Climate risk enables insurance technology to blaze a trail

Acute regulatory, shareholder and consumer pressure on climate change is fuelling increasing demand from insurers for technology to assess the impact of climate risk. Ronan McCaughey explains how insurance software vendors are responding to the challenge

Climate risk is the burning issue to emerge from InsuranceERM's 2021-22 technology guide.

This trend is based on questionnaire and corporate statement responses from some 60 vendors that supply more than 120 risk, capital and asset management products for the insurance market.

Climate change of course poses a huge challenge for re/insurers, particularly in property lines where they expect to face with increasing weather-related natural catastrophe losses.

According to Swiss Re, climate risk could hike insured property catastrophe losses by 90 to 120% by 2040 in key markets such as China, the UK, France and Germany.

Nevertheless, climate change also offers plentiful opportunities for those insurance technology vendors that can help insurers improve their modelling, forecasting and scenario projections for climate-impacted risks.

Conning has been one of the technology vendors leading the way in climate risk management, evidenced by wins at the InsuranceERM UK & Europe and Americas awards this year.

Earlier this year, it launched a software-as-a-service (SaaS) scenario analysis tool – called the Conning Climate Risk Analyzer - to help insurers assess the impact of climate change for strategic planning and regulatory reporting. In July, the firm added a range of environmental, social and governance (ESG) and climate change indices into its GEMS Economic Scenario Generator software.

Responding to InsuranceERM's technology guide questionnaire, Conning says insurers need to understand how different climate change scenarios might affect the financial markets and their holdings over a range of time horizons.

Moody's Analytics is also active in the climate risk space for insurers. For example, its Climate Pathway Scenarios service provides forward looking climate-aligned economic scenarios that can be built from a range of assumptions.

Commenting on insurance customer demand trends, Moody's Analytics says: "External scrutiny, corporate values, and financial impact are driving insurers to address climate challenges across a range of business functions.

"We are experiencing demand for risk identification and measurement relating to climate risk in economic and regulatory capital."

Colin Holmes, general manager at Moody's Analytics, also points to the significance of Moody's acquisition of catastrophe modelling firm RMS.

Holmes says the RMS acquisition will add a core P&C modelling capability. "We see breadth of capability as a real strength that enables us to deliver comprehensive solutions. Well, this investment will take that to the next level."

From Ortec Finance's perspective, it sees an increasing demand from clients for sophisticated economic and climate scenarios and solutions that can translate these scenarios into optimal balance sheet management decisions.

In addition to climate change, the provider adds there is increasing demand for integrating broader ESG criteria into investment decision-making and risk management processes.

Ortec Finance's head of research, Hens Steehouwer, comments: "The latest IPCC report, as well as recent natural disasters across the globe, clearly demonstrate the large and fast-moving impact of climate change on the world that we live in and in which insurers run their businesses.

"We are seeing more and more requests from insurance clients for climate solutions, and I think insurers are catching up with the pensions industry in that space."

Cloud

Insurers' renewed focus on cloud technology during the Covid-19 pandemic was highlighted as a clear trend in last year's technology guide, and vendors continue to develop software for deployment in the cloud.

Mark Saunders, a director in Conning's Risk Solutions group, says: "A couple of years ago, companies had concerns about security, stability and privacy with the cloud.

"Now, we often see SaaS as a must-have in terms of demand. One of the drivers is that clients want information sooner and management wants analysis in a timely manner — cloud helps to deliver that."

Modelling automation

The pandemic also highlighted the growing demands on actuarial and financial modelling teams to perform stress and scenario testing, to help inform corporate strategy.

Willis Towers Watson says its clients are increasingly moving modelling teams out of the "engine room" and taking the benefits and insights of the model around the business, to assist in risk-based decision-making in underwriting, business planning as well as the more traditional reinsurance management support.

"This is only possible if the teams can free themselves from the model maintenance treadmill which, together with the regulatory reporting schedules are causing many teams to 'run to stand still'," says Willis Towers Watson.

Willis Towers Watson’s global proposition leader for reserving, Christina Gwilliam, comments: "Forward-thinking insurers need to do things more often, at a more granular level; and when they do that, they need tools for automation and may need auto-interpretation and machine learning technology." 

Software Alliance (Sal) says insurance clients want an operational modelling solution that "has the flexibility to allow data and assumption changes". The ability to produce results on updated model versions without making custom changes to the system, while maintaining control and governance over model code and inputs, is also vital, the vendor says.

Meanwhile, Ortec Finance' Steehouwer sees room for improvement in the field of ALM modelling.

"Traditionally, a lot of effort goes into assessing the current balance sheet and corresponding short-term capital requirements. These are very important of course."

Steehouwer adds: "But another question is how to get insights into the potential future developments of the balance sheet under a wide range of scenarios, and how this is impacted by both the insurance product, as well as the investment strategy.

"One could call this 'dynamic ALM' compared with traditional more short-term static interpretations of ALM. Several insurance companies around the world are now picking up on the benefits of this dynamic ALM approach. The required technology is readily available, but does not have widespread use yet in the insurance industry."

IFRS 17

With the introduction of the insurance contracts accounting standard, IFRS 17, less just 15 months away, Holmes at Moody's Analytics says there is a broad range of preparedness. He explains some customers are well advanced, having performed significant test-runs already, while others have yet to select a vendor.

John Bowers, consulting director, EMEA at RNA Analytics, stresses the entire purpose of IFRS 17 is to create comparability with the accounts, which of course all comes down to the transition.

In his view, the transition process for IFRS 17 and that first reporting cycle "will not be as smooth as insurers would like it to be – or as future reporting cycles will be".

He warns: "Without a good grasp of your transition numbers early on, then you do not know how your IFRS 17 numbers will look at all."

Aptitude Software says it seeing IFRS 17 compliance as a massive driver for finance transformation.

Christophe Kasolowsky, executive vice president for product strategy and innovation at Aptitude Software, says if you pick any IFRS 17 programme currently, 75% of the budget is allocated to transformative aspects of the project.

"The recognition of the need to invest is there since we are talking about decades of consolidation and growth without any investment in back-end systems," he says.

Guy Shepherd, chief executive of Software Alliance, believes modelling will change for the better. However, he is "slightly concerned we are adding another layer of regulation with IFRS 17".

"My biggest issue with Solvency II was it was just another layer and did not fundamentally change the way people did modelling.

"I'm slightly worried the same thing will happen with IFRS 17. The way insurers work, it's such a tangled web of dependencies. My worry is that people will not use IFRS 17 as an opportunity to chop away the stuff that is no longer required."

In the US, similar accounting reforms are underway. The Long Duration Targeted Improvements (LDTI) to GAAP standards is due to hit large US insurers in 2023, and Holmes says that LDTI preparations are "clearly ramping up".

FIS, vendor of the market-leading Prophet solution, offers a fair assessment of the current insurance landscape by highlighting that industry challenges and the global pandemic are driving the need for insurance companies "to do more, more quickly and in different ways".

The firm says speed and agility have never mattered more, such as when it comes to making changes to risk models and running those models with additional scenarios and stresses.

Martin Sarjeant, head of insurance risk solutions management and strategy at FIS, comments: "Insurers are demanding systems with strong governance and flexibility, and are looking at ways to lower costs as they emerge from the pandemic." 

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