Navigating Risk: Insuring a sustainable future in a fragmented world

Transcript

Navigating Risk: Insuring a sustainable future in a fragmented world

Navigating Risk: Insuring a sustainable future in a fragmented world

Soundbites:

TOM: The current global risk landscape is unprecedented

JD we saw an event this summer that had a real contagion effect.

that created real technology risk,

TOM: Be it tech, economic, geopolitical or climate risk

Vince we think about ways that our insurers can grapple with the fact that the climate pattern changes have now become structural. 

TOM: The world needs to become more resilient and the insurance industry must play its part.

Mark roughly speaking, the insurance industry manages about $35 trillion of assets. 

TOM: by using every tool at their disposal to prepare for the worst

JD I prefer we get ahead of it rather than have a major systemic cyber event that causes trillions of dollars potentially of economic damage

TOM PARKER:

I'm Tom Parker, and welcome to the next five podcast brought to you by the FT partner studio. In this series, we ask industry experts about how their world will change in the next five years, and the impact it will have on our day to day. In this episode we explore the current and future risk landscape for global businesses and the role that insurers are playing that supports a path to sustainable and profitable growth. 

TP:

We live in a world of tremendous uncertainty where businesses are increasingly challenged to adapt to a rapidly evolving risk landscape. Economic instability, rising geopolitical tensions, technological disruption, cyber threats and the energy transition, are just some of the concerns for boards and businesses globally. Companies need to prepare for risk and maintain resilience. One major area for businesses and the insurance industry is climate related risk.

According to WEF’s Global Risk Report 2024, two-thirds of survey respondents ranked extreme weather as the top risk most likely to present a material crisis on a global scale in 2024 and second most severe risk over a two year time frame. 

JD (23:28.91)

Tom, for a long time we've helped clients think about climate risk. 

TP: This is John Doyle, CEO of Marsh Mclennan. 

Although I think many of our clients hadn't necessarily even framed it in that context, right? But the traditional way, for over 150 years, we've helped clients finance property-related risks through the balance sheets of all the insurance companies that we work with.

It's much more than that today. And the conversations with our clients have changed a great deal. They're not just asking us to go buy effective and efficient risk transfer in the insurance market. They want us to now map their owned assets against certain climate scenarios. It's a very different conversation. They're not just facing the risk of property damage. They're facing real risk of business interruption.

And so that's evolved a great deal. Those conversations evolved from that to helping them understand the consequences of weather on their supply chains, right? So very, very different discussions. And again, we had a massive event here in the United States, you know, just recently with Helene, you know, that, you big economic consequences, again, a human tragedy, of course, with the loss of life. But it's quite clear these communities weren't prepared for events like that and hadn't been thinking about these events, right? We've got water supply, you know, cut off power, of course, and then some of these things happen in bigger events and some don't. The risk of hail, convective storms, all of these things now we're modeling and helping our clients think through and prepare for. And so it's about being prepared.

JD (25:44.534)

in terms of where your portfolio is, where your assets are and how they're located. But then also how to build with greater resilience than you have in the past. And then thinking about, again, how to de-risk some of these issues longer term. 

TP:: From 1980 to 2010, the United States faced an average of five severe natural catastrophic events annually that hit an inflation-adjusted $1 billion in damages or more.  Between 2011 and 2022, the number of events had tripled to an average of 15 per year. Last year, 28 such events occurred and by the end of 2024 losses from extreme weather are expected to surpass 100 billion dollars in damages for the fourth year in a row, with hurricanes Helen and Milton claiming up to 55 billion dollars of those losses alone.  

Insurance plays a critical role in helping insured disaster victims and affected areas recover faster, but these mounting claims are pressuring underwriting profitability and reserve adequacy.

Vince (06:21.872)

So when we think about climate, we think about ways that our insurers can grapple with the fact that the climate pattern changes have now become structural. 

05:46

TP: This is Vince Tizzio, President and CEO, AXIS Capital. 

That the reliance of using historical models that were generated many years ago and keeping them contemporary doesn't work. And so the introduction of advanced analytics that account for the changing weather patterns is certainly being baked into how we identify insured exposures and how we counsel our intermediaries.

Vince (08:15.043)

You think about the framing of your question, Tom, the dynamic difference in numbers of storms over the last chronicled period, the degree of damages that you spoke about. But think about it more practically. There are insurers that are seeking solutions of certainty, right? People buy insurance for certainty. And so what kind of decision does a company take in evaluating the insurance company?

Axis' value proposition, if I can call it that, seeks to price its business with a long -term relationship in mind. It seeks to provide a solution that aligns to the companies of risk and exposures. And that contemplation includes how they look today, where they operate today, and whether or not they're buying adequate protection. We think we have a role to play in that. And what's not necessarily obvious in the question is the dynamic change of the broker landscape. Because during the same period that you referenced, the emergence of a structural change in our business model has been the wholesale distribution channel. And you may be aware that this channel is growing at a substantial rate. It's now estimated at the end of 23 to be a $115 billion channel. You might say, well, how does that play into this?

Well, importantly, because wholesale distribution has created a more resilient and defined capability at helping insurers that are facing dynamic risk. You're pointing to climate in your question, but there's many others. And allowing them to have access to specialist insurers, such as AXIS, for products that are flexible and designed to meet that changing risk landscape that you point to.

TP:: 08:00 Insurance companies do indeed have a role to play and need to move with the times and be a part of the solution. According to Blackrock’s latest survey of the industry, virtually all global insurers now include at least one low-carbon transition goal in their investment plans, a stark contrast from just two years ago.

Mark Erickson (03:02.95)

insurers think about climate risk on both the liability side as well as the asset side.

TP: This is Mark Erickson, Global Head of the Financial Institutions Group at BlackRock.

And the direction of travel is they have been noting climate risk and an intention to set transition finance related gold in their investment portfolios. And this year we saw a firming of that in terms of actual implementation. So to us, that's an evolution of what they said they were going to do, they're now doing. And again, that makes sense for insurers because they're looking at climate risk both on the liability side as well as the assets side.

Mark Erickson (05:04.54)

So over the past two years, the bulk of insurers have transitioned from or have updated their responses from an intention to transition investment goal to actually implement data. So some of the numbers around that are 56 % said they have set a net zero by 2025 or other date goal.

52 % had said they had set a year-on-year emission reduction target goal. 49 % said they had set a minimum allocation to low-carbon transition solutions. And 22 % have indicated that they had set a temperature alignment goal. 

Mark Erickson (05:57.648)

Now, 0 % responded that no objectives were set. Rounding, it's about 99%.

Mark Erickson (06:12.732)

Two years ago, 2 % had set the goal and 85 % said they were intending to set a goal.

TP: So what does this actually mean for insurers and clients, Vince?

Vince (26:09.172)

Today, the risk landscape increasingly is calling for specialization. And as a specialist underwriter, we are seeing the benefit in solving clients' problems that bring to bear solutions that are rooted in customization and specialized terms and conditions to meet the dynamic needs of our broad customer base.

Additionally, and relatedly, you know, in the earlier part of 2024, we developed a new syndicate out of Lloyds of London, where we're a predominant market participant. And it's our so -called Energy Resilience Syndicate. It's dedicated to companies in providing insurance solutions as they make the transition.

toward net zero. And that oftentimes accounts for climate changes, environmental exposures that lead these companies in their journey to net zero carbon emissions.

TP:: While there are changes afoot, there are, unfortunately, other global risks that the world is not paying enough attention to.

JD (10:57.346)

There are several systemic type risks that I do worry about that we're not, we, the royal we, if you will, are not prepared for. And I think at the top of the list, of course, is technology related risks. And we saw an event this summer that had a real contagion effect.

That created real technology risk, real economic challenges, real social and political challenges for the world. And I think that's just a small example of what's possible there. AI, of course, is an important development that's going to create increasing systemic risk from technology all throughout the world. And so we do a lot of scenario planning and a lot of modeling around cyber incidents and cyber crime that's accumulated over the last several years. But we really truly haven't had a real systemic risk from the interconnected world, the digitization of the world. And that digitization is terrific, right? It's outstanding. It's created enormous economic growth, enormous opportunities. It's helped confront risks of poverty and other things all over the world. So don't get me wrong, it's all terrific, but it brings along with it other risks. so risks related to dependency around cloud service providers, electric grids. And again, while AI has great promise, there are a lot of cyber criminals out there and it brings great new tools to those folks as well. 

TP:: According to WEF’s Global Risk Report 2024 over the longer-term, technological advances such as generative AI could enable a range of non-state and state actors to develop new tools of disruption and conflict, from malware to biological weapons. Governments, businesses, insurers and individuals must understand and prepare for the inherent risks associated with AI, opening their eyes to the downside while cultivating a safe future for all. 

JD (13:20)

so we're working with governments around the world to try to help them better understand some of the potential risks that are out there and really trying to get in front of it. And so what we saw in the case of the pandemic, ultimately governments financed that risk overwhelmingly. And so it's one of the ways I try to get the attention of political leaders around the world, government leaders around the world and say, hey, this risk is on your balance sheet now.

Let's have a conversation about it. And I'm a private market person to be clear and I want our industry to play as big a role as we can. But when you do modeling of certain scenarios, and that's what we do, that's a big part of our business in helping clients again navigate all the opportunities and challenges in the world today, you model certain scenarios and the insurance industry can't finance those risks, right? And we don't just finance risks.

We help clients mitigate those risks, right? So what are the steps we can take today to improve resilience around technology and technology infrastructure? What are the types of scenarios that could emerge and what are the collateral consequences to those types of scenarios and how do we get ahead of those things? And then financing them, right? What type of incentives do we wanna create in the system? One of the things that happens in insurance is Insurance companies, while they're looking at, well, our clients are looking at finance risk on the balance sheets of insurance companies, they send signals back to business around how they think our clients are managing that risk. Are they effective or not? We can use some of those same, some of that same data and some of that same criteria to create the right incentives in public private partnerships, for example. But I

I prefer we get ahead of it rather than have a major systemic cyber event that causes trillions of dollars potentially of economic damage and it's going to be largely uninsured.

TP: The capital requirements surrounding the digital revolution and risks involved do need keen focus as Blackrock’s report highlighted, but optimism is high.

Mark Erickson (11:54.736)

We asked a specific question about technology and AI and the response was that they definitely saw it more as an opportunity than a risk. For insurance companies, they think about technology and AI both from an operational perspective. How are we using technology? How are we using AI to operate our own companies? And in that respect, there's definitely an appetite for more investment in technology, particularly around integrated strategic asset allocation and asset liability matching, which are at the core of what insurance companies need to do. And then secondly, there is a significant investment opportunity with respect to technology and AI. So if you think about some of the big, really seismic technology changes that have happened in our lifetime. You have the internet revolution, you have the smartphone revolution, now we have the AI revolution. And the difference about this revolution compared to the last two is it's very, very capital intensive, where you need trillions of dollars to build data centers and the energy to support those data centers all around the world. And we expect that in addition to equity capital that needs to be invested, given the magnitude of capital that is needed for that infrastructure, there's going to be a significant amount of debt issues from the hyperscalers who are investment-grade. And that very long-duration, high-quality debt is very well matched to insurers who have long-duration liabilities and where there's a real shortage of high...quality, long duration paper to put again.

TP:: According to KPMG’s US CEO Pulse Survey, CEOs are saying that near-term risks to growth such as geopolitics and cyber, as well as structural changes like new regulations including climate disclosure rules and tax policy, are requiring investment, supply chain and operational adjustments. They see investing in, and the application of, AI and Gen AI as a key solution to overcoming these challenges and in gaining a competitive advantage. To build resilience to risk there needs to be a balance between long term thinking and short term action. 

Mark Erickson (09:53.788)

So in terms of long term, long term thinking versus near term tactical thinking, on the long term side, it's really about some of the mega forces that we've been talking about at BlackRock and the two biggest and most important ones for insurance companies are changing demographics and the future of finance. In terms of changing demographics, given that we have aging populations and more people are moving from retirement accumulation from a wealth point of view to insurance decumulation products, that's a major shift. Whether it's in a retirement savings account, whether it's in a defined benefit account, which then can transfer to insurance companies through pension risk transfer, that's something which is going to be affecting the industry over a multi-year period of time. And then in terms of near-term tactical, that relates to questions about how I feel about the economy? Where do I expect interest rates to go? Is the yield curve going to shift from inverted to a more regular steepening yield curve? Those questions, and then depending upon the liabilities that you're insuring, making the right tactical asset allocation decisions based upon short-term rates, long-term rates, and the duration that you're seeking from that.

TP: Answering short and long term questions ultimately requires a more agile approach to strategy for businesses. 

JD (18:43.02)

Well, Tom, I think finding that balance is the critical question really to me. And, in my conversations with business leaders all over the world, they're now trying to better balance resilience with efficiency. And I think, you know, many businesses recognized at that moment that, wow, you know, maybe we're over indexing on efficiency, you know, in the near term. And they needed to find that balance in a different way. And in many cases, CEOs are coming to the table in my meetings with them, sounding like chief risk officers, which I think is absolutely terrific. They're coming to the table knowing what their top three or four or five risks are and thinking about what they're doing.

to again find that better balance between resilience and efficiency. I think that's good for the long term economy and for society candidly as businesses are confronting these issues And so, and I think a big part of a growing part of our conversation with clients all over the world is around scenario planning, right?

We built all these tools, but how do we bring some of these tools into the C-suite? Not necessarily just in the risk function, but into the C-suite and how some of these conversations really impact their strategy in a material way. How do we move more quickly to both risk and opportunity in our business? You need to be more agile in today's world than you've been in the past.

TP: Opportunities for action can be taken locally, internationally, individually and collaboratively that can significantly reduce the impact of global risks. How do we foster collaboration in a fragmented world that reduces the impact of global risk? 

Vince (12:04.446)

Well, I think it's a partnership. It's a tripod relationship between the intermediary, the broker, the insured and the insurance company. In certain types of insurance, we're able to collectively as an industry aggregate points of view. You know, there's a great conversation to be had around cyber and many contemporaries on my side of the aisle reason that ultimately the governments of these respective countries are going to have to weigh in because the insurance industry doesn't have enough financial wherewithal. You may recall Tom Trea, which is one set example where the industry came together and said, look, as it relates to terrorism, we need a backstop of the federal government here in the United States is one set example. So we've got to collaborate.But right now, today, we think about that really in the cyber world. We participate in a number of interconnected agencies of communication here in our local governments, but also globally collaborating around how we are thinking about sharing the best ways to protect our insurers. And so I think that's one way.

TP: All of this leads to an interesting next five years.

Vince (16:05.8)

One, we'll see deepened specialization being called upon by insurance companies. Exposures that companies are trying to transfer are increasingly becoming more complicated, more dynamic, and the traditional way of underwriting a company's exposure will not be good enough. Years ago, we talked merely about breaches of data. We introduced words like ransomware, phishing and there will be the next generation of losses being perpetrated in cyber. Some are known today, many aren't. Additionally, the confluence of the integration of these exposures that companies face, particularly global companies, think about it. They face climate problems, they're likely to be challenged on resilience, and they certainly face cyber. How do they have the financial wherewithal with an insurance company to assess what their exposures are with their risk tolerance, I think it's going to be a very difficult road ahead. Finally, we operate, as I said at the outset, with a societal risk landscape, that there's a lot of uncertainty. There's a lack of civil discourse in many parts of the world. I think in 2024, some 60 odd countries will have elections in this year. There's a potential for a lot of change. You have continued globalization of everything in our society. And then finally, you have a finite amount of capital in the insurance industry. 

Vince (18:18.933)

A number of us believe that ultimately the federal government will have to help in connection with cyber, that the amount of available capacity, as we call it, to meet the needs against what is projected to be, by some estimates, a $30 billion marketplace by, I believe, 2030 there may not be enough capital to support it. The degree of uncertainty of how we are pricing this type of insurance is evolving and whether or not we all feel we have enough capacity to meet the needs of our clients is a question.

Vince (21:15.348)

What I would hope occurs over the next five years is number one, the risk landscape. All of the uncertainty around the interconnectedness, the clarity around whether or not cyber resilience and climate is better understood and its dynamic changing risk profile is brought to a more steady state.

TP: Indeed when it comes to accessing capital the next five years will see new forces emerge.

Mark Erickson (15:22.3)

The next five years, we spent a lot of time thinking about that. I think there are a couple of things going on in insurance. One is there's a significant convergence happening between the insurance industry and the asset management industry. So to put some numbers around it, roughly speaking, the insurance industry manages about $35 trillion of assets. And the asset management industry manages approximately $115 trillion of assets. But if you count up the overlap between those industries, today it's about $24 trillion of overlap. And let me give you the numbers behind that. There are $16 trillion of money that is managed by asset managers that are owned by insurance companies. There's roughly $6 trillion that insurance companies outsourced to asset managers, to third party asset managers. There's roughly a trillion dollars of insurance assets now that have been acquired by asset management companies either buying insurance companies or investing in insurance companies. And the last trillion, or less than a trillion today, but going back quickly, are asset management insurance partnerships where insurers and asset managers are either co-creating products or co-investing in insurance vehicles together.

That, I believe, is still in the early stages of development. And the reason why I say that is the mega force of the future of finance.

Mark Erickson (17:20.636)

So if you go back to the financial crisis, which was at heart a banking crisis, there was a de-risking of global banks. And the de-risking of global banks shifted lending from banks to the capital markets and non-bank lending institutions. The two biggest non-bank lending institutions are asset managers and insurance companies.

And because of that shift, which is a multi-trillion dollar shift, asset managers and insurance companies are coming together.

TP: But there is hope that the world can make it through the complex risk environment ahead.

JD (36:45.912)

Tom, I'm excited about the next five years. 

JD (38:17.454)

We're operating in a very complex environment. There's no question about that. There's always risk and uncertainty in the world. Having said that, I think the tools that exist today to help manage and navigate that uncertainty are better than they've ever been. And so I'm excited about what we can do to help businesses and economies thrive through this complexity, through this uncertain period of time we're investing against that in a material way. And we can help businesses better balance resilience with efficiency and deploy capital in a more confident way. And so that's what has me focused on over the course of the next several years. When we talk to our clients, the work that we do, they see great promise, even though there is extraordinary risk as well. What I most hope for over the course of the next several years is really a de-escalation of the major geopolitical risk that exists in parts of the world. And of course we have a couple of major wars happening today, tragic consequences from those, but we also have rising tensions in other parts of the world as well. And so at the top of the list for me, you know, is for governments and leadership around the world. And I think business plays a critical role in this conversation, really bringing better balance to those discussions and really, really helping understand how we can better work together and create a safer and more prosperous economic agenda. I think we can all agree that we all want that. so deescalating geopolitical tensions really at the top of the list.

TP OUTRO: 

The recent years of topsy-turvy interest rates and higher inflation has built an uncertain economic environment, marred further by geopolitical tensions and energy crises. Add on top of that the climate and AI risks the landscape for businesses and government is a difficult one. The insurance industry has a uniquely important role to play in addressing risk by making the economy more resilient. Insurers can develop innovative insurance products that incentivize climate-related risk prevention. When adequately priced, insurance plays an important market-signalling role regarding the inherent risks being insured, especially within the rapidly evolving climate risk landscape. Collaboration plays an important role in climate action. By working together, public and private enterprises can improve the overall understanding of climate-related risks and promote a more sustainable and resilient future. But the same is true of other risk arenas such as AI. All in all, the insurance industry must also be well equipped to deal with the risk landscape to support businesses in an uncertain future. Shifting interest rates, changing sources and cost of capital, increased claims levels following years of high inflation, coupled with climate events and emerging AI risks, requires insurers to innovate and evolve with these uncertain and volatile times. But, we’ve learnt today that heads of industry are working together to allow for more confident allocations of capital, and data is helping c-suite remain agile to near term action for long term success.