In a recent webinar series, AIR experts on liability risk assessment discussed some of the most pressing issues facing the market today with guests from the industry. In two of these fireside chats on the future of risk management Arium’s Robin Wilkinson and Florian Loecker spoke with David Bassi, Managing Director of Guy Carpenter’s Global Strategic Analytics Organization. The topics of conversation were liability risk management in general with a focus on climate change liability and the tools and data needed for implementation use cases.
The impacts of anthropogenic climate change have accumulated, remaining largely unnoticed for centuries. The relationship between atmospheric CO2 levels and global temperatures has been observed and quantified since Swedish chemist Svante Arrhenius calculated it in the 1890s. The urgency of responding to climate change increased as direct impacts, such as sea level rise and changes in weather patterns, became painfully evident. The indirect impacts, and the potential liabilities associated with them, are only now beginning to be appreciated.
Sea level rise, for example, is a major contributor to increased risk of coastal flooding and the growing cost of property damage associated with it. Sea level rise has the potential to negatively affect the future value of assets in locations vulnerable to its impacts. Once future declines in asset values are generally anticipated, asset devaluation could be very sudden with serious implications for mortgage-backed securities and other property-based lending and investment.
Entities with a financial interest in affected property risk in these areas—including residential and commercial property buyers, mortgage lenders, fiduciary advisors, and investors—could be exposed to significant liability risk.
The risk from climate change is not confined to sea level rise and is likely associated with other perils. Wildfires, for example, are not caused by climate change but it can boost conditions that increase both their frequency and severity with potentially similar impacts on property values in these markets and the associated liability risk.
For anyone buying homes, investing in property, providing professional advice, or building and/or designing buildings, failing to consider the indirect implications of climate change could be deemed negligent or even a breach of fiduciary responsibility. Insurers who do not understand the potential impacts and convey that information to investors are also at risk.
The First Step to Managing Risk Is Understanding It
Modeling can help to understand and quantify liability risk by creating a consistent framework for assessing risk that moves beyond the realm of expert’s subjective opinion. Standardized, relevant and accurate data will be centrally to utilizing models to quantify risk. Flawed inputs will lead to spurious model outputs.
Before catastrophe models became available, property insurers generally had a limited understanding of their exposures and often believed they were adopting conservative views of natural catastrophe risk. Those beliefs were challenged by events. Models have enabled them to better understand their risk and, as a result, expand their capacity. They have also facilitated the injection of new capital through insurance-linked securities, for example.
Insurers seeking to grow their business need to be looking for opportunities to develop new products and ways to help insureds better mitigate risk. Liability risk modeling is still a new field, but it is developing rapidly in scope and sophistication, and there is increasing confidence in the ability of liability models to capture the risk. Improving data standards, growing the acceptance of the models, and developing the skillsets necessary for insurers to employ them effectively are some of the things necessary to enable liability insurers to take similar steps to both better understand their risk and expand their capacity ensuring that insurance capacity remains available and grows to meet increasing demand.