Flying blind in an adverse climate!

Poor pricing and reserving do not bode well for insurers as the #ClimateCrisis worsens.

Just as the Indian insurance market was beginning to open up to private players, two companies – one in Australia (‘HIH’) and the other in the UK (‘Independent’) coincidentally went into run-off. For similar reasons. Pricing and reserving! Underlying these two was poor corporate governance. Why is it important to revisit? One, most newcomers to the Industry perhaps missed out on them. Two, in a world besieged by Climate Crisis – these reasons will play out yet again. However, the ground has moved significantly since then. The canvas has widened into ESG (environment, societal and governance).

HIH saga

In The Inside Story Of Australia’s Biggest Corporate Collapse Mark Westfield documents how: ‘The plot of the HIH soap opera is familiar – the insurance company collapsed in 2001 with debts of about $5.3billion, which Ray Williams and his cohorts achieved through gross mismanagement, largely charging too little for premiums and failing to put away enough to pay out claims.’

The HIH royal commission probing the collapse of HIH turned out to be a very costly case study into how not to run a company, a poor corporate governance culture and risk management gone wrong. So what can corporate leaders learn from Australia’s largest ever corporate collapse?

• Using qualified & experienced directors does not guarantee success.
• Directors must probe senior management and ask questions.
• Directors cannot abdicate responsibility.
• Long term strategies need to be developed and questioned.
• Do not do business with a company related to directors/management.
• Be very diligent during mergers and acquisitions.
• Accountability and propriety is essential at all levels of the organisation.
• Risk Management should go beyond statements, guidelines and policies.
• External regulators need to be more proactive.
• Culture affects behaviour and behaviour will ultimately affect performance.

How Independent?

‘The demise of Independent left 500,000 individuals and organisations from the London Fire Brigade to the Oval cricket ground to Somerfield supermarkets and the McLaren Formula One racing team seeking new cover, cost more than 1,000 people their jobs and will almost certainly lead to a further 1,000 losing theirs eventually, and punched a hole in the investment portfolios of thousands of shareholders.’ Chris Blackhurst traces the life and times of the CEO Michael Bright in his piece The fall of the house that Bright built. The meltdown at Independent Insurance took the City and thousands of policy-holders by surprise, he observes. Yet the signs of impending disaster had been there for years, with only the charisma of its chief executive, Michael Bright, to hide the danger.

Bright, as Blackhurst points out, realised that by not building up reserves and putting cash aside for an event that may never happen he could grow profits. How did this translate into the company’s last four annual reports arithmetic? Gross premiums rose from £438m to £830m, almost double. But the outstanding claim reserve barely moved, from £354m in 1997 to £372m in 2000!

Climate Crisis is staring us in the face

‘Finance & insurance is increasingly hard to procure for high emissions fossil fuel industries. Nothing surprising about that! Global insurers will inevitably price in carbon risk, to protect shareholders & deliver on their treaty obligations – believes Tim Buckley of IEEFA. The issues involved are beyond insuring and investing in fossil fuels.

Shareaction recently analysed how the top 70 insurers in the world are performing?  Here are their findings:

• Majority of large insurers do not live up to their role as ‘risk experts’ as they fail to adequately address systemic risks such as climate change and biodiversity loss.
• Insurers’ boards remain ill-equipped to appropriately manage the environmental and social impacts of their organisations.  
• Despite the insurance sector’s focus on risk, the world’s largest insurance companies are largely failing to assess the impact of climate change on their investment portfolios.
• Vast majority of insurers have not yet started to develop their approach to biodiversity loss. 

• Most of the world’s largest insurers show severe negligence of their impact on human and labour rights across their investment and underwriting activities. 

A special report by ratings agency AM Best highlights as to how insurers and reinsurers that ignore ESG in their underwriting and investment decisions confront serious reputational risks. In turn, this risk can cause buyers and investors to flee to competitors, affecting the companies’ creditworthiness and ratings. 

With the likes of the IAIS (International Association of Insurance Supervisors) in a sleep easy mode and IFRS (International Financial Reporting Standards) having missed out on sustainability, responsible lawmakers have taken the lead. This is an extract from a missive shot by four Democratic party senators to the top eight US insurers:

As the leader of a major insurance company, you know the significant financial and economic risks climate change poses to both underwriting and investment. 

Economists, central bankers, financial regulators, asset managers, investors, insurance analysts, credit rating analysts, investment bankers, real estate professionals, and scientists have produced an enormous trove of research suggesting that climate change and the failure to plan for an orderly transition to a low carbon economy can produce staggering economic losses.  

These losses relate to the physical risk of damages caused by climate change or the transition risk of stranded fossil fuel assets as the economy transitions to low-carbon sources of energy. 

Physical risks of climate change pose a serious threat to insurers, both on your assets side and on your claims side. There is ample data that rising sea levels and increased storm intensity and activity will do substantial damage to coastal property values. 

In addition to sea level rise and coastal storms, more frequent and intense wildfires, riverine floods, droughts, and heatwaves will also result in very large losses, much of them insured. Indeed, the management consultancy McKinsey warns of massive physical risks that will increase “nonlinearly” as the earth continues to warm. 

Transition risk is also significant for insurers that hold large stakes in fossil fuel assets. One economic paper reports “economic literature combined with industry practices suggest the presence of persistent market inefficiencies for fossil fuel reserves, so these assets are likely to be stranded and mispriced.

Beyond pricing and risk transferring

Climate Change represents an existential threat and historical models are not predictive of the future. As more and more carbon gets injected into the system – risk grows by the day and is increasingly assuming a systemic form. Transferring the risk is not only insufficient as it does not solve the problem. Moreover, pricing without factoring for externalities will further inflate the carbon bubble for insurers. Therefore, this calls for what McKinsey prescribes – broadening the relevance of the industry and changing outcomes. Needless to mention the big clamour for Net Zero – what ought to be the last resort has become the first love. A license to greenwash.

In conclusion

‘With physical risk becoming increasingly hard to price – translation from hazard to exposure to damage and the manifestation of that in cash flows is just hard to model’. This just about telescopes the pricing challenges into reserving misadventure. Factor in the rising environmental and societal demands – would it mean insurers might be flying blind till such time a dependable navigation protocol appears on the horizon? Regulators, actuaries, analysts, auditors, customers, investors, risk-managers, run-off managers, shareholders et al have a lot to ponder and act upon. Looking back, an HIH or an Independent may appear a minor aberration?!

Translation into simple Chinese: Courtesy Yibo Fang (PG student at NUS).

在恶劣气候的迷雾中航行

随着全球气候日益恶化，不恰当的定价和准备金评估对保险公司来说不是个好兆头。

21世纪初，当印度保险市场开始对私人企业开放时，两家保险公司——澳大利亚HIH公司与英国Independent公司均由于糟糕的的定价和准备金评估能力被监管淘汰，而在这两者背后的深层原因则是公司治理不善。为什么现阶段重新审视这两个因素对于行业至关重要？一方面，当前行业中多数新成立的保险公司常会将其置于优先度较低的地位甚至忽略它们。另一方面，在现今这个被气候危机愈演愈烈的世界里，这些原因将再次成为影响公司治理的关键驱动因子。事实上，险企的经营治理基石板块早已变动，核心逐步扩展到ESG（环境、社会和治理）这个更大的议题。

HIH往事

在《澳大利亚最大企业倒闭的内幕故事》中，马克·韦斯特菲尔德（Mark Westfield）记录了HIH的破产原委：”HIH肥皂剧的情节耳熟能详——这家保险公司在2001年倒闭，负债约53亿美元。正是雷·威廉姆斯和他同伙们的严重管理不善导致了这一结果：由于定价错误使得保费收入被严重高估，但准备金评估不足使得公司没有足够的钱来支付赔案。

澳大利亚为HIH案成立的皇家委员会对HIH的倒闭进行了调查，并总结出了一个代价高昂的反面教材——高管懒政、糟糕的公司治理文化和风险管理手段致使公司破产。那么，企业领导人能从澳大利亚有史以来最大的企业倒闭中学到什么？

• 使用合格和有经验的董事并不能保证成功。
• 董事必须调查高级管理层并向他们提出问题。
• 董事要积极承担自己的责任。
• 公司需要制定长期战略并不时对其进行修正。
• 不要与董事/管理层关联的公司做生意。
• 在并购过程中要非常勤勉尽责。
• 问责制和合规在组织的所有层级都至关重要。
• 风险管理应超越报表、准则和政策。
• 外部监管机构需要更加积极主动。
• 企业文化影响行为，行为最终会影响绩效。

多么“独立”？

英国Independent公司（下文译为“独立保险”）的破产迫使从伦敦消防队到欧沃板球场，再到萨默菲尔德超市和迈凯轮一级方程式赛车队所涉及到的50万个体和组织重新购买保险，破产还使得超过1000名雇员失去工作，并给数千名股东的投资组合以重创。克里斯·布莱克赫斯特（Chris Blackhurst）在他的作品《布莱特建造的房子的倒塌》中回顾了首席执行官迈克尔·布莱特的生活时代。他指出，独立保险的破产令伦敦金融城和成千上万的投保人感到意外。然而，独立保险的破产灾难早有预兆，只有其首席执行官迈克尔•布莱特（Michael Bright）在竭力掩盖这一危险。

正如布莱克赫斯特指出的，布莱特意识到，通过不积累准备金和为可能永远不会发生的事件预留现金，公司可以增加利润。那么这一想法是如何反应在破产前四年的财报上的呢？据其年报显示，独立保险总保费从4.38亿英镑增至8.3亿英镑，几乎翻了一番。但准备金几乎没有变化，仅从1997年的3.54亿英镑小幅上调至2000年的3.72亿英镑！

气候危机正凝视着我们

碳排放极高的化石燃料行业越来越难以采购到合适的金融和保险产品，但这并不奇怪！IEEFA的蒂姆·巴克利（Tim Buckley）认为，全球保险公司将不可避免地为碳风险定价，以保护股东并履行其条约义务，这其中所涉及的问题不仅仅是为化石燃料提供保险和投资。

英国非营利组织Shareaction最近分析了全球前70家保险公司的表现，并有如下发现：

• 大多数大型保险公司没有履行其作为”风险专家”的角色，因为它们未能充分应对气候变化和生物多样性丧失等系统性风险。
• 保险公司董事会仍然没有能力适当管理其公司行为对环境和社会的影响。
• 尽管保险业注重风险，但全球最大的保险公司多数未能评估气候变化对其投资组合的影响。
• 绝大多数保险公司尚未开始开发应对生物多样性丧失的解决方案。
• 大多数世界上最大的保险公司在投资和承保活动中严重疏忽其对人权和劳工权利的影响。

评级机构AM Best（贝氏评级）的一份特别报告强调了在承保和投资决策中忽视ESG的保险公司和再保险公司将面临严重的声誉风险。另一方面，这种风险可能导致买家和投资者选择竞争对手，进而影响公司的信誉和评级。

由于国际保险监督员协会（IAIS）处于监管滞后、缺位状态，而国际财务报告准则（IFRS）等机构在可持续发展方面也未能如出一身，负责任的立法者已经率先采取行动。下文是四位美国民主党参议员向美国八大保险公司发函中的摘录：

作为一家大型保险公司的领导者，您应当清楚气候变化对承保和投资构成的重大金融和经济风险。经济学家、央行行长、金融监管机构、资产管理公司、投资者、保险分析师、信用评级分析师、投资银行家、房地产专业人士和科学家都通过大量研究表明，气候变化和未能计划有序地向低碳经济过渡，可能会造成巨额的经济损失。这些损失涉及气候变化造成的物理损害风险，或随着经济向低碳能源过渡而滞留化石燃料资产的过渡风险。

气候变化的物理风险对保险公司构成严重威胁，这一威胁反映在资产和负债两端。有充分的数据表明，海平面上升和风暴强度和活动增加将对沿海财产价值造成重大损害。除了海平面上升和沿海风暴外，更频繁和更强烈的野火、河流洪水、干旱和热浪也将造成非常大的损失，其中大部分都投保了保险。事实上，管理咨询公司麦肯锡警告称，随着地球持续变暖，巨大的物理风险将“非线性地”增加。

对于持有大量化石燃料资产股份的保险公司来说，过渡风险也很重要。一篇论文指出：经济文献结合行业实践表明，化石燃料储备市场效率始终低下，因此这些资产可能会滞留和被错误地定价。

超越定价和风险转移

气候变化代表着生存的威胁，历史模型无法预测未来。随着越来越多的碳被注入系统（风险与日俱增，并越来越多地以系统的形式出现），单纯转移风险是不够的，因为它不能解决问题。此外，不考虑外部因素的定价也将进一步加剧保险公司的碳泡沫。因此，这需要麦肯锡的处方——将行业之间的相关性和不断变化纳入考虑，更不用提社会对于“净零”的强烈呼声——“漂绿”本应是应对气候变化最后的手段，现在却成了最初、最美好的愿望。

结语

“随着物理风险越来越难以定价——很难用模型去反映从危险到风险的转换，以及现金流中这种风险的表现”。这使得大量的定价挑战变成准备金评估的意外事件。随着越来越多由环境和社会需求主导的风险慢慢浮现——保险公司可能会在迷雾中航行，直到届时一个可靠的灯塔出现？监管者、精算师、分析师、审计师、客户、投资者、风险管理者、合规经理、股东等有很多需要思考和行动的因素。回首往事，是否会有另一家公司重蹈HIH和独立保险的覆辙？！

本文首发于The Diversity Blog [2021.07.08]，作者Praveen Gupta，英国特许保险学会会员（FCII）。译文中如有错误和词不达意之处敬请谅解，一切观点以英文原文为准。