Firms must incorporate climate change into decision making: Guy Carp’s Turner

The (re)insurance market should increasingly factor climate change into their business decision making as investors, ratings agencies and financial regulators apply pressure on firms, according to Guy Carpenter’s Jessica Turner.

Speaking to The ReInsurer, Turner, senior vice president of catastrophe advisory at Guy Carpenter, highlighted the need for (re)insurers to understand the “materiality of the climate change risk” on their portfolios and then make decisions based on risk appetite and exposures.

“It is very important that companies start to incorporate climate change into their business decisions,” she said in a video interview.

Steps by the UK’s Prudential Regulation Authority (PRA) setting out the strategic approach that insurers should take to combat financial risks generated by climate change and the inclusion of climate change on the regulator’s General Insurance Stress Test have been an important driver in causing firms to deal with climate change and its impact on exposures, Turner said.

“For as long as I’ve been in this business, we have known that climate change exists and that it could be a threat but there has been an attitude that we do not need to deal with it because we write one-year contacts so we can always change our price or stop writing business somewhere,” Turner added. “I think that has changed.”

But it’s not just the regulator that’s applying pressure on firms, Turner added, noting that the increasing frequency and severity of natural catastrophe events is forcing the sector to take notice. Investors and rating agencies have also proven to be major drivers behind the change, Turner said.

“Investors are starting to ask companies to disclose their risk and rating agencies are increasingly including ESG criteria in their ratings,” she explained.

However, the lack of climate change-conditioned cat models remains a concern. Guy Carpenter is currently working to address this critical market gap by performing research on perils and climate change, advising on the use of cat models in a changing climate and helping our clients understand the complexity associated with climate change.

“There are very few climate change-conditioned cat models out in the market. There are a few but these are limited,” Turner said.

“The major vendors haven’t produced these types of products and that’s been due to market demand. Because the market demand is changing, I’m expecting the vendor companies to start releasing these types of models very soon.”

There remains a number of “open-questions” that need to be solved, Turner added, such as what emission scenario is considered and how far out into the future is looked at. 

She said: “There are definitely challenges but I’m looking forward to watching these products come out in the future.”