KBRA md Peter Giacone and Nephila Climate structured finance director Ariane West discuss the nexus between insurance risk transfer and ESG

PG: How does the insurance industry fit into the ESG discussion and where do you see touch points within the Nephila Climate universe?
AW: The evaluation of climate risk, a key aspect of the ‘Environmental’ factor, is a core capacity and it is what we do every day. In terms of the ‘Social’ element, the obvious thing is that insurance exists to help mitigate or manage risk.

It is there to provide crucial resources to respond to, or recover from, the effects of an event that an individual or a community might not otherwise be able to bear. But if we look deeper, insurance can also play a further role in enhancing sustainability and stability.

The safety net that insurance often provides can enable innovation and promote cooperation. From this very good starting point, a question that we, as an industry, can be asking ourselves is: what activities are you helping to sustain?

On the governance side, insurance is known for being a well-regulated industry. Governance, at a fundamental level, is about being clear on what we require from one another and as a society. Governance rules are the guard rails essentially, to ensure that we are keeping our commitments to each other – they are there to guide us and keep us on the right path. I think that as an industry, we generally benefit from our strong regulatory foundations, and therefore bring a lot to the table in terms of modelling the importance and benefits of good governance.

PG: Have you seen the momentum of the industry change the discussion in the insurance sector?
AW: The Bermuda market is known for providing reinsurance coverage, particularly relating to peak natural catastrophe events. We have seen many wanting to talk about weather and environmental risks, as well as social and governance factors.

Engaging in these dialogues in the context of the broader market, I was reminded of the story that David Foster Wallace relayed in his address ‘This is Water’. The story is about two young fish swimming along, when an older fish swims by and asks: “How’s the water boys?” And the little fish swim on, until one turns to the other and says: “What the heck is water?”

For us, in the natural catastrophe and climate risk transfer market, being asked about the assessment of climate-driven risk is a little like being the young fish swimming in the water. It’s what we are swimming in day-to-day, and so we don’t think of it as a separate or novel issue, as some organisations might.

So we are now in a position where we need to think about how we communicate with ‘non-fish’ regarding our views on ‘the water’. How can we be most helpful in moving this forward?

We need to be thoughtful and to make sure the lessons or expertise we convey makes sense in this context. I think we have a great opportunity to contribute to the discussion and advancement of the assessment and disclosure of climate-related risks.

PG: Can you talk through some of the processes for developing speciality products to address specific environmental risks?
AW: We try to listen and understand the problems that are out there and understand how these play out in a business or organisation. To design a product that effectively addresses a risk, it requires us to understand a lot of things that might not be visible to us from the outside looking in.

Once we have that understanding, we can make proposals in terms of how to analyse the risk, how to come up with the right way to measure it and how we can guide our counterparty to the different type of risks that can be covered in a particular product, and how they can be best mitigated or managed.

At the end of the day, we are looking to structure a risk-transfer product or transaction that is a good fit for the risk holder, both in terms of coverage and cost. As part of that process, we will look for indices or data sources that allow us to measure and track the risk being underwritten that are transparent.

PG: Are you seeing an increased focus in the industry to address constituent ESG perspectives or broader products?
AW: We will always stay close to our core expertise, which is the assessment of weather-driven risks, but what we are seeing is that social risks and sustainability risks are increasingly linked to climate events. We are seeing an increase in volatility.

So we are, in effect, capable of developing products that are addressing real societal concerns. We are seeing demand from the market and a need for products that take a more holistic approach.

PG: We have had a change of administration in the US. What are the implications for your business and ESG investing if regulatory mandates were to come into play in the US?
AW: I think the expectation is that we will see some significant developments in the regulatory space to do with climate risk – there have been announcements from the US Federal Reserve, the SEC, the CFTC, to name a few notable ones. Movement in this space will bring the US into better alignment with the UK, the EU and other jurisdictions, which to date have been further ahead on that path.

What this likely means is that companies and public sector entities will be taking a hard look at their exposures. For risk transfer and risk mitigation, it is helpful if we are able to start the discussion and the product development process at an earlier stage. At the end of the day, the more information we have, the better able we are to take it in and this will open up opportunities for the insurance industry.

Angela Sharda