Tracking preparedness for global climate risks

Mark Maroon:

Hey, everyone. Welcome to Climate Check. This is Mark Maroon, Vice President and Head of Portfolio Management and Reinsurance at American Modern, a Munich Re company. Today, we're joined by Tim Brockett, Executive Vice President and Head of Specialty Lines, Innovation, and Strategic Products within the reinsurance division at Munich Re. Tim, thanks so much for joining us today.

Tim Brockett:

Hi there, Mark. Happy to be here, and thank you very much for having me.

Mark Maroon:

Yeah, absolutely. So, let's go ahead and kick this off. Maybe could you tell us a little bit about your role at Munich Re, and then maybe why the reinsurance division places such a strong emphasis on climate change?

Tim Brockett:

Yeah, sure. Specialty lines comprises kind of our smaller, more niche type business, so marine and credit and surety are the underwriting teams that roll up into specialty lines. But it's also the area where we explore emerging risks, so we've been involved in building our cyber strategy, we've built out a flood book of business, as we've explored that opportunity. We are kind of quarterbacking our AI strategy and things related to opportunities and how we're using AI within the Munich Re group.

All things kind of protection gap related, so of course that's the flood strategy that I've already talked about, but also a team we call Digital Solutions and a team we call Climate Insights and Advisory, and they really work hand in glove together to really kind of help our clients understand, measure, and manage physical risk. As you know, Mark, the weather trends over the last couple of years have been rather concerning from both a frequency and a severity standpoint, driving higher claims payments both on the part of our clients, but also as a reinsurer.

So, these teams are operating along with the clients to overlay the Munich Re view of risk on the client's view of risk to provide some ideas around alternative accumulation type methodologies, so identifying hotspots and concentration risk, and then, of course, putting some risk transfer around some of that to help manage volatility, things like benchmarking, that sort of thing. So, in order to do all that in a really good way, you need to level set at the beginning. And I think that's where this climate survey is really going to be important as we advance these conversations with our clients. What level of preparedness are we seeing from companies? From homeowners? What are they prepared to do to offset some of the current concerns that they have? And how might that impact losses going forward?

Mark Maroon:

Thanks. Yeah, it sounds like you've got certainly enough to keep you busy. So maybe let's dive into some of the specifics around the key elements of the climate risk preparedness that the survey addressed.

Tim Brockett:

Yeah, so the survey consisted of 6,000 respondents across 12 countries, so it was a global survey, which, of course, included the US. The respondents were either employees of companies or owned their own company. Various levels of responsibility within those companies, so there were individual contributors as well as kind of management level, so we have it sliced and diced that way. Yeah, and then there was a kind of a second part of the survey that also asked them if they owned a residence, then how would their responses change based on level of concern and level of preparedness?

The key elements of the survey, at least from my vantage point, one, of course, was the overall level of concern. How concerned are they with weather trends? And how does that differ between the US and other economies? How does their perception of risk impact the prevention measures they're prepared to take? And number three, at least for me, how does experiencing a natural disaster impact their attitudes towards preparedness?

Mark Maroon:

What did you discover in terms of average level of concern amongst those polls? People totally freaking out, people just, "Yeah, this is an issue we're addressing," or maybe it's just: "Ah, this is totally overblown. We're not all that worried." What would you say the average response looked like?

Tim Brockett:

It was a big number, Mark. So, 80% were either concerned or very concerned about the impact of climate change, which was, at least from my standpoint, a higher number that I guess I would've expected. Now, some of that varied by geography. Emerging economies, maybe not surprisingly, were more concerned about climate events or climate change than more developed economies. Perhaps that's a signal based on the preparedness of larger economies. That came through in the data.

Big companies were more alarmed than small companies about climate change. In terms of different industry verticals, different sectors in the economy, the financial sector, which includes insurance, was among the most concerned about the impact of climate change.

Interestingly, and this will come through in some other data, the public sector was less so. I found that a little bit interesting. Services as well, but yeah, but the financial sector was up there in terms of concern.

Senior level managers were more concerned than less senior managers. I think that makes sense, it would be kind of intuitive. But the overall level of concern across management levels was much higher now versus 10 years ago.

Mark Maroon:

I think that does kind of make a lot of sense, and especially in regards to some of the different industry verticals responding differently. Certainly, the financial sector seems like it's got a little bit more systemic risk that would be associated with this than some of the other sectors that you might have been trying to capture here. So, did the survey uncover any information about previous or past impacts from climate events that the organizations endured?

Tim Brockett:

Yeah, the one thing that I thought came through loud and clear here was there's a question about how your own loss experience influenced your perception of risk. And what came through loud and clear was optimism bias. Optimism bias, just to define it, is the cognitive bias that causes you to believe that you, yourself, are less likely to experience a negative event. And this permeates not just how you feel about climate, but also how you feel about driving in traffic and that sort of thing.

So, the question was to what extent do you see changes to weather disasters which could negatively impact your organization? And if you had experienced fairly high financial impact from a weather disaster in the past, 76% saw significant changes to weather disasters that could negatively impact them. 76%, that's a pretty big number. If you had no previous experience with a weather disaster, only 14% saw some impact. So, it came through the numbers that if you've had an event, you're going to probably be more concerned about it, you're probably going to be more willing to do something about it, versus if you haven't.

Mark Maroon:

Which I think probably makes a lot of sense, right? If you've been burned by the past, no pun intended, by these types of things, you're certainly going to be a little bit more cognizant of its potential effects and going to have it more on your radar.

One of the things that you had mentioned was some of the challenges around business interruption, and so can you talk maybe a little bit about some of the measures organizations are taking to help mitigate some of the risk around climate risk and supply chain resilience, and some of the different risk transfer mechanisms that they're looking to put in place to avoid some of those issues?

Tim Brockett:

Yeah, so we're talking adaptation and loss prevention, but then as you mentioned, certainly insurance. And I think that's where there was some good news in the survey. Insurance take-up is widespread. It's definitely seen as an effective measure to increase resiliency. Not surprising probably, but also a good signal.

60% of top managers stated they had bolstered their prevention measures. That's good. Within that, 53% have taken measures to protect or strengthen their infrastructure. 53% also increased their supply chain resilience. 49% have purchased additional insurance, so that would include things like flood, that's more of a discretionary purchase. So all good.

SMEs, small businesses, lag a little bit. Again, public sector is lagging. Other sectors, which again, I thought were a little bit interesting.

I give you the but here, though. 60%, while a good number, is obviously less than the 80% concerned that was identified earlier. So, 80% are concerned, but only 60% of are doing something about it.

The other aspect here is optimism bias, that creeps in here as well. So, if you've been hit by a disaster, you're three times more likely to consider prevention as opposed to not being hit, which goes along with what we've already said.

Mark Maroon:

So, do you think there are specific reasons that would prevent some of the respondents from investing more into resilience measures?

Tim Brockett:

Yeah, there was a lot of variance in the responses to this question, and maybe interestingly, one third of the managers that responded said they felt that they were already adequately addressing the risk. But in terms of those that have not really invested or haven't invested more, too expensive was the response that led the pack. It was closely trailed by lack of effective solutions and lack of effective information, also lack of resources. It was a little bit all over the map, but that was how the responses came back in terms of that question.

Mark Maroon:

Right. Okay, that makes sense. One of the things I found pretty interesting as I was going through the survey, that it wasn't really just looking at only business risk mitigation decisions being made, but also personal decisions about their own properties. So why did you decide to go down that path?

Tim Brockett:

Yeah, obviously Munich Re provides insurance and reinsurance to residential properties as well. So, we thought this was a good area to probe to make sure that we were covering that as we talked to our clients and our insurance entities were talking to their customers. Clearly, as I mentioned in the beginning, the loss experience, particularly in the US, has not been very good for residential, considering the weather trends. Residential tends to be more vulnerable construction. Population trends, people moving into harm's way is a known factor that's increasing claim counts over the last few years. And really, community resilience, to state the obvious, depends on the preparedness of its residents. So we wanted to get a read on how prepared people actually were.

Maybe unsurprisingly, it followed the same patterns as they answered for their company. 70%, as opposed to the 80% response before, were concerned or very concerned with weather trends. Again, higher concern with emerging economies, higher concern over the past 10 years, more concern if you've been impacted by a disaster, so none of that is really different. The one thing that I think stood out here, the percentage had invested significantly in loss prevention measures, and that was only 11%. So that gap between, okay, 70% are concerned, but only 11% are really doing something significant about it was interesting.

Mark Maroon:

Yeah, that's pretty alarming when you think about the protection gap that could be potentially set up there and just, do you think it really is just cost prohibitive for them to invest more in these resilience measures? Or do you think it's a lack of availability for potential solutions being offered in the market? What's your read on that?

Tim Brockett:

Yeah, so 35% stated high cost, so that was how the responses came back. I guess, at least from my vantage point, it depends on what kind of prevention measure we're talking about. So, if you're talking about raising your home, okay, that high cost is definitely an issue. But a fortified roof, the IBHS has been important in helping promote and develop standards around, it doesn't cost a whole heck of a lot. Finding qualified contractors has been a little bit more of an issue, but fortifying a roof is pretty low cost.

The broader question is about barriers to adoption. The one thing that came back was 24% of the respondents said insurance is going to cover it. While true, you wonder about, okay, well, the availability of insurance is somehow impeding efforts to help fortify property.

Mark Maroon:

I think that's fair, and I think it's certainly something that we're seeing across the industry, especially here in the US, as results have deteriorated over the last couple of years through a myriad of reasons. Certainly inflationary costs, certainly increased frequency of attritional events, you think severe convective storm, hail, thunderstorms, everything else. So, it does kind of make me wonder if there are better ways that the insurance industry can provide outreach to consumers to help them better fortify their homes, or maybe take more drastic risk mitigating actions to prevent some of this damage.

Tim Brockett:

Yeah, I would agree. One thing maybe to just add on, there was a question about have you considered expanding your insurance coverage? And 40% came back and said, yes, they would consider expanding their coverage. But, 56% were no, for various reasons. One is that, of course, they feel like they're adequately covered. But also, that it was too expensive, or they just didn't feel like there was the right product to help them.

Mark Maroon:

No, in some regards, I totally understand where they're coming from. And I think certainly, we're seeing some challenges in terms of demographic shifts as well, to your earlier point around how folks, just generally speaking, are moving to higher hazard areas. We're seeing more people building more expensive properties on coastline. We're seeing expansion of new homes in hail-prone areas. I think Texas, for example, you've seen a lot of people move to Dallas, Fort Worth area, the Austin area. All fantastic places to live, but unfortunately, they come with higher frequency and higher potential for hazard and damage to be done to property. So, a lot of different issues here to unpack and certainly interesting questions to try to get our arms around.

Tim Brockett:

Absolutely. Yeah, you're kind of feeding into what I wanted a little bit to mention in terms of what we should be taking away from this survey, maybe next steps. There's something we don't talk a lot about, but it's a vital role of insurance is sending risk-based signals. No one likes when their insurance premiums go up, I don't like when my insurance premiums go up, but it is a signal that your level of risk has gone up, for whatever reason. Insurance companies are good at risk evaluation. They have the data to back it up and to price their products appropriately. So, sending risk-based signals is going to continue to be an important role that the insurance industry serves.

We talked a little bit about continuing to invest. The insurance industry puts a lot of money into how to educate consumers on levels of risk, the Insurance of Business and Home Safety and everything that that organization has done to kind of promote proper building codes and the like. And then, of course, Munich Re and our clients and our competitors are out there every day in terms of communicating what we think the current level of risk for various perils looks like.

Mark Maroon:

Yeah. Certainly, I feel like the industry is sort of a leading indicator for the levels of risk that we're seeing across different geographies and across different perils. And for those not super familiar with the IBHS, I would certainly encourage you to Google them, get a sense for some of the work that they're doing, because it is very interesting. They do a lot of really interesting research, and it is one of those situations where I feel like building a more resilient world is something that benefits everybody, private sector, public sector, as well as the industry. So certainly, it's something that we want to continue to make sure that we're working with anybody who's willing to listen to us to say, "Hey, you know what? We're all in this together."

Tim Brockett:

Well said.

Mark Maroon:

Tim, thank you so much for taking the time to join us. And for all of our listeners out there, if you're interested in taking a look at the Climate Risk Survey, head on over to our website, munichre.com, you'll see it out there. Or simply put Munich Re Climate Risk Survey into Google, it'll pop up there. If you like this episode, please subscribe to our podcast for easy access to past and future episodes of Climate Check. And for more information, head on over to munichre.com/climatecheck. We'll see you guys next time.