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Climate response requires new products & modelling techniques: Cavaciuti-Wishart, AXIS Capital

4th February 2020 - Author: Matt Sheehan

A comprehensive response to the complex challenges posed by climate risk will require reinsurers to adapt business models, develop new products, and improve modelling techniques, according to Ellissa Cavaciuti-Wishart, Head of Cat Modelling – International at AXIS Capital.

Faced with the unpredictability of climate-related impacts, reinsurers must develop ever more sophisticated, data-oriented solutions to quantifying risk, while directing their attention and resources to mitigating their effects, she argued.

Currently, reinsurers write most of their business on an annual basis, and changes that take place over longer timescale are not easily translated into pricing for individual policies.

In the context of natural catastrophe models, the historical data used to calibrate the models may no longer represent an accurate indication of future events, Cavaciuti-Wishart noted.

“Rather than turn away from this problem, it is crucial for reinsurers to broaden their focus to explore wider risk-assessment practices,” she said.

“Testing of portfolio sensitivity to the various possible impacts of atmospheric warming scenarios can provide us with a range of information on which to base decisions and inform a strategic view of risk. To support such sensitivity testing, it is vital that we address the paucity of exposure data that exists for key perils such as flood.”

However, AXIS also sees potential opportunities for reinsurance as the range and scope of climate risks expand.

Expanded product offerings may form against the backdrop of changing climate and disruption, with renewables and climate liability likely to be growth areas as the uptake for clean energy increases and more organisations are held accountable for their role in global warming.

The company also believes industry-wide cooperation could help to narrow the protection gap by developing ways to support potential insured that have become marginalised by climate risk, such as through parametric products or microinsurance.

“Another logical, proactive area of insurance-sector response to climate risk is the offer of support to international investment in renewable energy and hazard mitigation schemes,” Cavaciuti-Wishart added.

“As an example of the latter, reinsurers could devise tailored flood solutions to support communities and businesses coming under increasing pressure as the risk of severe inundation increases.”

She further stated that reinsurers should consider the ways in which they can support sustainability by increasing their Corporate Social Responsibility activities to focus on the environment and climate-risk initiatives.

“Climate risk is increasingly dominating reinsurance conversations,” Cavaciuti-Wishart concluded. As an industry, we must ultimately adapt, develop new products and improve our modelling techniques.

“In the meantime, we can proactively assess what it may mean for our business strategies and move to adopt climate-friendly internal practices. We often talk about the social role of (re)insurance. On this issue, both the business and the social case demand reinsurance-industry participation in the global response to climate change.”

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