Moody’s RMS’ Matthewman: Insurers must think longer-term to deal with climate change impacts

Insurers must take a strategic view in addressing climate change where they plan for the medium and long term, according to Dr Joss Matthewman, senior director for climate change product management and strategy at Moody’s RMS.

In a rallying call for the industry to end its inaction on climate change, Matthewman told The Insurer TV: “We need to start making progress, and we need to start doing that now.”

He said the concept of an insurance CEO living “renewal to renewal” was now outdated, calling on industry leaders to take a strategic view where they are “planning for the next five to 10 years”.

Matthewman said it was important to consider how climate-related trends can take time to emerge from the data, such as how natural catastrophes are being impacted. With extreme weather, he warned that the consensus is always “a little bit more uncertain”, particularly with smaller data sets.

Matthewman said insurers should also look at the data for a longer period on emissions pathways.

“Are we on a very high-emissions pathway or a lower-emissions pathway? The Intergovernmental Panel on Climate Change (IPCC) expresses this in terms of Representative Concentration Pathways.

“With these RCPs we have both more pessimistic and optimistic trajectories. We don't really know which one of those we'll be following up to 2050 – that's another area of uncertainty,” he said.

Matthewman said taking a longer-term strategic outlook will help insurers better prepare for the impacts of climate change – a move likely to be welcomed by reinsurers, given the current loss landscape and hard market conditions.

“[Insurers] being able to demonstrate that their book is stable in terms of the risk they're running and their projected growth over the next five or 10 years is important to their reinsurance partners,” he said.

Matthewman was also keen to stress that this inaction on climate change also had the potential to affect the “investment side of the balance sheet” for insurers.

Matthewman saw this happening via two different vectors: first, through more straightforward “physical risk,” such as the impact of a rising sea level on property portfolios, and secondly, through transition risks.

“We also have transition risks, so what risks do we have in our transition from where we are today to a lower-carbon and lower-emissions society? And that has impacts for stranded assets, for example, in the investment side of the book,” said Mathewman.

Matthewman called for insurers to better marry the risks in their underwriting with investment portfolios, creating a more “aligned view” of their total exposures to climate change. He added that Moody’s RMS is already trying to do this by de-siloing its climate risk-related departments.

“This is why we aim to bring all of this together in [RMS] Moody's under one roof, where we have catastrophe risk, credit default risk, real estate and transition risk all in one combined framework.”

Watch this 13-minute video to learn more about:

  • Why climate change’s impact on extreme weather is tough to pin down
  • The importance of modelling non-catastrophe lines of business
  • How (re)insurers engage with the regulator