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Insurers mindset key to climate risk scenario planning

Organisations must think like insurers when it comes to climate risk scenario planning and take a holistic approach in factoring externalities, said head of Climate and Resilience Hub (CRH) at Willis Towers Watson

Organisations will have to think like insurers for climate risk scenario planning, concentrating more on “exposure and vulnerability”, according to Rowan Douglas, head of Climate and Resilience Hub (CRH) at Willis Towers Watson.

Insurers take a holistic approach in factoring externalities, something that non-insurance agencies “have never had to think about before”, he added at this year’s City & Financial Global’s City Week event.

“The other thing about insurance is you don’t need to own something to have an insurable interest in it. We’re beginning to see in the context of risk disclosure, insurance being used almost like a management vehicle for governance of shared assets.”

Julia King, Baroness Brown of Cambridge, chair of Climate Change Committee’s Adaptation Sub-Committee, points out the elusiveness of nature makes it “quite hard to predict” in climate risk scenario planning.

“Nature often responds nonlinearly to climate change and we start to see threshold effects […] One of the things we’ve got to do is get our finance system to work so that it can invest in the adaption measures we need to ensure nature can continue to perform for us.

“Although we’ve had lots of great studies like the Dasgupta review, and the introduction of natural capital accounting, we are still struggling to translate that into really effective investment in nature.

“We are seeing increasing risk [to our climate] and it’s partly because the investment and the action we’re taking to adapt to the changing climate are not keeping up with the changes.”

William McDonnell, group chief risk officer at RSA Insurance Group, said a lack of governance around carbon pricing provides balance sheet issues.

“There is not very much governance and standards and policing in the market at the moment. There are questions about the accounting of it. It’s certainly nothing like what we’re used to in financial accounting.”

McDonnell added there is a “major opportunity for the City of London to step into this vacuum and be stricter. Poor quality offset will be rife with reputational risk.”

Douglas suggested the “carbon fuelled financial information system” will shift to “climate fuelled”.

“There’s going to be a few paradigm shifts and crisis moments over the next year or two, when we realise that what we’re doing in the climate information space isn’t necessarily answering the real questions that companies have, and integrating that into their own operational DNA.”

Future financial decisions will “take climate into account”, added Douglas.

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