How do you make the future insurable? With Convex Insurance

Speaker 1 Hello, and welcome to another episode of Shake and Not Burned. When we talk about climate change, we often focus on the physical impacts, things like floods and storms and droughts and wildfires. But there's another layer that's just as important. And that's how the risks of those events are understood, priced, and managed inside the financial system. Because insurance is a fundamental part of how the system works. It doesn't just sit in the background, it underpins whether any economic activity can happen at all. If you think about it, banks rely on it to issue mortgages, investors rely on it to finance infrastructure and businesses, while developers rely on it to build new projects. If something can't be insured, it often can't be financed. And if it can't be financed, it doesn't get built or expanded or rebuilt. So how the insurance industry understands long term risk effects everything, including whether or not new fossil fuel projects get built. And that's why changes in insurance availability and focus and understanding of uncertainty matters so much. When risks become too uncertain or too costly, coverage can be reduced, restricted or withdrawn entirely. And that's where the idea of the protection gap comes up. The growing difference between the losses caused by climate related events and the share of those losses that are actually insured. Today we're being joined by Rachel Del Hayes, who's the Group Head of Sustainability at Convex Insurance, to take a closer look inside the system that creates this environment. Because insurance isn't just a financial product, it's part of the infrastructure that shapes where capital can flow, what gets built, and ultimately who is able to recover and who is left exposed. Rachel, welcome to the show. Could you introduce yourselves, tell us a little bit about yourself and how you ended up at Convex? Speaker 2 Hi, so delighted to be here please here. So I'm Chief Sustainability Officer for Convex Insurance. I have been in insurance all my career. I was a chief risk officer of a previous insurance company and prior to that I'd been a broker. And probably about six or seven years ago I had been looking at climate risk from my risk perspective quite a lot. And I just started getting a lot more interest in the broader field of sustainability and the role of insurance in that. And then so I ended up taking a role with Convex where I was which is a relatively new company at the time, but where I could really sort of start to to build that strategy and framework of how we were going to address issues of sustainability and particularly our focus on climate and the environment in what is now a quite a substantial insurer. I. Speaker 1 Think you bring up a point that's incredibly important because I talked about risk quite a lot in the introduction. So I think maybe the first question I have for you is when we talk about climate risk, what does that actually mean from an insurer's perspective? What is it that you're trying to measure or predict or understand? Speaker 2 So climate risk has a few strands as far as insurer's concerned, but the probably the most apparent 1 is the physical risk. You know the floods, the wildfires, the storms, etcetera. And we are well used to natural catastrophe risks. So we look at it from a consideration of severity of how extreme it might be, the likelihood of that risk and how much what the impact is when when we start thinking about climate change. So what is the climate change doing to that hazard risk? And we have, and that's a really important part because you don't want to confuse it with matters like exposure. So for example, we will look at the hazard, which is the flood of the wildfire. We'll look at exposure, which is the amount of buildings exposed, that and where they're built, etcetera. And then the vulnerability. So what are they made of? There's been a flood, there's been a hurricane. It's all driven by climate change, right? So we're well used to natural catastrophes, but there's no question that that is going in a certain direction and particularly in some with some hazard more than others. It's important that we, we, we try and understand well what that is. So that's, that's what our and all of our analysis goes into. But the there are other aspects of climate risk, you know, so for example, there is increasing amount of cases of climate litigation, corporates being sued for being taken to court for us and, and some of that will come back to insurers. It's sort of increasing amounts of it. It's quite sort of low level. But you know that we can't ignore that, right? So we have to be quite why do we think about climate risk. We also said transition, how some of the sectors are transitioning, so energy and construction particularly that that affects us from insurance perspective, but also we're enormous asset managers as insurers. So we will have capital exposed to valuations of faculties and bonds in those industries. So we have to be alert to that as well. Speaker 1 That brings in two things that I think are very important. One is this idea that we have to remember the climate risk itself. When it comes to the physical risk, climate is a risk multiplier rather than the original thing. Am I right in saying that that it what you're looking at is how much more likely or how much more severe a particular event might become because of changes in the climate? Speaker 2 Yes. So what is that doing and what that really boils down to is, is there an increasing amount of uncertainty associated with that, with that, that that risk, that task free risk? We know there is, there is always uncertainty, right. You know, we have very good models, but there is always uncertainty and what climate change is doing is increasing the amount of uncertain and that's. Speaker 1 The thing that's hardest to manage, and I do not envy you because everyone on a very basic level kind of goes well. I've got insurance. If something happens, I'll claim on the insurance. It should be fine. But obviously as uncertainty increases, it becomes harder and harder for insurers to be certain about what they can and can't cover. I remember a comment 20 odd years ago from a senior reinsurer saying that the historical data was no longer something that could truly be relied on and the insurance industry needed to look differently at what would be happening next because of climate change. And where that gets really interesting is what that actually means inside an insurance company, because you mentioned that as insurers you're also asset managers. So that's things that you own and you have to think about the risk to those assets, but at the same time you're also deciding what to cover and what not to cover and at what cost. So I suppose the question there is what does climate risk mean in terms of the decisions that you make on a day-to-day basis? Speaker 3 You as an asset manager and what that does with things you own, but also about what you price, what you cover. Speaker 1 Yeah. Speaker 2 That sort of thing. So I would say the climate risk considerations are certainly much more significant for us, much more material on the underwriting side. Just to sort of close off on the asset side, we, we have to have a very stable and and relatively low risk set of, of, of assets and we don't have a sort of an enormous exposure to, to sort of climate vulnerability there. But I'll come on to that later. Perhaps there is interesting stuff we can do from a from a proactive perspective as an asset manager, but from a climate risk perspective. So what we're doing is using the models that we have to understand that risk. But I think you alluded to, there are people in our industry who rightly say, hang on a second, the models that you've got are based on this historic data of event sets and sort of probabilistic simulations of what that might look like based on a climate that particularly the last five to 10 years is not looking like it has done before. And particularly when you look at the charts that show you the increasing temperature in the last, particularly in the last 10 years. So that is affecting that uncertainty that I referred to earlier. And therefore we have to get, so some of the modelling companies have got some quite good models sort of upgrades of looking at what can sort of simulations, what does that look like. So that's sort of moving towards a 2° world. What is that likely to do to that increasing flood risk, that increasing severity of hurricanes etcetera. And I guess in many ways we do. We are in the insurance world where pricing risk on a 12 month basis. So most of the time our insurance policies are for 12 months. So we will insure for that. But obviously we are part of a system where we want there to be a resilient sustainable insurance, part of the economic makeup of the financial system. So we want that to be well established and we want that to be there for the long term. So we just don't, we don't want to just be able to say, you know, we're pricing for 12 months and this is what it is. We have to look and work with other actors in the financial system to say how can we make sure that that through resilience, proactive measures, etcetera, this can be more sustainable. Speaker 3 I think the real question here is how do insurers decide whether or not a risk is insurable well. Speaker 2 Insurers want to insure OK so so especially if you are like convex you know insuring big commercial you're in that could turn that task free world of insurance. We like that risk, OK. So sometimes it feels as if the the the rest of the world has just woken up to the fact that the insurance businesses, they're taking on enormous amounts of risk, paying out billions of dollars of claims every year after these massive catastrophes. So we like that risk, OK, We want to understand it. We want to take it up. That is kind of the reson debt of insurer of of catastrophe insurers like ourselves. But yes, you have to understand and you have to try and understand it as well as you can as you're going through. We work with with brokers, a big part of it. We work with the the the modeling firms themselves, as I as I've said. And then there comes a point where if the becomes too expensive, if the price for that, then that's where you can start to get onto this area of the protection gap. So then what happens in that instance, what happens when to the price that the insurer suggests is that is what they need for that uncertainty and that risk, where does it go? So then that's when you then bring in government assistance, etcetera. Obviously there's things like, you know, you know, are there flood defenses in place? Where's the bill? So there's lots of considerations in assessing that risk. So the risk itself is A and that that assessment process is a very sophisticated process. Speaker 3 I think that's what I'm trying to understand more about because there's what you talked about earlier, which is the hazard and the exposure and the vulnerability. But I'm thinking also about where that particular asset sits. You mentioned flood defences. So what is it that you're looking for, beyond hazard and vulnerability and exposure, that means something might be more insurable or less? To be blunt, I don't really fully understand where the boundaries are. Speaker 2 It is about understanding the hazard risk, right and different models helping you do that. It's about understanding where your exposures are and whether are there exactly when we go back to that terrain, are there flood defenses, what is the local state, what is this sort of support system there, What is there, what is the building made of, etcetera. But all of that will be to a certain extent that is factored into these models. That's why the models become quite important because quite a lot of that data goes in there. So that is not just a, a model that's telling you the probability of a hurricane going through at this. It's more than that. So it, the in that entire process is, you know, you've literally got a model showing you've got OK, so all these buildings in Florida are based there. We we know that that is the building codes in that area that have improved substantially from say the 1980s. So that means that the buildings have been built up for a certain point are much more robust. So there's lots of considerations and quite a lot of that will go into these models. And then you've got the underwriters themselves and they have sophisticated understanding of certain jurisdictions and they'll be specialists in certain areas etcetera. So it's really understanding the the risk of that like your property insurance, right, if you buy your house at yours, it's like a sort of sophisticated version of of that Adam for item. Speaker 3 And that does make sense. I listened to a talk that was actually about how many large scale properties in Midtown Manhattan were problematic because they're in a flood zone. All the electrics is at the bottom of the building and in a flood zone in these old buildings. That makes that property very hard to sell. And that's a different thing from insurance, but it is that thing of thinking, when was it built? How much money can you make out of this asset? Is this something I want to work with? Speaker 2 OK. So the brokers play a very important play, a very important part in helping the clients understand the sort of how to improve that risk, how to make it more insurable, right. So exactly your point about, you know, you know, electric sockets in the, in the, in the, in the, in low down the building in a flood zone area. So what, what are, you know, what are the sprinkler system like risk mitigation things that they can be really good as they're advising and, and they're incentivized to do that the buyer of the insurance because that brings down the premium. So it is a very commercial proposal because the more risk mitigation that you bring in, the more insurable you make it. And that is and the cheaper that and that's reflected in the cost because it's a very competitive market, right? There's lots of insurers compete meeting for that business and trying to lower down the price that and that's why it's really important that you understand is the risk because of the way in which that building's been built or the way out or the mitigation that does or doesn't have as opposed to the next one. Because they're both exposed to the same hazard or climate of the flood or whatever it is. And there were some good examples of that. You had some pictures of the old building standing that had withstood the fire so much better than others. Speaker 1 There's been a. Speaker 3 Shift, I would say in the last 18 months from commercially from a conversation about climate and risk and ESG, much more towards resilience. And what you're talking about is the importance, at least as I understand it, the importance of recognizing the difference that acting to build resilience can have on what you're doing and what you're building and where you're building it and how you're building it. And if you do it right, not only is that good long term, just generally for resilience, but actually it will lower your insurance premiums. So it's a win, win. Would that be fair? Speaker 2 It's true, but it's it's definitely something that government policy plays an enormous part in. So it can be quite difficult to motivate people to do that, to build with the stronger roof tiles, to have less flammable materials, etcetera. Government policy, I think in many studies just has an enormous impact. And that that example of Florida building codes is a good one because, you know, the bill buildings are built after a certain date withstand hurricanes so much better than other ones. There's lots of good evidence, but it is not necessarily the most popular decision from a from a local state or a local government from a politically. So that's where the challenges are. Speaker 3 I can see that because when there's a new way of building things or a new material that is more resilient or will withstand something, they tend to be more expensive. And politicians, as a general rule, don't like to suggest that everybody has to do things that are more expensive. Speaker 2 Actually, you had a really you had an interesting interviewee on a podcast talking about the building in industry and he spoke about how we know how to build more resilient buildings and we know how to build more low carbon buildings, but we just need to prioritize it. We do the yeah, investment funds are not going towards that. It's very frustrating because so much more could be done in that way, but if you building regs makes an enormous difference. Speaker 3 That's one of the reasons we actually do shake and not burn, because it's only by understanding how things like decisions about building codes and the price of insurance and how you build a building and how it's not as simple as saying, well, that's too expensive, I don't want to do it. That you need to think about things in the longer term and in connection with how all these different aspects of how our economies work actually work together. And if you can identify where those levers for change are, you can actually do something about it. And that is what's really fascinating. I think the thing I'd love to understand is when the future becomes more uncertain, how does that actually show up in underwriting decisions or broking decisions? Because you've talked about the difference between underwriters and brokers, can you talk me through how it looks different for different actors within the insurance system? Speaker 2 Well, as I say, it shows up in that level of, of uncertainty and then the problem that can then be is does it become if things become uninsurable, right. So then, so you've got a good example of that of flood risk in the UK. So flood, you know, I, I think it was after 2009, but there was an issue with, with, with flood risk. So that's where the UK government stepped in and created this thing called flood tree. And there's lots of other examples of that of the sort of government backed catastrophe programs in Europe, in the, in the US. But the flood tree is a good example. It works rather well because whilst you if you're in a flood prone area, you pay more for your insurance. We mean through which is backed by flood Re, but we all contribute as well. In fact, I didn't really understand this properly until I looked into it recently, but we all in our UK insurance premiums pay a very small amount towards flood Re and that's how it finances and the concept of insurance is about spreading the losses of the few amongst the many. So it's I guess it's a captures that well, but you pay more if you're on a flood zone and you can only get it for buildings built up to a certain point. So if you choose to build your building on a flood prone area beyond on a certain date, then you've got to bear the commercial cost of that insurance right, which could be prohibitively high. So these sort of. Speaker 3 Government programs come in. One of the challenges you have in the UK is that people build in flood zones because the government said that's fine, you can build in a flood zone. So. So one of the things that comes up a. Speaker 1 Lot. Speaker 3 Is are there examples where insurance hasn't been provided because of climate risk? Perhaps what's more interesting is what happens when that risk hits and what you do afterwards. Speaker 2 So the insurance industry is generally quite strong after a sort of massive catastrophe event. They are still there to continue to insure. And that's not, that's not that I can't speak for everyone. That's not the case in, in, in all for all companies, but it's certainly something that that Convex takes seriously. So as an example, in the LA wildfires last year, we had enormous underwriting losses from that. But I would say no more than expected. It was a very big loss. We knew we could get a very big loss from wildfire. We have capital and and reinsurance protection for that. So we continue to be there, right? So after that, we continue to ensure we will all learn lessons from it, OK. If there's lessons that that can be learned in terms of building in terms of, you know, whether aspects that could exacerbate the, the, the, the, the, the, the risk through whether there's electric lines there, whether you know, or the the usual sort of fire associated considerations. So lessons can be learned, but we will absolutely continue to to be there and ensure after the event and the same thing after large hurricanes. So I think it's important to note that insurers are learning from these event, putting their capital out there and and continue to charge for the risk and be there with their capital. Speaker 3 That's is LA building back with better protections. Do we know, you know, do we know what's driving it? If they are, is it insurance prices? Is it local government? Speaker 2 I mean, is a state that is very attuned to the and, and in absolutely no state of denial around the considerations of climate change. Okay, so they take it seriously for easily 15 years of community or 20 years I've communicated, I've communicated back returns to the California insurance Commissioner about climate risk consideration. So they definitely have been on top of this. So I without doubt they are almost suddenly learning from this that wildfire affected a lot of people, a lot of people who with with perhaps some consideration of particularly the cost that's going to cost them to continue to insure their their property. And if they weren't adequately insured, as I understand sort of 60% of that of the the homeowners in California were not or underinsured if if not absent of insurance, then they would want to be and then they will absolutely want to be alert to what can make that their house continue to be as affordable insurance as possible. Speaker 3 There's a really important point there about the protection gap, which is. Speaker 1 The. Speaker 3 Huge number of homeowners in that particular circumstance who were either underinsured or not insured at all. What do you think is driving the gap? Speaker 1 Because there's there's a couple. Speaker 3 Of things here that interest me, one, you've mentioned the idea that California is really aware as a state about climate change, but we are seeing some pushback from a lot of government bodies in different countries about action on building climate resilience. At the same time, the protection gap historically has been seen as one of those things that's not really an issue in the Global N, It's far more an issue in the Global S, But the LA wildfires kind of really highlighted IF6. If the 60% figure is accurate, that's a phenomenal number of people without insurance. So what? Why are people not getting? Speaker 2 Insurance, well, the protection gap is important to understand so that, so first of all in the protection gap is the difference between an insured loss and an economic loss. And in the business of natural catastrophes, that is roughly about sort of 40%. So 40% insured globally versus 60% uninsured is this sort of standard figure. So first of all, it's also quite important to get that in context. In the 1980s, that figure was about 15%, so 15% insured versus 85% not insured. So whilst there are areas of protection gap that are growing and it's alarming, OK and the reasons for that, but actually the picture is better than it was 50 years ago, considerably better. And probably the key reason for that is because insurers 50 years ago and even 40 years ago barely had the models that I'm talking about. So the models where you can put in all this data of the hazards of the exposure and get a better estimate of what that risks could be and and therefore allows insurers to manage their aggregate of exposure because we're taking on hundreds and thousands of buildings etcetera every year. So you've got to manage how bad a single to multiple events can be. So that modeling capability has really strengthened the understanding and I think that's been one thing as well as strengthen building codes etcetera. But I think that's probably the thing that's really helped improve insurers and their ability to take on these sort of big these catastrophe risks. So the picture is not as bad as it was 40 years ago. However, the areas of increasing protection gap let's and let's just talk for a second about the OECD world. So that that probably comes down to political decisions. There is no question that if you are going to even accept that these climatic effects are making flood risk and wildfire risk etcetera worse. And there's such obvious correlations between strength and building codes and, and, and resilience, you know, and matters of resilience. So and permitted, giving sort of building permission. There are areas where there should simply not be built. So you can't mitigate against coastal erosion forever. You have to just accept that that there's coastal erosion and therefore the building shouldn't be built there. You can't accept you. If you look at there's there's cities which have so much, the percentage of tarmac is so phenomenally greater than it was, you know, 60 years ago. If you're going to allow tarmac over huge areas of cities, then of course the flood risk itself is going to be exacerbated irrespective of climate change that, you know, insurers can do a lot in terms of helping with risk mitigation techniques etcetera, you know, pricing for it properly. But it's got to be a joint thing. It's got to be that the government policy has to come in and I think we have to be really aware of quite climate change is happening, right? There's no, there's no doubt about and, and a lot of it's baked in. You know, what's gonna happen the next 10 years going from 1/2 degree to two degree. You know, that is fake. So what does that look like? So kind of, you know, you wake up and smell the coffee, you know, what does that look like? Speaker 3 What's really interesting about your mention of tarmac is that thing about how flood risk is related to urban decision making and planning. Because water doesn't soak into tarmac the way it will soak into Earth. You know, It's not a complicated thing to understand. But if you build in isolation, if you make plans in isolation without considering the knock on effects, that's going to be problematic in a time of climate change. And I think maybe, well, you know, one of the roles of insurance is to actually help highlight the fact that these issues are connected and you can't look at them in isolation. Speaker 2 I think generally flood risk management is a really important thing as well. So the more a council or a country or state can do, I can think of little local examples near me except where they sort of deliberately try and contain something that floods every year in a certain area. And if you take proactive and say, right, we'll put some little sort of ponds going down that hill, that's becomes a natural reservoir for what is the regular flood risk. And then that takes it away from where it could then have a more disastrous effect further down the kind of pipeline. So look at the Dutch right? There's lots of good examples of intelligent flood risk management. So when we talk about this kind of circle of insurability, that's kind of what it comes into, right? It's so it's, you know, the insurers can do something, but there's so much fault that governments can and society the steps they can take to make the world more insurable. Speaker 3 We were talking about the protection gap, so and let's talk about. Speaker 1 The. Speaker 3 Protection gap in the emerging markets. Speaker 2 Obviously it's a much, much greater concern there because where that figure of 40% that I talked about globally in many countries in the emerging markets, it's insurance penetration is of the order of, you know, 3% or less and middle income countries, you know more, but not a great deal more. So it's a real concern and there's quite a lot of increased awareness of why that matters. So it matters to the global lending institutions, the IMF, the World Bank, etcetera, because what happens at the moment or what it's starting to change, but it's been a there's been not nearly as much in pre disaster risk financing as post. So what happens is that, you know, a country, you know, has a disaster and then you know, they're, they're they, they get a bailout from the World Bank or from from the IMF, etcetera. And, and if you can bring in pre disaster finance and and increase that in that or mitigate that protection gap that is bringing in the kind of not just insurance itself, but also the risk mitigation that sort of insurance tends to bring with it is enormously effective. And we work closely. There's a organization called the the Insurance Development Forum, which we are a part of. It was set up 10 years ago. It's like tripartite institution with the World Bank and the UND P and is led by a group of insurers. And that's all about trying to expand the footprint of insurance in the in the developing world. And indeed the kind of risk modelling capabilities because one of the reasons why you see much less in the way of insurance there is because there is less data, there is less modelling and there is a dedicated working group that I Co chair looking at that, that that's really sort of trying to incre improve just not just the capability of these countries and institutions in these countries to be able to model these risks, but also the data and have the tools, et cetera. But there, there is a sort of positive signs that this is being taken, that more has been done about this and that it's being taken more seriously. The, the, the addressing of the, the, the protection gap. One of which is that it's, whilst it's been a sort of, it is a problem of the global lending institutions. So also large corporates now have much greater insights into this sort of risks of their value chain. Speaker 3 So I was thinking about that. Speaker 2 Yeah. So, you know, 10 years ago, you know, Unilever, Microsoft, whatever were they thinking about the fact that they have a huge dependency on a supply chain, you know, a service provider in let's say, India or in somewhere in the Paris, the Southern hemisphere or somewhere that may be more vulnerable to climate change, the impacts of climate change than where they are. And and they may be well insured in some areas, but the risk mitigation, the insurance, the availability in, in in these other territories would is likely to be much less. So that sort of transparency actually from regulators as much as anyone is becoming quite acute. It's becoming sort of more pronounced. So, so as it becomes a more sort of clear vested interest in the why commercially you want to make sure that that there is a either insurance or risk mitigation that there is pre disaster, there is that there is resilience measures being put in place and that helps a lot. Speaker 3 I love the fact that you're bringing up resilience and pre disaster finance because one of the things that is crazy as an outsider when you look at it is the idea that you're paying for a disaster twice because you're paying for it when it and then you're paying for it again in order to build back. Whereas if you invested in the 1st place, it might not happen. And I know there are challenges around how you monetize avoided losses and how that's understood by the financial system and international lenders, but it just seems like common sense to shore something up before it falls apart. Speaker 2 Exactly. And fortunately, there's a brilliant example recently of where that you concede very directly why this makes financial sense for a country to and an institution to, to, to take this seriously. So Jamaica had a catastrophe bond in place. Now a catastrophe bond is basically an insurance mechanism and it just, and it pays, you know, it pays an amount of capital should an event occur. And that event is, is a sort of triggered by. So it could be that in this case, the strength of a wind, it could be for earthquake, you know, for the severity of an earthquake. But it's very sort of binary, you know, it happens and by doing that you don't. So it's quite useful in in situations where you may not have a particularly sophisticated insurance infrastructure and this this bond can pay and this bond can be invested into by both insurers and other capital market investors. So this cat bond was in place for Jamaica. They had terrible Hurricane Melissa last October. And that bond was was issued by the International Bank for Reconstruction Development on behalf of Jamaica. But it was part of a wider risk and resilience management program of Jamaica Moody's the rating agency increase. They improved the sovereign credit rating of Jamaica's in December and cited in doing so the risk mitigation steps that Jamaica taken the cat bond, OK. So that will have a direct monetary impact on Jamaica because their credit score is improved, their credit repayments. Speaker 1 Lower. Speaker 2 So that's the first time that we've seen that being cited in that way. But you know, to solve this, there's lots of players, right? And the rating agencies are quite important ones because if they can be recognizing that, then that will encourage the, the big financial institutions, the IMF's, etcetera to build more. And so if you ever are lending to a country, why wouldn't you say right, 3% of it has to go on resilience measures or whatever that so that they can be incentivized to put in place that sort of structure. So I think that's a heartening example of how we can sort of progress against this what might otherwise feel like an expanding protection. Speaker 3 Are we reaching a point where some risks are becoming fundamentally difficult to ensure? Speaker 2 So that's some areas of wildfire, you know, you look at some of these European wildfires, look at some of the areas of flood. And I think that takes you back to its questions of government policy and, and it's not a bad sign if it becomes an and all that means is it's prohibitively too expensive. So therefore, what are you going to do? You're going to have to improve your flood management. You're going to have to improve your, your wildlife or, and more importantly, you're going to have to take climate change super seriously because we're bringing this on ourselves, right? Speaker 3 That's an incredibly important point to make that the issue is not that insurers are not insuring, the issue is that if something becomes fundamentally difficult to ensure, it's a signal that things need to be done differently. I'm interested in what you think about the role of insurance in building resilience rather than just responding to losses. Do you think that is part of the role of the insurance industry or do you think that's, you know, I know we've talked about government, but I'm thinking about the financial system and lenders and equity? Speaker 2 Investors, yes, I think I, so I think from an insurance perspective, yes. And the more insurers can work with different institutions, particularly early on in construction, probably they are because we are typically offering 12 month policies. All these in a construction situation, it would be more like a 5 or 10 years for the the construction of the of the building. We had to have them engaged in the conversation early on is really important. So quite often the financiers that the banks lending the money for the project or where it's being raised, they are very involved and insurances can typically be brought in a bit later. And yet what you really want is that insurance being brought in early, particularly if it's new building types, if it's new technology, so that they're advising on it and this quite good examples where where they are brought. There's a new carbon capture and storage facility in the UK which has been insured, right. So it's ensuring this capturing this carbon is a really important part of transition technology trend, you know, transporting into an underground saline aquifer and then the containment risk of that carbon not, not, not not escaping for the next 10 years. And that's been insured. We've insured that along with a couple of other insurers. And that's then you know, that took a lot of sort of hard, tough understanding etcetera. But again, we were brought in probably not quite early enough, but but pretty early in the project. But just to say that, you know, insurance has a lot to guide in terms of the best risk management techniques etcetera, how we're going to go about pricing it etcetera. So I think the more insurance can be brought in early. Speaker 3 And working on things together, because one thing you said is that when some projects you're looking at insurance over 5 to 10 years and it's distinctly possible that the climate's going to get more volatile in the next 5 to 10 years and how likely it is that the circumstances have changed. So you need to be in those conversations at the very. Speaker 2 Beginning and I think that's an interesting point as well kind of banks, the asset managers are all now using climate models in a way that they did not right in 2020 years ago if they were financing. I mean, you know, I'm not an asset manager by the way, but I'm pretty certain that the kind of a, a huge expansion of climate models in that world is a relatively recent thing. And that's because they're looking and they say, right, exactly as you say, we're lending for the 2020 years. What does that risk look like? Now we have got tons more sophisticated hazard and, and, and, and climate models that that are in many cases are being are being used. So having that insurers perspective and OK, that's what the model might say, but how do you interpret that? The models are kind of a guide, right? There was an example the A bank in Asia showed me where they had been described the next 20 years risk of what that looked like for the site of where the hospital, whatever it was that was being built. But what about the all the adjoining the sort of wide area? What about the kind of the crucial Rd. that is bringing, you know, the so it's not just the site you have to look at all the other dependencies on that building for the next 20 years. So it's, and that's probably goes back to your original question about what are the things they're looking at. You know, the insurers are insuring the building and they'll pay when it gets flooded or burns down or whatever. But if you are looking at this from an investment perspective, there's a lot more climate considerations you have to put into that. But the, the regulators are, and certainly in the UK, you know, the PRA is increasing in its attention on how both banks, insurers are evaluating climate risks. There's just increasing attention on what we're all doing there. But I think insurers have a lot to contribute to that, to that I think insurers capital and how that can be used. So we for example, have an impact investment fund or an allocation of to impact investments. We will invest in environmental technology, in businesses that are progressive towards a circular economy, etcetera. In a in a way that's, you know, managed in a way that's managed sensibly and commercially. Also we can invest in insurers can invest in infrastructure and in fact one of there's a very good new fund called the Infrastructure Resilience Development Fund, which was initiated by the Insurance Development Forum that was is deliberately trying to target insurance assets being invested in areas of the emerging markets, middle income economies, infrastructure where it wouldn't normally, you know, because of our conservative risk capitize. Normally we it would be more difficult for insurers to invest there. But this has been structured in such a way that the World Bank's investment arm, the IFC is taking the junior tranche and we as insurers, as insurers, asset managers are taking this sort of senior tranche with some thought and structure and deliberate targeting. It's a way of making sure that insurers assets and their, their investment capability can be drive towards helping make a more insurable, more sustainable world. So I, I think that's a really good initiative. The funds being run by Black Rock, it's if we could do more of that kind of thing, I think the better. So it just takes, if people just focus, we're doing a commercial return, you know, we're doing it so that the risk is mitigated. But it just took some structuring so you can see the connection with, you know, right, there's a protection gap because you can't insure in, you know, Brazil or in wherever it is in Guatemala. And that's but but if you can invest the infrastructure, then in the infrastructure investing in energy and transport. So if you can make give them the energy infrastructure, you're more likely to have a power plant being or a data center, right or so being being based there and then and then that is more insurable because it's got a longer term energy source or it's more investable. So it just helps bring what is needed for ultimately economic stability and, you know, this cycle of insurability. Speaker 3 One of the things that would be great to talk about is, is the uncertainty of the science because we are constantly learning. We know the connection between climate change and physical risk. But I'm interested in this idea of when we learn new things, what actually changes in the business? Is it that the models update? Is it the prices change? Would that be that we can learn that something is not insurable at all? How does that actually work? Speaker 2 I think we are all slow to learn from the science. I think that people look at it. We're we're interested in tipping points. I think you get people that are like me, they're interested, right? And you get people that are looking at and then see what what will happen is that the the modelling companies and insurance will work quite closely with the universities, right? So there will be where they that academic research is being done. Then you know, you want to make sure that's being reference that that's been brought into models, but that that just takes some time. So you're sort of wider understanding is pretty important. And I do think the more we as insurers can contribute to that, then the better. So what that, you know, our our broader understanding of areas of climate science is our important part of the financial system. We all right time we're all affected by climate change and therefore the better we can try and understand that it's going to it's going to be to our benefit, right? It's going to be to the asset managers, the banks societies benefit. You know, we're big finance at houses, right? We have the means sometimes to help support and help leverage what universities can otherwise do. Speaker 3 But for listeners, if there's one thing that you would want people to know about what gets protected in the changing climate, what do you think it is people need to understand most? Speaker 2 I think they should understand that much of it can be protected. OK, we do need to work sensible. We need governments to take as a sensible approach to resilience. But much of it can be protected. And I would love it if there is tons of capital out there. In fact, another of your interviewees, I think his name was Paul Kidney, spoke about climate finance, Sean Kidney. And he talked about how there is, and he's right, there is tons of capital out there. We can do this. I would like to expand the breadth of insurance. Yeah, I'd like. And you know, places and buildings can be made insurable if they are built in sensible places, if they are built to sensible standards, etcetera. And there is, as I described earlier, a massive area of the world where the the insurance penetration simply is hardly existent. So we should use our the capital the world has at its disposal, which is enormous, to really make the world as resilient as possible. Speaker 3 Yeah, Rachel, thank you so much for joining us today. And I think what stood out for me most is this idea of how important it is we understand the role of insurance within a wider system, the knowledge and expertise that is there to work with other actors within the system, sort of to change the pathway forward. Because I think one of the things that stands out about insurance is that most of the time it's sitting quietly, ticking over, keeping the economy. But it can play a much deeper role than simply paying out after a disaster because it can help decide where the capital flows in the 1st place, what gets financed, what gets built and which areas or places or sectors slightly avoided. Because the reality is, is that when insurance is available and affordable, risk can be shared, investment becomes a possibility and recovery has a clear pathway. As our climate risks get more uncertain and more extreme, the systems we have in place are being tested. And that's because not only are the risks changing, but our understanding of them is. And we're learning every day how working together, we can change the way we meet the future. We're still learning how different parts of the system behave, whether that's the financial system or the climate system. We're learning about shifting weather patterns. And there's emerging areas of science like blue carbon, the uncertainty around what the science tells us about what the risks are. It all feeds in to how things are priced and whether they can be insured. But we have to remember that whether or not insurance becomes harder to access or more expensive, the issue doesn't go away. The cost is there, whether it's to households, to business or to governments. So then we have different kinds of questions, not just what the risk is and how we manage it, but who's included in the systems that manage it in the first place. So for the moment, thanks again for listening. 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