AXA XL, the global P&C and Specialty insurance and reinsurance arm of the AXA Group, sees real value in the ongoing development of the world’s first Ocean Risk Index, designed to assess, transfer and trade the risks associated with the change and deterioration in our oceans, while simultaneously supporting resilience.
Reinsurance News met recently with AXA XL’s Andrew MacFarlane, Managing Director and Head of Pricing & Analytics for London & Bermuda, Reinsurance, to discuss the re/insurer’s longstanding and ongoing commitment and interest in the ocean.
The re/insurer is one of the more active companies in the ocean risk space and has participated in numerous initiatives in recent years, including the 2012 to 2016 Seaview Survey, which was sponsored by Catlin and which set out to map and develop a baseline for coral reefs globally, through to the Deep Ocean Survey in 2016 and the first Ocean Risk Summit held in Bermuda in 2018.
The meeting in Bermuda, explained MacFarlane, was to bring stakeholders together from all parts of the financial community, including bankers, insurers and reinsurers with scientists, academics and regulators, to educate around the potential impacts we might face as a result of changing oceans.
The Ocean Risk Summit was really held to promote and educate stakeholders around the impact being seen as a result of changing oceans. This encompasses ocean warming due to the oceans absorbing excess heat from global warming, to ocean acidification as a result of the oceans absorbing excess CO2, to harmful algal blooms and other impacts we could potentially see, first, second and third order as a result of the oceans changing.
“It’s also about highlighting the importance of the oceans in all aspects of societies, what a big contributor it is towards the economy and really out of that, the idea was born to try to calculate and generate this Ocean Risk Index,” said MacFarlane.
Initially, AXA XL started thinking about this from a very, very broad standpoint, but soon realised that the needs and ideas of many different stakeholders meant that it was a challenge to bring that together into something digestible.
“We took a step back and we rethought about it and now we are going down the route of being a little more simplistic to start, focusing on two areas around seal level rise and degradation of marine ecosystems. Thinking about the processes, the data, the relationships and the partnerships that we need in order to get those moving and then the idea being that hopefully, once we’ve sorted that out we can think about broadening it into other areas of risk,” he explained.
He continued to explain that the reason AXA XL decided to start with sea level rise and marine ecosystem degradation, was a combination of both ease and necessity.
“Sea level rise is obviously a massively important one from the perspective of coastal communities and cities being directly exposed. There are some great stats around the number of people that are living in areas that are exposed to rising sea levels and what that is going to look like in 2030 and 2100. So, that certainly is a driver.
“Then ease is another element because we have relationships with scientists who have done work in terms of mapping and looking at inundations of sea level rises at points in time, along with taking into account the assets and the information we have to try and form a robust index,” said MacFarlane.
On the marine degradation side of things, AXA XL is very interested in natural assets such as coral reefs, mangroves and coastal marshes, and the impacts that they have on resilience for coastal communities and the impacts that the changing ocean is having on those marine ecosystems.
“This is certainly an area of interest to us, and an area where we think we can set up risk transfer mechanisms that can be impactful,” said MacFarlane.
Despite the potential impacts of the changing climate and our changing oceans, more and more people continue to live in coastal communities, all of which are extremely vulnerable to both rising sea levels and the degradation of marine ecosystems.
It seems that regardless of the potential impacts the trend of coastal living is by no means going to slow or cease to be an issue, which effectively drives a very real and very urgent need to understand these risks both now and importantly in the future. This is the aim of the Ocean Risk Index, explained MacFarlane.
By generating an exceedence probability curve it becomes possible to assess what the exposure might look like now and in the future, enabling the ability to value how the assets in one particular area might be impacted as a result of changes in our oceans, and how one might go about transferring that risk.
In time, the idea is that people will want to trade using the Index, and in light of this, Reinsurance News was eager to understand exactly what needs to happen for the industry to want to leverage it for trading.
“We obviously have to demonstrate that it is robust and ensure people understand how we calculated it,” said MacFarlane. “We have to demonstrate that it is objective, we have to show that it’s not something we have just made up internally, and we have to demonstrate the data we’re using behind it.
“Also, the partnerships that we have in place and the way we’re going about developing it is really to engage with the scientific community to access data that they’ve used in terms of their studies and the work that they’ve done and use that to calculate the Index.
“So, from that perspective I think if it’s published and people can see who we’ve partnered with, how we’ve calculated it, what the data sources that we used are, how we’ve thought about it now and in the future, and what models we’ve used, I think if we get all of that out there and we are able to demonstrate the objective nature of the Index, then I think that will go a long way to proving the objectivity of the Index, and the robustness of the calculation.”
He added, “We obviously feel there is a real value in it otherwise we wouldn’t be doing it. It is something new, something different and so there will be work that will be required to prove its value.”
