Category Archives: climate change

COP 26

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As the world’s leaders conclude their two-week summit in Scotland it is good to see some of the leadership in the insurance industry involved in the most critical issue facing all of us today. Many in the insurance industry are working positively to promote policies that will help mitigate climate change – or at least don’t add to the problem – such as new ESG guidelines for the company, looking at the impact of placing climate risks in their portfolios, new modeling, and reassessing where to invest the huge assets the insurance industry has under management. Reinsurers rank climate change as the top risk facing the global insurance industry, according to PwC’s latest survey.

Climate policy is a risk management system, and the industry needs to provide a comprehensive vision for risk sharing going forward. There are many complex issues to be worked out for both the insurers and their insured for sure, however, a cleared-eyed approach by all parties can get us there.

Innovations like from AXA XL which has launched a tool that maps current and future flood hazards resulting from climate change and integrates the protective benefits of coastal ecosystems into insurance risk models, is a great example of where the industry can lead.

There is a theory in the risk management world, however, that insurance can be seen as a barrier to the kind of innovation needed to tackle the hard nut that is climate change. Providing P&C insurance, or D&O insurance, to a client without concern for the long-term impacts climate change can bring can remove the responsibility from the clients. Adding to this, innovative changes to infrastructure, along with the recent technologies used to build resilience, can be hard to insure as they rarely have claims history. This makes it difficult for the insurance sector to price the risk.

I think the basic principle behind captive insurance will accelerate solutions. With captives, organizations take direct responsibility for their risks – they now own it. The data on how to mitigate climate risk comes from their captive which allows them to be more focused on pursuing resilience at all levels. No longer is there a large, anonymous insurance company obscuring leaders from understanding and acting to better protect their own properties, employees, supply chains, and ultimately shareholders. And captives are innovative. They have the ability to take specific risks for an organization that might be looking at pioneering ways to use new technologies to protect from the impacts of climate change.

I remain hopeful that with a comprehensive and coordinated effort from all facets of society and industry we can turn the corner on climate change. Captive insurance will be part of that solution.

Stay well and see you soon!

Rich Smith,
VCIA President

It’s Hot!

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Captivated – July 9, 2021

The record-breaking heat in western North America is just another example of the climate change challenge we all face in the years to come. The insurance industry, not surprisingly, will play a lead role in helping their clients –  and society overall – manage this risk in innovative ways.

One such innovation that is beginning to take off in the captive insurance arena is the use of parametric insurance. Parametric insurance is a non-traditional insurance product that offers pre-specified payouts based upon a trigger event. Trigger events depend on the nature of the parametric policy, which can include weather-related events as well as earthquakes, travel cancellations, and much more.

I know parametric solutions are getting more traction in the captive space because we have not one, but four organizations that are providing Ignite Talks at VCIA’s 2021 Annual Conference on the topic. Ignite Talks are short, TED-Talk style presentations on solutions to challenges facing captive insurers.

Not in any order, we have Aon presenting Parametric Insurance – An Alternative Solution, which will explain how captives supporting Parametric Insurance placements are helping organizations address a hardening market for Natural Catastrophe coverage, contingent and non-damage business interruption risks and other ‘difficult to insure’ areas.

Another session by AXA XL is entitled Parametric Solutions for Captive Owners where you can learn more about how parametric programs enhance risk management for captive owners, and the practical solutions offered through effective captive utilization.

X350 – Magnify Your Reinsurance Capacity to the World´s Largest Capital Market(s) With One Page presented by RYSKEX will explain how the future of buying reinsurance capacity as part of a blockchain-based Digital Risk Exchange (DREx) ecosystem will allow you to start selling your risks to the capital market with parametric risk trading.

And finally, Arbol presents Streamlined “Captive+Parametric” Solutions for Climate Change Risk Management which will explore how captives can play an active role in corporations’ responses to the climate change risk management mandate using climate data, online tools to structure and price parametric protections, and settle claims automatically via smart contracts.

Quite an incredible line up! The VCIA Annual Conference will be held online August 10 – 12th, which is fast approaching, so check it out here and Register Now!

Thank you and I look forward to seeing you soon.  

Rich Smith
VCIA President

Black Swans for Thanksgiving

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I, for one, am glad its Thanksgiving next week. First, I love the feast! Family and friends (well, er, no friends this year) gather for dinner and conversation – no gifts, no chocolates, no decorations. Just like me: boring but predictable. Second, like everybody I could use a break from the craziness that is 2020, and Thanksgiving does allow one the opportunity to take a reality “time out” at least for a day.

But as my mind drifted to turkey, another bird edged its way into my brain. The proverbial black swan that is at the top of mind for many of us in the insurance community. An article yesterday in the London Times by Alex Wright highlights how many in our world are working to create insurance solutions for things that historically have been labeled uninsurable, like the pandemic.

As Alex outlined in his article, traditionally, companies have mitigated against risk by taking out an insurance policy. Underwriters would spend hours poring over reams of historical data to determine the likelihood of the risk occurring before giving a quote.  But black swans don’t fit this mode well, as by definition they defy historical data – at least in the linear manner we usually think of.

The burgeoning world of artificial intelligence (AI) and machine-learning is looking to change that. The key benefit of AI in insurance is that it can quickly process large data sets and identify significant trends that mere mortals are unable to do.

Dr. Marcus Schmalbach created the VUCA (volatility, uncertainty, complexity and ambiguity) World Risk Index, a parametric index that uses machine-learning to gather data from a range of trusted and verifiable sources, many of which aren’t considered in traditional underwriting. That data is then rigorously analyzed alongside information the technology has gathered from previous experiences to look for patterns and links between events and determine the likelihood of a major event occurring. Among the areas his group has successfully modelled is business interruption loss in the event of a pandemic based on the data they crunched.

Climate change, natural disasters, political and trade conflicts, all could be better priced in the insurance world with new AI applications. AI can also reduce paperwork and the time taken to receive a quote or claim. Using parametrics, AI can also establish if an event has happened, thereby triggering payouts and avoiding any disputes.  Captives are well poised to take advantage of such innovation.

While nobody can predict the future with 100% accuracy, AI will allow insurers to detect anomalies that will help anticipate future events, like pandemics, and maybe better prepare us for the black swans. Perhaps roast black swan instead of turkey….

Thanks, as always, for your continued support in these trying times. I look forward to hearing from you!

Rich Smith
VCIA President

Summer’s here and it’s Grillin’ Season

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I know last week I said summer has finally arrived here in Vermont after a tough spring with 80 degrees and sunny, well that’s nothing to the 90 degrees we had the past couple of days. And like I said that means it’s grilling season.

That reminds me that I am looking forward to my grilling of Vermont’s Commissioner of Financial Regulation, Mike Pieciak! Well, not that I am planning on a “grilling”, perhaps just a light “sautéing” instead. Mike is going to join me at the end of the first day of VCIA’s Virtual Conference to discuss.

Commissioner Pieciak will join me in a conversation with me on major issues impacting the captive insurance industry in Vermont, at the NAIC and beyond. We will hear Mike’s thoughts on transformative changes due to the COVID-19, the current regulatory environment, and other things I plan to spring on him.

Now Mike is a very smart guy and pretty unflappable, but I am going to do my best Mike Wallace on him (for all of you old enough to know the famed 60 Minutes reporter). More information to follow – I hope you can join us this August!

Rich Smith
VCIA President

It’s time we stop being ostriches…

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How much longer is our industry (and by that, I mean the general insurance industry) going to keep ducking one of the most (if not THE most) important risk issue of our time: climate change?

Regardless of what your philosophical or political beliefs may be, the evidence is clear that we are facing unprecedented changes in the earth’s climate – well at least going back a few thousand years. And still, the one industry that is supposed to be out in front on risk management has its head in the sand.

As late as last year, Business Insurance reported that “the majority of insurers, particularly in the United States, do not integrate climate change into their risk management practices despite historic flooding in many communities”. Reinsurers, on the other hand, seem to have had a better response to climate change-related financial risk, according to the study by the University of Waterloo called Insurance and Climate Change Risk Management: Rescaling to Look Beyond the Horizon.

As reported in Gloria Gonzales’s article in BI, most insurance companies assumed the risk to property from extreme weather is static and based their premiums on historical data. Insurers have not adjusted as extreme weather events have increased in severity, frequency and unpredictability, according to the study.

“As extreme events become more frequent, insurers that ignore climate change will not put away enough money to cover their claims,” Jason Thistlethwaite, a climate change economist at the University of Waterloo, said in a statement. “To recoup those losses, they’ll have to raise rates or pull coverage from high-risk areas. When this shift happens, thousands of people will lose coverage or it will be unaffordable.”

“Some insurers are better at understanding climate change than others,” Mr. Thistlethwaite said. “These organizations will survive and likely be able to sell climate services to their counterparts struggling to understand the problem. Those that don’t will fail.”

As I blogged more than a year and a half ago, the insurance industry, including captives, needs to step up and lead on this issue. No industry is better placed to clear-headedly explain the risks and provide much-needed leadership on mitigation and sustainability. It’s what we do!

Thank you all very much, and I look forward to hearing from you!

Rich Smith
VCIA President

South Pacific…A Captive Story (Not the Musical)

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cyclone-gita-tonga

I read a news story back a few months which I thought was pretty cool. The government of the Pacific Island country Tonga had received a $3.5 million pay-out from a captive, the Pacific Catastrophe Risk Insurance Company (PCRIC), following Cyclone Gita that struck the islands on February 12, 2018.

The PCRIC offers member countries parametric insurance which is designed to payout within 10 days after a triggering event, providing those in need with valuable funds very soon after an event occurs. Something this vital for vulnerable regions when addressing the impacts of natural disasters and climate-related events.  The PCRIC purchased reinsurance from four international reinsurers, with additional capital contributions from the Multi-Donor Trust Fund, which includes contributions from Germany, Japan, the U.S., and the UK, and is managed by the World Bank. Sure enough, funds from the program were transferred after seven days of the cyclone event, providing the Tongan government with appropriate financing to support disaster-relief efforts and effective service delivery to the affected areas.

Gita reached its peak intensity as a Category 4 cyclone before making landfall on Tonga on February 12, where its destructive wind strength caused wide spread damage.  PCRIC chief executive David Traill said, “It is clear that the increased level of coverage provided to Pacific Island countries through the establishment and capitalization of PCRIC by our donor partners has made a positive impact on the support we are able to deliver to the Pacific Island region.”

To me, this story reinforces the growing recognition of climate change and related severe weather events to the insurance world. I believe captives can and will play a more important role as the world confronts this problem.  At the upcoming VCIA Annual Conference August 7-9 there will be a terrific session called Natural Catastrophes and their Impact on Risk Management, which will feature the following experts sharing information on the potential impact of natural catastrophes on risk management:

  • Gillian Galford, an Earth Systems Scientist at the University of Vermont and lead author of the Vermont Climate Assessment
  • Howard Kunst, Senior Modeler and Chief Actuary, at CoreLogic
  • Jason Shafer, Professor of Atmospheric Sciences at Lyndon State Colleges, who focuses on the valuation of weather information within the private sector
  • John Ferrara, FCAS, MAAA, senior manager at Ernst & Young

Register soon at www.vcia.com to get the best rates! Early rates expire June 30th. We look forward to seeing you in Vermont in August. Thank you all very much!

Rich Smith
VCIA President

Weather or Not

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rich-weatherman

It was recently reported that Strategic Risk Solutions Europe (SRS) has introduced a carbon emission risk program to be run in conjunction with Carbon Risk Solutions.  The program will initially involve a series of workshops where sustainability directors and risk managers are invited to learn how they can identify, manage and finance the carbon emissions risks their firms face in the transition to the low carbon economy with a range of insurance-linked solutions, including the use of captives.

Stuart King, president of SRS Europe, echoed what many have said of the broader insurance industry in confronting climate change and its associated risks: “The insurance market has been rather slow to respond to carbon risk transfer solutions for multinationals. We see an opportunity to develop these programs within captives and cells, while the commercial market develops and becomes more comfortable with this emerging risk.”

I think this bodes well for our mighty little industry. As I stated in a previous blog, captives are well placed to deal with the vagaries of climate change and risk, and that those who wait too long may be too late.

VCIA continues to address and explore this issue with a number of sessions at our Annual Conference this coming August 7-9.  Our session Natural Catastrophes and their Impact on Risk Management will feature experts  sharing information on the potential impact of natural catastrophes on  risk management from a variety of viewpoints including  academic, actuarial and risk management.

The expert panel for this session includes:

Gillian Galford, an Earth Systems Scientist at the University of Vermont and lead author of the Vermont Climate Assessment; Howard Kunst, Senior Modeler and Chief Actuary, at CoreLogic; Jason Shafer, Professor of Atmospheric Sciences at Lyndon State Colleges, who focuses on the valuation of weather information within the private sector; and Brad Waldron, ‎Vice President, Risk Management at ‎Caesars Entertainment Corporation.

Registration for the VCIA Annual Conference opens May 1st. We look forward to seeing many of you there for another excellent program!   Thank you and I look forward to hearing from you.

Happy Holidays and See You in 2018

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church

I just wanted to wish all of you Happy Holidays as we head out of 2017 and into 2018. It’s been another busy years in captives, that included a horrific hurricane season, the decision of the Avrahami case on 831(b)s, the specter of continued cyber security issues with the hacking of Equifax (among others), and the soon-to-be-passed Tax Reform bill – all of which impact our industry.

That being said, captive insurance is growing and remains a robust part of the world’s risk management sector. Vermont broke through the 1000 captive license mark and looks to add around 25 new captives before year’s end. With challenges and opportunities that lie ahead such as healthcare, drones, (more) cyber risk, and AI (artificial intelligence – get used to it), captives will show how entrepreneurial and innovative our industry can be!

Thank you all for another great year and Happy New Year!

Rich Smith
VCIA President

Sustainability + Risk Management = Resiliency

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sustain-RM-strong

I recently read a Forbes article of risk management and sustainability I thought made much sense.

It was an interview with Dr. Leo S. Mackay, senior vice president at Lockheed Martin, and he was describing a reorg at Lockheed that puts enterprise risk and sustainability under common reporting, since ERM and sustainability are both principally focused on the identification and prioritization of risk.

Considering risk and sustainability together is part and parcel of the same thing because sustainability in strategic terms is about building in resilience and efficiency into the business.  “Rather than have separate silos where discussions or disaggregated thinking around what are the existing and emerging risks, that now is a coordinated effort,” Dr. Mackay says “Those things are tantamount to risk mitigation and the control of risk.”

To me what Lockheed is building in their business is resiliency – perhaps an over-used word these days, but as good a descriptor as any. With organizations facing increased risks from cyber security to climate change, captives can lead the way to help create that resiliency, especially as many captives already work across silos if they cover diverse risks such as property and employee benefits. So as captive practitioners you can get the process started – by coming to VCIA’s Annual Conference to get some good education with sessions such as Expanding Your Captive Business Plan and Optimizing Your Captive’s Risk Profile and Reinventing Your Captive for Maximum Results.

Check it out: http://conta.cc/2vDCNrG

And a quick follow-up to last week’s blog: I reported about my concerns with the proposal to add a border adjustment tax (BAT) to any tax reform that Congress might attempt this summer, as it might cause additional costs to the captive insurance industry utilizing offshore reinsurers. Jim McIntyre just reported to me that the White House and congressional GOP leaders said that they are no longer looking at a border-adjustment tax as they work to get tax-reform legislation enacted this year. Good news as it eliminates one uncertainty in Washington!

I look forward to hearing from you.

Rich Smith
VCIA President

You’re Getting Warmer

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Brache, James 2017 photo

Jamie Brache, 2017 VCIA Conference General Session Industry Keynote 

Some of you might have heard recently that a giant iceberg about the size of the State of Delaware (or twice the size of Luxembourg to our more Eurocentric friends) has broken off an ice shelf on the Antarctic Peninsula and is now adrift in the Weddell Sea.

At 5,800 sq km the new iceberg, expected to be dubbed A68, is half as big as the record-holding iceberg B-15 which split off from the Ross Ice Shelf in the year 2000, but it is nonetheless believed to be among the 10 largest icebergs ever recorded.  According to experts, this event will not itself result in sea level rises.  As one cool scientist described it “it’s like your ice cube in your gin and tonic – it is already floating and if it melts it doesn’t change the volume of water in the glass by very much at all.”

That being said, it is a reminder that climate change is upon us, whether you believe it is a natural occurrence, anthropocentric, or a little bit of both.  While climate change is accepted to have played a role in the wholesale disintegration of the Antarctic ice shelves, there is no evidence that the calving of this giant iceberg is linked to such processes.  However, climate change could have made the situation more likely, according to scientists.

The insurance industry is starting to play a role (indeed, must play a role) in mitigation strategies and resiliency when it comes to climate change. At the VCIA Annual Conference this August, Jamie Brache, Deputy Managing Director of Credit & Political Risk at Zurich North America, will provide his thoughts on the impact of climate change on the broader insurance marketplace and, drawing on his background, discuss some of the potential implications of climate change on risk management and the global political risk environment.  I hope I will see you there!

I look forward to hearing from you.

Rich Smith
VCIA President