Net zero requires a holistic view of risk: Scor

Re/insurers must adopt a holistic approach to transition risk and physical risk or their commitment to net zero by 2050 is meaningless, Scor’s group head of sustainability has warned.

Speaking at a webinar hosted by The Geneva Association, Michele Lacroix explained how Scor came to realise climate change risk had blurred the line between investment and business, and asset and liability.

The webinar was held to discuss the third and final report produced by the taskforce on climate risk assessment The Geneva Association launched in early 2020. The report, Anchoring Climate Change Risk Assessment in Core Business Decisions in Insurance, provides guidance to re/insurers on how to produce forward-looking climate change risk information to support decision-making.

Lacroix is an active member of that taskforce, which mobilised experts from 18 of the world’s biggest property/casualty (P&C) and life insurers.

When Scor started looking at climate risk assessment on the investment side less than 10 years ago, the focus was transition risk because that was something familiar to financial markets, Lacroix said. This involved taking climate scenarios and “translating” them according to macroeconomic variables.

In that context, at a time of low and falling interest rates, it was easy to think like a financier and view an investment portfolio in terms of profitability, she said. This led to a lightbulb moment for Scor.

“It raised the question, ‘What is the impact of an interest rate decrease on the liability side?’ That was the first signal that we needed to have a holistic approach,” Lacroix told the webinar audience. “Otherwise, we would have continued to be quite comfortable with our invested assets, whereas as a global insurance company, we were also concerned about transition risk.”

That holistic approach began when colleagues from the business and investment sides of Scor discussed what each understood climate risk to mean. Although the P&C side understood climate risk “as the basis of their business”, Lacroix said, they were unused to thinking in terms of the long-term development of their port­folios. That meant sea level rises 10 years in the future or an increase in severity of natural catastrophes were not on their radar when assessing physical risk, so were not priced into physical assets, she said.

“The notion of a forward-looking scenario was just not on the table and so we would come back [from speaking with them] with forecasts of German wind and Japanese earthquakes, but nothing related to climate change. And so, we asked them, ‘What if? What if we change the scenarios with a climate change path, are you able to model those?’”

The conclusion was “something was missing” between the physical risk and transition risk sides of the company, she said. The result is, as head of sustainability, Lacroix is building an environmental, social and governance (ESG) data platform for both.

“It’s very tough to make it acceptable to both sides because their needs are different and the way they collect and use data is different,” she said, “but net zero is not the only target.”

The Net-Zero Insurance Alliance’s recently announced target setting protocol is “where we should try to land if we want to limit both our transition risk and our physical risk”, she said.

“It’s beyond risk management. It’s really much more a political and strategic vision of how the world should evolve, and the guys on my team are dedicated to that. When they’re asked how to allocate resources, it’s just natural for them to try and dig in as much as they can to detect new trends, to see ahead of the curve, what’s going to happen.”

That same mindset led to Scor starting three years ago to embed biodiversity into its investment portfolio, she said.

The key is to develop tools that are not limited to quantitative assessment, but also incorporate qualitative research, including ESG ratings on risk governance, such as disclosures by investees on how they are managing climate change risk, she said.