Transcript PwC-Insurance-Climat.. - Boston Green Ribbon Commission

Interviews with
insurance industry stakeholders
Climate Finance Series
Insurance Climate Change Roundtable Dialogue
Topic hits on UNISDR Private Sector Alliance for Risk
✔
Sensitive Investments (AR!SE) themes and stakeholders
Commercial Real Estate (CRE) developers
Tenants
Insurance
Cities
Strategies
AR!SE
Citizens
Education
& Training
Insurers
Benchmarking
& Standards
Educators
September 18, 2015
Investment
metrics
Themes
Legal &
Regulatory
Regulators
Financiers
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What we observed – complex motivations/incentives
Multiple players, different concerns and varied incentives/disincentives to act
Property
owners
• Resiliency
actions not
sufficient to
“move the
needle” on an
individual basis
• More effective
efforts exist at
portfolio and/or
community
level
• As no “reward”
exists for taking
action, property
owners have
few incentives
to improve
properties,
unless high
deductible
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City
government
(Re)insurers
Regulators
• Issues 1+ year • Insurance
• Must coordinate policies that do
markets “highly
resiliency
not align with
regulated,
actions at macro long-term risks
short-term,
level
• Covers specific
backward
• Concerned with perils, not broad looking and
long-term
“climate risk”
slow to
ability of city to
coverage
innovate”
recover from
• Exclude certain • Regulation
disasters
perils (heat
written by
• Primary player
events,
separate state
to orchestrate
flood/sea level
insurance
actions at
rise)
commissioners
regional and/or • Limited by
• Limited
community
regulation or
incentives to
level
reinsurance
coordinate on
• Experimenting
considerations
regional and/or
with models of
national basis
insurance to
protect assets
Tenants
Financiers
Citizens and
taxpayers
• Short-term
• Limited interest
perspective; can in resiliency
• Often most “at
quickly move
improvements
risk”
out of “at risk
as they do not
stakeholders
properties”
usually hold
(taxpayers may
• Limited or no
investments for act as “funders
responsibility
entire asset life
of last resort”)
for resiliency
• Hard to
• Do not
• Limited
leverage
understand
incentives to
potential tax
Gordian knot of
invest in rented benefits
ownership and
property
• Does not
responsibilities
• Limited
manage
• Mobilized by
incentive to pay properties;
media and
premium rents
limited
stakeholders
for risk-resilient authority to
who might have
properties
promote
incomplete data
improvements
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Executive Summary
•
No simple straight-line relationship – lowering risk on property does not directly lead to reduced
insurance costs
•
We need an all hands on deck approach – (re)insurance companies not only stakeholders –
while many want to do the right thing and be collaborative, often find competing, mutually exclusive
jurisdictions, roles and responsibilities
•
“Climate change” not always operative term – insurers may not see perils as climate change
related risks; either as collection of single hazards to be addressed or outside of insurance realm
•
Timing is an issue – many insurers focus on next 18 months; many risks may have longer tails;
temporal issues must be harmonized
September 18, 2015
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Executive Summary
•
Off-ramp option – if risk too great, in certain instances insurance companies may exit markets
•
Insurance companies have dual roles – can have impact via underwriting and/or investing
assets
•
Moral hazard predominates – some don’t feel urgency (“can’t happen to me”); willing to rely on
others to solve problems (e.g., NFIP) or to cover insurance losses (e.g., Stafford Act)
•
Resiliency value not always understood – continuous education efforts may be undervalued;
limited accounting to quantify benefits (e.g., Sandy dollars); avoided costs not fully understood
•
Innovative strategies exist but re(insurers) may tend to take a “follow, not lead” approach to
dealing with buildings – strategies may be understood and demonstrate market opportunity and
rewards; but may not be embraced by critical stakeholders
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Who we interviewed
• We sought a broad representation of the industry, including:
–
–
–
–
Multinational, diversified insurance/financial services corporations
Privately-held, regional property and casualty (P&C) insurance companies
Insurance/reinsurance industry associations
Climate/business-related NGOs with activities in the insurance sphere
• We interviewed 14 participants in 13 organizations, including:
Global multi-line
(re)insurers
• 3 participants
• Two primary
reinsurers and
one primary
insurer
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Global P&C
(re)insurers
• 2 participants
• Emphasized
engineeringbased ratesetters
Regional P&C
(re)insurers
Industry
associations
• 2 participants
• Focused on New
England-specific
P&C insurers
• 2 participants
• One national and
one international
association
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Related
organizations
• 5 participants
• Participants
included NGOs
and academic
institutions
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What we asked
Our themes and sample questions included:
Incentivize customers
to make themselves
more resilient
Have climate change and weather disasters shifted customer demand for insurance products in the last five years?
Have you educated customers about resiliency?
Have you incentivized customers to rebuild more resiliently and/or to higher standards of sustainability?
Understand forces
driving disruptive
shifts toward
resiliency
What do you see as disruptive forces within the industry, and how is your organization adapting to them?
Who is involved in the product/service development process, and what issues or trends influence them?
To what extent has knowledge of climate change impacts changed how your organization does business?
Push the industry
toward excellence on
weather disaster
resiliency
What internal forces (e.g., better understanding of risk) are driving the industry toward greater product offerings
and concern for weather disasters?
What external forces (e.g., forthcoming regulation) are doing the same?
What barriers exist to further change within the industry, and what might be done to overcome them?
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How our hypotheses changed
Original hypothesis
• Simple linear relationship
between action and reward
• Insurance companies should
offer green products and/or
rewards resiliency efforts
• Insurance companies simply
balking or ignoring climate
change risk
Observations
Current understanding
• Market highly regulated and varies
by jurisdiction
• Market is complicated and non-linear
• Market is short-term and backward
looking
• Certain risks are not “bucketed” as
climate change risk and may not be
covered by insurance
• Targeted solutions leading to some
successes
• Market is fairly complicated and
may require multiple actions by
key players
• Certain insurers may be wellpositioned to share an interest
with their customers in
minimizing specific losses
• Solutions must include longterm investments in education,
awareness, valuation and
monitoring
• Identifiable parties share strong common interest in maintaining insurability of CRE
• Multiple change drivers must be activated over time to achieve the desired outcome
• Temporal periods are not harmonized so that actions, risks and consequences are not aligned
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Findings – disincentives/distortions abound
Role of US Federal Government and proportion of total loss paid by government in covering
disaster losses increased with regulations (e.g., Stafford Act)
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Hurricane Diane
(1955)
Hurricane Hugo
(1989)
Hurricane Katrina
(2005)
Hurricane Ike
(2008)
Hurricane Sandy
(2012)
Source: Study by Dr. Erwann Michel-Kerjan (Wharton School).
Have We Entered an Ever-Growing Cycle on Government Disaster Relief? and his testimony before the U.S. Senate (2013)
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Leading practice, Boston building codes/checklists
Boston Zoning Code
Article 37
• Ensures that building projects
minimize environmental impacts
and prepare for climate change
• Communicates City’s expectation
that new projects adhere to LEED
standards
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Resiliency Checklist
• Provides framework for assessing
project environmental impacts
• Specifies climate-related impacts
for which buildings must be
prepared, especially flooding due
to sea level rise
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Interagency Green
Building Committee
• Advises Boston Redevelopment
Authority (BRA) and Inspectional
Services Department (ISD)
• Reviews building construction for
compliance with Boston’s climate
change policies
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Insurance industry – barriers & disruptive changes
There are actions that shift cost basis of the industry (e.g., building code changes) and actions that shift cost
basis of industry clients individually (e.g., rewarding actions of forward-looking companies)
Existing business
models don’t work
Politically motivated
programs underprice insurance
Hard to establish
precedents based
on isolated infrequent
events
Top level risks (e.g.,
flood) not covered
by insurance
companies
Building codes are
essential to reduce
costs of storms, but
not necessarily to
increase demand for
insurance products
Increasing size,
scale, cost and
frequency of events
Derivate and
innovative solutions,
including engineerbased approaches
New relationships
between insured
and insurers
Technology
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Incentivizing customers toward resiliency
Key point
Follow-up question
Customer education critical and
profitable – but could be done
more effectively. More customers
really understand risk exposure,
more insurance becomes part of
risk exposure strategy
How can industry improve
customer receptivity to education
(e.g., storytelling, waiting for next
Katrina)?
Reinsurers could better tie pricing
to resiliency actions by
incentivizing insurers to better
educate/collaborate with
customers
What are the barriers to creating
these incentives, and how can the
industry work together to overcome
barriers?
Products best developed when
there is clear value-at-risk
What tools exist so customers can
share value-at-risk in useful ways?
Derivatives and alternative
products (e.g., sub-catastrophic
covers, index-based products)
drawing increased attention and
capital from P&Cs
How can the industry innovate in
this space, yet still focus on real
resiliency actions?
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What we heard
“It’s an attitude we see about 20%
of our clients take. They ask, ‘How
do we get ahead of climate change
and prepare for the long term?’”
“If you put out design specs for
insurers, they’d get behind it
quickly.”
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Understanding the challenges facing the industry
Key point
Follow-up question
Industry operates on 1-3 year
timeframe (due to regulation) for
product development
How can industry adopt longer
timeframe for climate-related
products?
It often makes more sense for
multi-line (re)insurers to shift
resources to other lines rather
than innovate in P&C
How can the innovation gap be
bridged for multinational, multi-line
(re)insurers?
US customers have “unrealistic”
expectations about flood
insurance prices
How can industry work with
government to change consumer
perceptions about prices?
Acquiring granular, accurate
climate data is difficult, timeconsuming and expensive
How can industry better support
activities of detailed risk modelers?
September 18, 2015
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What we heard
“Every year, it seems like a new
issue pops up as a priority for our
clients.”
“We don't look twenty years out to
see if we need to be concerned
with particular areas. We just rely
on FEMA maps.”
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Understanding the challenges facing the industry
Key point
Follow-up question
Building code updates can set
groundwork for more resilient
infrastructure development
How can (re)insurers effectively
advocate for these changes and
spur leading practices (e.g., NY)?
A need exists for public-private
partnerships (PPPs) to assist the
public sector in risk mitigation
What first steps could be taken by
private insurers to institute these
PPPs?
Engineering-based models are a
viable alternative model to set
prices and assess risk
How can the industry expand the
Highly-Engineered Risk market to
promote resiliency?
Fire insurance is a checklistbased system of rate-setting;
disaster insurance could be too
How can we expedite the
development of a checklist for
weather disasters?
September 18, 2015
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What we heard
“Wish list: a consistent platform to
provide information about buildings
for flood insurance.”
“Where we're trying to get to here
is firm commitments from
insurance companies to credit the
actions of forward-thinking
companies.”
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Criteria for evaluating solutions
In evaluating solutions, might want to develop model to consider various criteria:
1. Ease of implementation
2. Potential impact on stakeholders/properties (one property to community)
3. Amount of long-term investment and follow-through required
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Multiple innovative practices being tried
Increased
capital influx
Reinsurer
incentives for
insurers
Building code
updates
Approval
divisions to
test products
Pooling of
risks (e.g., for
city)
Customer
education/ma
terials on
climate
change
Vouchers/
subsidies
to make
premiums
affordable
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Disaster
claims teams
onsite
before/during
/after event
Multi-year
term
products
Green
business
discounts
Engineeringbased pricing
model
Derivative
products
Deductible
model (over
% VAR)
Improved risk
maps / data
gathering
Checklistbased ratesetting
Parametric
Insurance
NFIP data on
granular
property level
Blackout
model
Educational
consumer
tablet app to
build/retrofit
fortified
home
Reinsurers
share costs
and benefits
Insurance
against
equipment
breakage
Quota Share
Products
Catastrophe
Bonds
Reduced cost
to file new
products with
state
agencies
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Platform for
sharing risk
data and
information
Designing for
purpose, not
specification
s (e.g., wind
resistance)
Allowing
insurance
companies to
charge
appropriate
prices
Change in tax
code to allow
credits for
doing the
right thing
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Selected quotes
To extent that climate change is playing out through flood risk (flash flooding and storm surge), NFIP, in our
view, has facilitated unwise development in flood plains
We need creative
people to address
and finance risk
Demand is not for
climate change
products, but
products to protect
from weather-related
losses
We need to change
the “this can’t
happen to me”
mentality
Top level risks (e.g.,
flood) not covered
by insurance
companies
Insurers don't lead,
they follow -because they have to
follow regulations
If you can protect it,
we will insure you
Having a regulation
helps, but only if it
requires action –
many standards don’t
have a requirement to
implement
It comes down to
fact that insurance
companies will not
participate unless
they see an
underwriting profit
Realtors/developers were influential in some coastal states in getting their members to push for a rollback of
some of those (risk-based pricing) changes. They were successful over our objections
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AR!SE
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