To coincide with our Insurance & Climate Risk Americas conference, Environmental Finance conducted a Q&A interview with keynote speaker Maurice Tulloch, CEO, international insurance, at Aviva.
Has the 'penny dropped' for most insurers regarding the risks they face from climate change – or just the vanguard such as ClimateWise members?
There is still work to do to raise awareness of the risks that climate change presents and the need to act now. Climate change is a major strategic issue for our business and for the insurance industry, as well as the people and planet beyond.
Insurers have a collective responsibility to collaborate to narrow the protection gap, and we have a role to play in modelling, understanding, communicating and working with others to mitigate and manage risk disaster recovery.
"Climate change is a major strategic issue for our business"
Weather catastrophes, for example, are six times more frequent today than they were in 1950. This makes more assets uninsurable and creates a protection gap for consumers. Insurers should invest in prevention and resilience. We need to actively manage risk, not just avoid it, otherwise we will struggle to narrow down the protection gap.
Is more action on this issue required from insurance industry regulators?
We all have a role to play to address climate change. Regulators can take more action in creating a framework that encourages businesses and consumers to embed climate risk into their strategies. We have three main asks of governments and regulators which we think are key to effecting action:
- The first one is for regulators to drive demand for sustainable investments, by clarifying businesses' duties and educating citizens about the role their savings play in funding sustainable companies.
- We also ask regulators to improve information about climate and broader sustainability performance by companies around the world, by implementing the recommendations of the Taskforce on Climate-related Financial Disclosures, and considering making all companies comply with these, and by funding independent publicly available league tables showing businesses' performance on climate change and other UN Global Goals.
- Finally, we ask regulators to radically reward low-carbon investments, by removing fossil-fuel subsidies that make fossil fuel investments artificially attractive, introducing carbon pricing domestically, regionally and globally, and using capital differentiation to incentivise low-carbon investments over high-carbon investments, reflecting the lower long-term transition risk of low-carbon investments.
Most attention so far has focused on physical risks – should more be happening to deal with transition and liability risks?
Absolutely. As I said before, one of our main asks of regulators is for them to radically incentivise the transition to a low-carbon economy, and this has everything to do with the transition risk.
The transition to a low-carbon economy requires capital. A large proportion of this will need to be directed towards infrastructure. We are also active on this front. For example, this year we financed £187 million ($246 million) in a solar wind farm and invested into a major offshore wind project in the UK, our home market.
What do you see as the priorities in building resilience to climate risks?
Climate change is a strategic issue for the insurance sector. Left unchecked, climate change will continue to affect the actuarial assumptions and therefore the insurance products that our industry provides. It will also render significant proportions of the economy uninsurable.
In 2015 Aviva published its Strategic Response to Climate Change, that sets out our priorities in tackling climate change. A key priority for us is embedding carbon risk in our investment decisions, to make sure it informs our investments policy. As part of this, we committed to invest £2.5 billion over the course of five years in low carbon infrastructure projects.
"Every dollar spent on reducing people's vulnerability to disasters saves approximately seven dollars in economic losses"
Another priority is awareness and education, so that customers are more aware of risks, prevention and protection. Insurance has been cited by Standard & Poor's as a tool to build resilience in country infrastructure. Research has found that increasing insurance penetration by just 1% can reduce the disaster recovery burden by 22%.
Should insurers be doing more to press policymakers to help mitigate and/or adapt to climate change?
Ultimately it is for governments to create the frameworks needed to tackle climate change. We will continue to engage with policymakers to support strong policy action.
Will climate change inevitably lead to a greater role for government-backed insurance schemes like the UK's Flood Re?
Absolutely. Every dollar spent on reducing people's vulnerability to disasters saves approximately seven dollars in economic losses. Public-private partnerships are critical to building capacity, and customers understanding and managing and mitigating risks themselves.
As an example, we have Flood Re, a joint initiative between the UK government and insurers, of which Aviva is part. Flood Re is designed to provide affordable cover for those households at highest risk of flooding and create a 'level playing field' for new entrants and existing insurers in the UK.
Aviva ceded nearly 22,000 policies to Flood Re in 2017 with average premium savings of £500. Aviva has removed any additional flood excesses for new customers and for existing customer's policies as they are renewed, irrespective whether they are ceded to Flood Re. However, this is only in place for personal line customers, and if we want to make sure that economies are resilient to climate change we need to work further with governments to support small businesses and supply chains.
Do you expect to see the withdrawal of private insurance cover from many regions/asset types due to climate change?
That is a risk, yes. We will still be able to price the risk, but weather catastrophes are today six times more frequent than in 1950. This makes some assets uninsurable due to the premiums which would have to be charged. Insurers will struggle to reduce this protection gap if our response is limited to avoiding, rather than managing, society's exposure to climate risk.
Our recommendation is to work with customers to make them more resilient to extreme weather. There will be a need for more and more insurance pools, and other insurance solutions and it is imperative that we learn how we're going to play in them.
On the asset management side, are the TCFD recommendations helpful and feasible?
The TCFD recommendations are an instrumental piece in standardising and harmonising decision-useful climate disclosures globally. In fact, Aviva plc was one of the first signatories committing to implementing the recommendations of the TCFD.
But, while voluntary disclosure is an important first step, it won't get us far enough fast enough to mitigate the worst impacts from climate change.
"We call upon the International Organisation of Securities Commissions to endorse the TCFD recommendations"
To be truly effective, the TCFD's voluntary recommendations need large-scale adoption, with regulators becoming involved, and we call upon the International Organisation of Securities Commissions to endorse the TCFD recommendations as a means for a deeper examination of climate-related disclosures.
Are you convinced that Aviva's policy of engagement with fossil-fuel companies is yielding results?
Yes, absolutely. Our approach as an investor is to engage first and divest if necessary. Engagement helps us to understand the direction of intended travel for a business and so continue our support of coal companies who are moving their focus to low carbon and renewable energies. We don't see divestment as a badge of honour, but rather as a failure of engagement.
We are pleased that we have seen change among some of the companies we have engaged with, with two companies committing to no further capital expenditure on coal and five companies committing to targets to reduce their greenhouse gas emissions to be aligned with the Paris Agreement.
We recognise that engagement takes time. To bring about change in a company's strategy is not something that is done overnight.
Maurice Tulloch is chief executive officer, international insurance, at Aviva. He previously chaired ClimateWise, an insurance industry initiative on climate change risk, facilitated by the University of Cambridge Institute for Sustainability Leadership.