Skip to content

Flying blind in an adverse climate!

Jul 8, 2021

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《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。


  • 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。


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。



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。


  • 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。









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。

From → Articles

Leave a Comment

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: