What trends are you seeing around this risk?
The World Economic Forum, with support from Marsh & McLennan, published The Global Risks Report 2020 which provides a perspective on the major threats in 2020 and over the next decade.
Climate change is a big concern from both likelihood and impact. This could broadly impact upon all areas of business, from physical damage to delays in shipping or trade routes and impacts on healthcare. It is a hugely prominent risk for most businesses.
What role can captives play in insuring against climate change?
Captives can provide support for those lines of business which will be negatively affected by environmental events (such as physical damage), particularly where commercial insurance rates may become too expensive or less cost-efficient.
A captive can also provide access to alternative markets and risk financing to transfer exposure, such as reinsurance. Additionally, it can also be used to fill gaps in coverage where none is available in the commercial market.
Captives and commercial insurance work well together; the benefit with captives is the flexibility in coverage, while the commercial market is essential in terms of the scale of the risk.
A combination of captive and commercial insurance can optimise a company’s response to climate change. Understanding the risk is the first crucial point, before secondly calculating what exposure the organisation is willing to take, and what it wants to transfer.
ave you seen an increase in interest around insuring against climate change using a captive?
Climate change has far-reaching impacts across many industries. Over the last decade, more firms are taking weather-related events – such as physical damage, supply chain disruption and business interruption – into account in their captives.
What are the biggest challenges associated with this?
Naturally, the biggest concern is the threat to life and impact on livelihood.
This can be from more extreme weather events (such as storm or flooding) and in turn, how people, governments, and industries respond to these challenges.
Some of the most heavily impacted areas could be uninsured or have improper coverage, so it is essential to receive the right advice on mitigating these risks. Proper resilience and defence plans will need to be considered and implemented. For example, in the UK, more focus has been put on standardising flood resilience requirements
How do you expect climate change coverage to expand in the coming years?
The impact of climate change is different for each company but would expect to see climate change become a larger part of the risk management conversation.
This will both be from environmental impairment liability being more prevalent, and from these exposures increasing. This means that the damage caused by climate-related events could be huge, and unfortunately, increasingly common. Climate change has fundamentally changed as a risk and companies will need to be aware of how it will affect them, and the insurance industry – both captive and commercial – will have a huge role in mitigating the associated risks.
How do you expect this coverage to expand in coming years?
Per The Global Risks Report 2020, Figure 1, climate risk is expected to be one of the biggest future risks in terms of likelihood and impact. More so than many other risks, this crosses classes of insurance and industry and will affect property damage and business interruption, supply chain, liability, employee benefit covers, and more.
Companies will have to be increasingly sophisticated in understanding its impact on their businesses, and seeking advice on the ways to manage this risk will be crucial. Captives can sit at the centre of this and are likely to increasingly play a role in these areas in the future.
Firstly, captives have always been essential vehicles for managing companies’ risks. Given their flexibility and bespoke structures, captives could be at the forefront of a company’s risk management plans given the potential to access reinsurance markets, insure the difficult to insure or uninsurable, and participate in multiple levels of a company’s insurance programme.
