MSCI’s Vice President of research Arne Philipp Klug has published a report on the importance of making biodiversity crisis a part of the underwriting process. Klug along with Cody Dong, Senior Associate at MSCI Research, has established a link between biodiversity loss and higher underwriting risks. This relationship is evident for re/insurance covering floods, crops, life, health and environmental liabilities.
According to this report, a large number of property and casualty re/insurers already use geospatial analysis in their pricing, claims processing and risk management. Data shows that adding a layer of biodiversity data to this analysis could help incorporate biodiversity considerations in underwriting.
Re/insurers may overlay a company’s data on asset location and ownership with biodiversity metrics. The researchers have used the MSCI’s Biodiversity-Sensitive Areas Screening Metrics and found that 37% of constituents had three or more known physical assets in biodiversity-sensitive areas, as of January 2023. Operating out of a biodiversity-sensitive area does not necessarily translate to a company generating adverse impacts on the biodiversity of these geographies.
Re/insurers have started acknowledging climate-change risks to their business. Biodiversity loss is emerging as a parallel challenge to this.
“Deforestation, land-use change, overfishing, pollution, climate change and the introduction of invasive alien species have resulted in biodiversity losses. One million known species could go extinct within decades,” says the researchers at MSCI.
Currently, more than half of the world’s economic output depends highly or moderately on nature and its benefits, such as fertile soils, food supply, clean water, climate control, erosion prevention and flood control.
Considering the case of floods in 2021, which caused an estimated USD 82 billion of economic losses globally. Only about a quarter of these losses were covered by re/insurance. According to the report, with every 10% increase in deforestation, flood risks increase between 4% and 28%.
The report also suggests that pollinator extinction, water scarcity and soil erosion threaten food production and expose insurers that underwrite the agriculture industry to higher claims due to potential crop losses.
Insurers that underwrite environmental-liability insurance could be directly liable to pay for the necessary cleanup and restoration of biodiversity that has occurred leading to the mispricing of this risk could impact insurers’ profitability.
Researchers at MSCI suggest that nature remains a key source for developing medicines. However, with the ongoing biodiversity decline, it is possible that humankind could lose at least one important medicine every two years. Reduced nature-based medicine sources could substantially increase healthcare costs, which will, in turn, impact the life and health re/insurers.
Location matters when assessing biodiversity impacts and risks which may vary, depending on whether company operations are situated in an urban area, a coastal zone or a tropical rainforest.
Therefore, the report states that geospatial tools could help insurers identify and manage biodiversity-related risks. Geospatial data has already been integrated into underwriting and investment practices among leading property and casualty re/insurers to support management and pricing.
Re/insurers with exposure to flagged companies working out of the biodiversity-sensitive areas could therefore combine the screening metrics with an in-depth review of a company’s practices for managing biodiversity risk or involvement in controversies.
The success of re/insurance underwriting lies in the proper pricing of risk the report states.
