I I I'd echo Ian's comments on education. It's it's education and empowerment. Let's let's show people what they can do and let's give them the tools to do it and support them along the way. Um, that's That's what I think is important, and I echo both of your points. Uh, ultimately, I think it's Bolden on us to support our customers, educate them and provide solutions to allow them to become Speaker 0: more resilient to climate in the future. We have to leave it there. Thank you so much for watching Do stay with us. We've got some information coming up in just a second on how you can potentially use this for structure learning. And CPD just remains for me to thank our fantastic panellists. Mark Dunham of Aviva, Doctor Ian Bartholomew of Flood Flash and Jonathan Evans of sustained insurance brokers from all of us here goodbye for now Speaker 0: to discuss the development of the electric vehicle market and what it means for insurers and insurance brokers. I'm joined now by Mark. He is head of motor commercial lines at Aviva Mark. So just how rapidly is the EV market evolving? I think it's safe to say it's moving at pace. Um, if you go back to 2020 compared to end of 2022 the the number of electric vehicles on the road tripled. Speaker 0: Um, and as an insurer, it means we're having to move at pace with that to make sure our customers are happy. We've had the government commitment to banning the sale of new petrol and diesel vehicles by the end of 2030. So it means that we're having to invest time and and money as a as an insurance business to make sure that we're We're keeping pace with that change and make sure we stay relevant for our customers. And and I suppose if there's more cars, there's got to be more infrastructure that's coming out as well. So what? What are some of the issues there? Speaker 0: A lot of it comes down to the investment, So if you look at at the moment, there's about 42,000 charging points on a around the UK network Speaker 0: to support that that ban of, um, petrol and diesel vehicles and that that transition to electric in 2030 there needs to be at least 300,000 by by 2030 so it's evolving pretty rapidly But how revolutionary are the changes then that are gonna face you as insurers? Uh, insurance brokers and and the end client? Given this backdrop, I think it's an interesting one from an insurance perspective, because what what we have to remember is that electric vehicle is essentially a four wheel vehicle operating on a UK road. So from an insurance product perspective, Speaker 0: the the product that is in place today meets the requirements of that vehicle. Um, in terms of if you look at the way way we price risks Speaker 0: motor insurers, we tend to use that rearview mirror and that the claim of the past tell us what the future is going to be. That claims profile could change. Um, so we we have to make sure that we we constantly review the data that we have at our hands at the moment to try and predict the future. But we are. We are seeing some of those dynamics change, and it it it's not really going to cause us too many issues, though, because, as I say the we've still got a a human being sitting behind a steering wheel, making decisions, Speaker 0: and we will still continue to see motor claims occur, and we'll handle those in the same way that we have done and price in the same way. Speaker 0: But in a couple of instances, I mean, if you get a fire in electric vehicle, I presume it's rather different from how you'd handle a fire in a in a petrol or a diesel car. Speaker 0: Luckily, the numbers that we see are really low at the moment. We if if you look at the research available, it's it's a very small number of vehicles. But if if a vehicle does catch fire, then it's a very different type of fire. I think the the ignition you you with a petrol vehicle. We have to have that that something that's going to ignite that fire, where an electric vehicle, Speaker 0: the number of chemicals in in a battery. If that ignites it, it can create over 100 different gases that are coming out of out of that battery. Some, some are poisonous to to humans, so Speaker 0: it comes down to having an expertise on hand that can can handle those. And I think for me, in terms of that claims process where we see those fires, it's Speaker 0: How How do we? How do we handle those claims? Um, Speaker 0: that that claims process is broadly similar, but what? What you have to do is have have skilled technicians in play, have some real expertise that they they know what they're doing when, when they're coming into contact with a battery, they know how to handle the battery in terms of storage, in terms of repairing it. It it brings a different level of expertise. And what about the underwriting knowledge? Because again, presumably underwriting something like a petrol station is very different from underwriting somebody who says, I've got a whole lot of charging points. Speaker 0: So if you speak to our property underwriters, the underwriting process is is very similar. What it comes down to the question. The key question for them is how they manage that risk. So Speaker 0: where where are the electric charging points placed? What are they placed up against? How how close are they to buildings to combustible materials? Where so it's a very similar process, but it really does come down to a conversation with the broker or the customer in terms of if we if we can get in at the start of the conversation when those those, um, charging stations have been designed. We can pass on some of our knowledge and actually help them design Speaker 0: at a station, which is going to be safe, and and one that we know we can rely on and we can underwrite. Speaker 0: And how much is there an international angle on this? Because a lot of your clients must have fleet of vehicles that don't just stay in the UK. They go to Ireland, they go to France, they go to Spain. Speaker 0: How? How important is it to be able to cover them in all of those different jurisdictions? Yes, so many of our customers will will travel on certainly on onto the continent. So our our policy, as I said earlier, it's It's still a A same vehicle operating and in the same. So the insurance requirements are the same. The vehicles being used in the same way. Um, the fact that it's an electric vehicle doesn't doesn't really change that. The the charging infrastructure may change because, uh, even if you look at, um in the UK, Speaker 0: the the types of charges, um, out there there's different adapters for for each vehicle there is. There's something called type two which has become the standard across Europe, but it it varies by by vehicle, Um, so that that's something that I think we, we we we work with the manufacturers to make sure that we understand that those processes and and we can then inform our customers when, when it comes to giving them advice on what vehicles they should be transition towards. Speaker 0: And what are you learning in this process as it is, a sort of move to EVs? Um, not least because you, as a a Viva are a large corporate. You've got some pretty publicly stated aims of trying to be net zero by 2040. Most people are going for 2050. So what have you learned yourselves? That you can apply to this market? I mean, with with that commitment to be net zero, we've we've made the commitment, our own fleet of vehicles that by 2025 it will either be completely electric or or plug in hybrid. So we're we've seen that process. Um Speaker 0: uh, all of our drivers sign up to that, and actually, the the performance of them is is very similar to what what we'd expect. Um, I think for me, it does. Does come down to that that risk management process again. It's the the one thing I think we tend to underestimate is the familiarisation with the vehicle. When, when you're given the keys to A for a new vehicle to a driver Speaker 0: in the past that the vehicle they've inherited will will be the same same sort of performance one they had before where the the the dynamics of a electric vehicle. The acceleration is very different. The braking is different. So we we've got to make sure from a risk management perspective that we are, we are given training on how to use that vehicle. Speaker 0: And how serious a player are you in the EV market today? Um, how serious would you like to be seen? As in, say, 345 years time? It's a good question. So at the moment, our market share across personal lines and commercial is between 10 and 12%. By 2030 we want to be the number one insurer of electric vehicles, so we feel that we need to Speaker 0: have a have a market share of about 14% to be to get to that number one position. Um, and I think from a from a commercial perspective, I think in the market today there is a perception that we are entirely comfortable with electric vehicles. Nothing could be further from the truth. Um, our underwriting appetite is there to add electric vehicles. We cover a large number already for some of our key commercial customers. They're transitioning at a rate of 1000 vehicles a year into electric Speaker 0: that our policies are set up. Our underwriting processes are set up for that Already, we've invested heavily in our claims model, so we own our own repair network. So they've been upskilling all of their technicians over the last couple of years, so they'd make sure they've got got got a skilled technician at every every repair shop. Um, so I think we're we're well placed already in that electric vehicle market, So we we have a stated ambition to be number one. Speaker 0: Aviva is known as an insurer, but you've also got a very big asset management to the business. So what are they up to? Is it aligned with what your goals are? Speaker 0: Yes, they are. Um, if you look. Recently there was a an investment made of 100 and 10 million into a business called Connected and that's that's been set up to Speaker 0: install about 100 and 90,000 charging points across the UK, some of it across our own real estate. Um, so that's one really good example of of how we're we're doing more than selling insurance. This is about how how can we invest in the community and the infrastructure to make sure that our customers, which are always at the centre of what we do, that that they're they're getting the full, full access to the full power of a. Speaker 0: And so finally, if brokers want to know more about this rapidly evolving market, how can Aviva help? So I think there's a number of ways we can help. We we have a electric vehicle hub online, and it's at the moment it's driven primarily at customer, uh, personalised customers, but Speaker 0: that that applies equally to to commercial customers so brokers can access there they they can use. We had a sustainability roadshow on for brokers recently, so that's available on on the Aviva broker website. But also I think the most important thing comes out of people. It's speaking to underwriters. We've got our sales and distribution team. We've got got our claims team, our risk engineers. They're all on hand to give advice. Speaker 0: We have to leave it there. Mark, Thank you for joining us. Thank you Speaker 0: to discuss the challenges that climate change is going to present to the insurance industry. I'm joined now by Doctor Victor Rosa. He is research fellow at the Grantham Institute on Climate Change and the environment. Uh, Victor, thank you so much for joining us. Um, to start with, tell us a little bit about your role. Speaker 0: I'm, uh, doing mostly research on climate change. Adaptation, Um, in particular, um, how we can build resilience in cities. Um, I'm interacting with insurers. Uh, politician, local decision makers, national decision makers, um, informing them, um, talking to how we can better adapt going into the future and how we can manage, um, increasing risks. Speaker 0: Well, well, just picking up on that II, I suppose, as a as a layman. I, I say, if you looked at climate and risk, but back in the day, everyone said, Well, we'll just build a great big barrier between us and nature. Problem solve. Now there's much more of a sense that we have to accommodate and flex with nature. Um, is that a fair enough sort of broad overview? And if so, where are we on that? Where are the politicians, the insurers on that spectrum between those those two points? Speaker 0: Um, yeah, I think that has increasingly become a necessity. So I think it's not something that we've chosen voluntarily. It's more like that. We really start facing the limits of what we can do and also what we can pay for in terms of engineered solutions. And I believe politicians have Speaker 0: understood that. I think we just not really acting on it yet. Um, there's a lot of potential in the UK and overseas to invest more in nature and, um, to learn to live with these climate related powers rather than fighting them. But I think there's still a bit of a way to go in terms of the implementation. Speaker 0: Does that throw up any particular issues for for risk modelling? If you're an insurer, then if you have to sort of say we got to let a bit of nature through the system rather than we've built a barrier. And we've stopped it. Yeah, um, it makes quantifying risk a bit harder. Um, if you think about a concrete wall compared to what we think now, um, trying in a lot of places, sort of like beaver dams and so on, which are like leaky dams. That sort of like, for example, when we talk about flooding, hold back to water. Speaker 0: That creates a lot of challenges. Because the way we model risk is sort of like we want, like, an almost lap like space. And I think concrete walls are really good for that because we have sort of, like a constant like a stream flow. We can measure it in a very contained space. While we don't have a lot of controls, for example, what we do, Speaker 0: And in many cases, this will, um, create a challenge on how to implement this in models. So is this a case that when things are getting harder to model, the the sort of what comes out of the model is less certain? Or is it that you're gonna need more intellectual and computing power to go in to to get results that are as certain out the other end. Speaker 0: I. I think it's both, um, it's the technology that helps us to get better measurements, get drone footage of, um, let's say, river beds and so on. Um, but it's also uncertainty. Um, that's increasing. And I think we've need to find ways to deal with these uncertainties. And what are the consequences of that greater uncertainty? If I could put it like that for the pricing of risk, Speaker 0: um, it it will might become a bit harder to price risk. But that's for several reasons. That's nature is one of it. Climate change is another. Speaker 0: Um, there is certainly ways to deal with that. Um, we can think of like a like other pooling solutions of risk. We can think, Think of governments becoming more involved in backing up these risks. Um, because in the end, I think we benefit all from it from having more nature based solutions, um, in our flood risk or any other risk management Speaker 0: and in your professional role. Do you see the insurance industry getting involved early enough in these discussions around risk mitigation? Um, that really depends. Um, also on which arm of the insurance you're talking to, Um, I would think, sort of the, um, investment side. And, um so, like this part of insurance and risk advisory, I think is really thinking about these things. I'm not sure how far we are in terms of the underwriting. Speaker 0: Um, I think one real challenge is that insurance comes quite late into the planning process, for example. So I think insurers are always asked at the last point whether they're willing to insure something or not. I think getting insurers involved earlier would have to really benefit that we could all benefit from their knowledge on risk advisory. But if we go back to say where people build in the first place in the insurance industry, Speaker 0: I mean, I was up near Battery Power Station recently, which they've redeveloped. It looks wonderful, but it is sort of sat next to a major river. We kind of hear the Thames flood barriers being shut more and more often, temperatures are rising, sea levels are rising. I mean, fundamentally, is it sensible? What? What can the insurance industry do when something that big and that important with all that money invested is is there and it's plonked there? Um, yeah. I think that's a really Speaker 0: a public and private partnership here. And I would be less worried, for example, about, like, big construction projects like the Better Sea power stations, because it is an area where a lot of investment will go into to, um, protect better sea power stations from these risks. Speaker 0: More worried about, um, the smaller place so don't attract the same amount of investment places where we need to build cheap. We need to create affordable housing. And we won't have the means to ensure that in the future and also secure it through any terms of barriers or anything like that Speaker 0: is a fascinating point, though, which is that the danger that this becomes the people who really are receiving it? It's the It's the social side. It's where it's where those with less money and influence end up being being sad. Yeah, I suppose. Yeah, exactly. I, um, think that this is really a social question. As much as it is, sort of like a technical question, because if you look into, like, exams like the Netherlands or so, um, they have quite successfully with huge investments, that sort of like, probably Speaker 0: would not meet any cost benefit criteria in any way. Um, and manage to sort of, like, um secure them from, for example, sea river rise for, like, a really long time. Um, but it comes with a huge investment, which I think a lot of areas won't be able to afford. Speaker 0: And if we accept, an area is going to be more prone to flooding Speaker 0: in the future than it was in the past. What? What are some of the things you can do to help the infrastructure, the buildings, the community adapt? Speaker 0: Um, there are several ways to do this. Um, there are centralised, uh, solutions we could think of, like, large, like flood defences and so on. But I think these become more and more difficult to manage going into the future because with a lot of the uncertainty that comes from climate change, we don't know exactly how high the water will. Speaker 0: We don't know how much rain we expect in certain areas, but I think what, um can really help are like decentralised, um, solutions and solutions that are closer to nature. So I'm thinking of, um, little parks and sustainable urban drainage um, adapted housing and we can. We can have data on this. There's Speaker 0: both like resistance and resilience. Resistance means you try to keep the water out of your house. Resilience means you let the water flowing through your house and you can even see talking. So, like to people and having survey data on this, people seem to be a lot more in favour with resilience measures. So letting water flow through the house. And I personally think this is probably the better solution in the long run Speaker 0: and and just picking up from that. Do you think it's likely that we're going to see um, industry insurers showing more interest, for example, in building techniques from other parts of the world where, you know, over time they've tended to have more extremes of weather, such as monsoons or something? I mean, does, does bamboo become the building material of choice in the UK in 20 years time? Um, Speaker 0: yeah, I think that's an interesting thought, and, um, in terms of building material, I think there's a lot of good reasons why we need to rethink the way we build our houses. Um, one is also just emissions. The building industry has huge emissions and we are really working hard to reduce these emissions. But on the other hand, also, a lot of building materials are better suited for flooding, for example, and there's a real balance here because we at the same time need to make Speaker 0: our buildings more energy efficient. But we also need to make them better adapted to climate related risks such as flooding, storms and so on. And I think we can learn from other parts of the world. I think Wood is a great building material, and if we sort of, like build it in a way that sort of like it, doesn't it flood resistant and it doesn't start rotting and so on, building things on stills and so on. I think that there is precedent and there are case studies from other parts of the world where we can learn from Speaker 0: you. You're talking about some very long term trends in in the climate. Um, I just want to get your thoughts on where the insurance industry fits with this in terms of underwriting, because underwriting so so cycles are pretty short. So is there a mismatch here? I agree. I think the one Speaker 0: the underwriting cycle is a challenge going into the future. Um, mainly because climate change is nonlinear. So it might go wrong for a really long time, and then we see a major step change with flooding, heat storms and so on, increasing on a really large scale Speaker 0: and dense where sort of like we have issues with, um payment, um, liquidity and so on. So, um, having longer time horizons, I think would really help to also on one hand, um, better manage these risks, but also, um, incentivize, for example, Speaker 0: um, adaptation measures and so on. Because if you if you're a commercial insurer and you, um, have your clients and you want to them to adapt, but then you always have to risk that they might move insurers. Um, the next year, um, you might have a low incentive to actually, um, invest in in these measures, Speaker 0: you're talking partly about the length of the the the insurance cycle. But also you say, Well, look, if you use backward looking data, it's not necessarily great for what the future might bring. What sort of confidence should people have in using predictive models? Speaker 0: Yeah, that's true. And I think humans are amazing in adapting to, um, like new conditions. And I think, uh, we have done well in the past, and I'm not too worried that we won't be able to do so in the future. So I think I would always take these predictive models with caution, but I think they give us a sense of what to expect. And, um, I think especially from sort of like an adaptation point of view. I Speaker 0: I think insurers, um, have a real case here to, um, use these models not so much about, for example, for the underwriting directly and for quantifying risk, but of getting a sense of where the market is going and sort of like whether they will face, for example, like markets in places that will become uninsurable and whether they want to do something about this. You mentioned uninsurable. I mean, do you think we could reach a scenario where parts of the world are uninsurable? Full stop? Speaker 0: Um, I? I think we will if we not adapt or we don't take any actions. I'm thinking of places like Florida or parts of Australia where, um, the amount of assets at risk in combination with sea level rise tropical storms and Speaker 0: so on will make it really hard in its current state to ensure. But, um, I'm I still believe that we can adapt, and we can still, um, find the necessary investments to actually, um, manage these risk in a way that they won't become insurable. But I think this is a real scenario. Speaker 0: But if you're an insurer, what are some of the signs you should be looking out for? So I. I don't know. Let's assume it's Florida. It's got lots of millionaires in it. So the state will probably go out of its way to try and make things better in the realm for Florida, full of millionaires than somewhere else. That doesn't have millionaires in. But even if the state starts to say, Well, actually, I'm not sure the taxpayers are going to put up with this for much longer. What what are presumably That's the point that it becomes absolutely uninsurable. You know, private money by itself can't make up for Speaker 0: the state, which is the ultimate, um, underwriter of risk. Speaker 0: Yeah, exactly. And I think it's, um, really a question of like, what is the price tag and what are we willing to pay? And what are governments willing to pay? Um, insurers, Um can always There. It's like a free market. They can always leave. I believe it's not in their interest, because in the end you want to have more clients rather than, um, having fewer clients over time. Speaker 0: So, um, I think insurers have a real case here to also like, um, do their part in, um, investing in adaptation. So not only leaving it to governments, but also sort of, like, take a more active role. Um, and by that in, like a public private partnership, I think we can find a model where, um sort of like this becomes sort of like still, um, payable in terms of like taxpayers' money, but also becomes sort of like an attractive business proposition for insurers. Speaker 0: Final question. You're describing insurance solutions, building resilience in You talked about things like dams and and and and and overflows and over spills. But is that compatible, given the sheer number of people on the planet? I mean, if we look at the UK Speaker 0: plenty of resilience in the model, you could argue in the Middle Ages because there was a population of about 4 million people. So we had plenty of space for waters to sort of burst the banks of a big river and disappear And, uh, you know, into into water meadows and so forth with 70 million people in the country, that's just not possible. Speaker 0: Um, yes, I agree. Uh, to the extent that a lot of the risk we are seeing today, um and also probably going into the future comes from increases in exposure. So, like what we call it exposed assets. Um, but that doesn't mean that this is not manageable. It will be more difficult to manage. I agree it's more difficult to manage flooding, Um, and sort of like relocation and so on in a case where we have 4 million people versus 70 million, Speaker 0: um, sea level rise. Coast erosion also means that, like the space we have will rather become smaller than bigger. Um, but nevertheless, I think what I've previously touched on in terms of adapted housing and so on, I think what we need to learn is to live with flooding, lift, um, with other climate perils. Um, and just go go with it rather than fighting it. We have to leave it there. Dr. Victor Rosa, thank you for joining us. Thank you very much Speaker 0: 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? 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. Speaker 0: 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 Speaker 0: 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 Speaker 0: litigation, um, and legal liabilities that come from perhaps not addressing transition or physical risks in the business planning process. So have you got an example of transition risk? Speaker 0: 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, Speaker 0: 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 talk about Speaker 0: 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, 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, but work our way backwards. Speaker 0: 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 Speaker 0: 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 Speaker 0: 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, Speaker 0: 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. Speaker 0: 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 a 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 Speaker 0: 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, ESG type disclosures, um, covered by, um bay. Um, so this is also TCFD aligned. Speaker 0: 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 TCFD 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 Speaker 0: 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 TCFD 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 ISSB, um that was set up to Speaker 0: 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 IFRS, 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. 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. Speaker 0: 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 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. 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 Speaker 0: there. There's not, um, a regulatory discussion around, um, prohibiting or mandating particular activities. Um, I think particularly in, Speaker 0: 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 Speaker 0: 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. do we want to kind of go faster. Um, in the journey, um, around the transition, Do we want to kind of Speaker 0: 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 Speaker 0: 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. 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. Speaker 0: Well, I mean, ju just one example of that. I mean, how good are insurers in the round at measuring the emissions that are coming off their underwriting portfolios? I think the short answer is that is very early days. Um, you know, there was something called the Net zero insurance alliance put together just about two years Speaker 0: ago. Um, we've only had the methodology around measuring the emissions from an underwriting portfolio in certain lines of business. Come out. Um, earlier this year, Um, something called the PC F methodology. Um, and the net zero insurance lines also announced, um, a target setting methodology. Speaker 0: Um, earlier this year. Um, 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 services sector. Um, but insurance is a little Speaker 0: 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. Speaker 0: 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 Speaker 0: 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, uh, that could be a, um, Speaker 0: that might look superficially attractive for an insurer. But on a 5 10 year view that might be seen as quite poor behaviour. 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, that the levers that insurers Speaker 0: 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 Speaker 0: 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 Speaker 0: 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, Speaker 0: 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. Speaker 0: 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 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? Speaker 0: 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 Speaker 0: 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. Speaker 0: 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 Speaker 0: 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. Speaker 0: 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 Speaker 0: 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, Speaker 0: 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. If I had to say to you pick one Speaker 0: risk out of transition risk, which is the biggest one facing the insurance industry in the round. What would it 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 Speaker 0: analysis. 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. Speaker 0: Greg Lowe. Thank you for joining us. Thank you.

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