The tie-up is increasingly allowing RMS to bring its climate risk expertise to bear with Moody’s broader array of clients, such as the banking and commercial property sectors – well beyond the modelling firm’s historical (re)insurance stomping ground.
This comes after a year characterised by extreme weather events – from winter storms and riverine floods to summer droughts and wildfires – with the blame firmly pinned on climate change.
“Catastrophe risk volatility has been a huge issue for the insurance industry. The climate signature has increased for the industry,” said Michael Steel, general manager at RMS. “I think the insurance industry is really struggling with how to deal with this type of volatility.”
Last year saw the $100bn insured loss threshold breached for only the third time on record, Howden said in a report issued on the eve of this year’s Monte Carlo Rendez-Vous. The broker also noted that primary and secondary tags for perils are becoming increasingly redundant.
Steel said that while the industry’s cat models are well set up for its primary perils of hurricane and earthquakes, increased frequency and severity of so-called secondary perils such as wildfires and floods have seen them become the leading driver of income volatility for insurers and reinsurers.
RMS has been investing around half its income into research and development (R&D), he stressed. “When you see the impact of climate change, you really see the benefits of that type of investment,” said Steel.
RMS has pursued “a proactive approach” beyond the insurance community in working with governments on areas such as flood and sea defences, for example, Steel noted. Not all cat risk modellers have been so willing to invest in R&D in such areas, he suggested.
“Companies brought out cheaper models, and they were licensed in the market. A number of years ago, a good enough model was good enough, if you never had any cats happen. It didn’t matter what sort of model that you licensed as long as you had something.”
Answers for climate risk
The acquisition by Moody’s is further expanding RMS’ outward-looking approach to finding new answers for how to model and manage climate risk.
Developing common language for climate risks beyond the insurance community brings fresh benefits in how such risks are managed and modelled within the insurance sector, Steel explained.
“The sector has been using our models for 30 years, so they’re familiar with our catastrophe models and they’re familiar with our approach to climate risk. Now they have a much greater expanded customer base using that same common language. So it creates more opportunities for them to expand in that space,” he said.
This is the biggest strategic benefit of the Moody’s acquisition, Steel emphasised. Historically Moody’s has had a small footprint in the property and casualty insurance space, although strong in the life insurance sector, as well as banking and asset management.
“It’s a natural fit into the Moody’s business, they have a very strong footprint in financial services, looking at banks, looking at asset managers, looking at a broad landscape of other financial services companies. RMS brought the insurance industry dimension to that, and the ability to deliver climate change across all of those other industries,” Steel said.
ESG underwriting solution
Moody’s has made its own strides in data and analytics investments in recent years, such as in providing metrics for ESG investments, a broad banner that also includes combating climate change.
Within the past week, Moody’s has launched its new ESG underwriting solution for insurers. The product highlights the integration between the two businesses and their combined, more holistic approach to risk.
“This marks the story about integrated risk assessment coming to life,” said Colin Holmes, general manager for insurance modelling and analytics at Moody’s Analytics.
“We’re bringing the ESG capabilities of Moody’s and leveraging the expertise of RMS and the P&C sector, to bring that into the underwriting workflow, so the insurers gain a much more integrated, holistic view of risk.
“Insurers at the point of underwriting have to assess the risk they’re taking on, but they also have to think about whether it fits with the firm’s ESG strategy and is it a firm that they want to do business with?”