The storms, fires and floods blamed on climate change that have devastated swaths of the world in recent years impact not only communities, but also the Hartford area’s signature industry, insurance.
Now Hartford-based Conning, a seller of risk and capital management software, has come up with a product to help companies, regulators, investors and others measure the financial costs of climate change.
“It’s very topical in the industry. Everyone knows they have to do something, but they’re not quite sure what it is they need to do,” said Lorraine Hritcko, head of risk solutions at Conning.
Conning’s new product — introduced in November — overlays technology the company already uses to predict risks onto a range of climate models. The software uses stochastic economic projections, or modeling using random variables based on historical data.
The company began developing the product, called the Climate Risk Reporting and Scenario Service, in response to growing demand from customers, said Matt Lightwood, Conning’s Germany-based director of risk solutions.
“We developed some very specific quantitative risk metrics … to help [customers] quantify these risks and start to talk about climate risk at the board level,” Lightwood said. European clients especially are feeling pressure from regulators to comply with tenets of ESG, or Environmental, Social and Corporate Governance, he added.
“The ‘E’ in ESG, particularly climate risk, has now become a real focus in the insurance industry, but generally in the institutional investment space,” Lightwood said.
Nations and states are coping with the aftermath of a record run of global disasters, including catastrophic storms, wildfires, floods and droughts. Average insured losses from catastrophes worldwide in 2020 were estimated at nearly $100 billion by Reinsurance News, with the biggest losses coming from Australia’s bushfires, the derecho storm in the U.S. Midwest and the Atlantic hurricane season’s impact on the Southwest.
And although the issue of climate change has become politicized in the U.S., companies and regulators are realistic about the impact of increasingly severe weather.
“You will still be exposed to the risk, regardless of what a particular geography’s politicians are doing,” Lightwood said. “The product’s been designed to be agnostic.”
Modeling risk
The software offers users three possible scenarios relating to climate change: First, that the global economy transitions to carbon-neutral in a very short period of time; second, that the transition happens over 30 years; and third, that no action at all is taken on climate change, resulting in global temperatures rising 4 degrees Celsius or higher.
Each of the three scenarios is modeled to measure the risk to a company’s portfolio in terms of transition risk and physical risk.
Conning’s signature product, its GEMS Economic Scenario Generator software, was adapted to measure the impact of climate change.
“That was a very natural thing to do since there’s a lot of uncertainty around what a particular climate scenario might do to the economy,” Lightwood said. “The [new software] is very good at capturing that uncertainty.”
About 75 companies already use the GEMS software and have expressed strong interest in adding a climate component to their risk assessments, Lightwood said.
Weather events have hurt the bottom line at many area insurers this year, including The Hartford, which reported pre-tax catastrophe losses of $229 million in the third quarter of 2020. The Hartford CEO and Chairman Christopher Swift called the third-quarter financial impact from wildfires and storms “unusually high.”
Property and casualty insurer Travelers Cos., which has major Hartford operations, said its third-quarter catastrophe losses were up 65% to $397 million, which was well above the 10-year average, according to company Chairman and CEO Alan Schnitzer.
Even as risks mount, however, insurers and other companies have struggled to adapt to unpredictable weather events that appear to be growing in intensity.
“Climate change poses material risks for investment portfolios and the global economy as a whole, yet we have found that many institutional investors have struggled to measure these risks, mainly because of a lack of a reliable and standardized methodology,” Conning’s CEO Woody Bradford said.
Software like Conning’s gives insurers across the globe another tool to protect their portfolios, Lightwood said, as pressure mounts on all sides to quantify the risk of climate change.
“We’re expecting that to gain momentum over the coming year,” he said of concern about climate. “In 2021 we expect this to really ramp up and really start to bite.”
