Insurance Asset Risk Awards 2023 - UK & Europe

Model and map climate uncertainties

Willemijn Verdegaal, managing director for climate and ESG solutions at Ortec Finance, explains how the company's climate solutions help insurers to take an integrated approach in their investment decision-making

How is Ortec Finance helping insurers to address climate risk?

Willemijn VerdegaalWe offer our clients forward-looking climate scenario analysis. That really helps clients identify climate-related risks and opportunities for their assets and liabilities. It also helps our customers consider where they might want to concentrate more assets, or where they may have to mitigate risks.

It is also important to mention that we model the transition and market risks from climate change. On the physical risk side, we have specific modelling for slow onset events, specifically the relationship between a rise in the temperature and economic productivity, but also extreme weather.

This is all very informative for insurers and helps them set their risk management strategies, as well as support their reporting and disclosures.

We really appreciate all our clients and partners, such as Cambridge Econometrics, which is a very important partner on the macro modelling side.

It is through that ambition to try and model better and better, and working in collaborative client and service provider relationships, that has really improved our services and pushed our innovation.

What are the major challenges insurers face in the transition to net zero?

Training, education and building awareness are the main issues. Climate risk modelling is quite a technical field and there is plenty of scope for upskilling insurance professionals in this area.

When we look at net zero, it is about reducing an investment portfolio's contribution to climate change, as well as managing the financial risks of that decarbonisation trajectory.

These two sides of the coin need to holistically contribute to the net zero journey. Modelling and measuring these aspects are important and they need to be done consistently. It is no use having a model on one hand, and a different set of assumptions on the other. That is what goes wrong in practice. Consistent modelling and implementation are vital.

What should insurers be aware of when choosing climate scenario solutions?

The quality of models and the quality of the research is obviously important. Questions that insurers should consider include: are there ties with academia? Is there rigour around the assumptions and are the assumptions and models transparent? In addition, is the provider very open about the limitation of the model?

Coverage is another aspect for insurers to think about and it is worth asking a vendor if a model covers a range of climate risks and asset classes.

We can also see that regulators have been active in climate stress testing during the last couple of years, with for example, the NGFS and the CBES scenarios. We absolutely welcome those initiatives because they really increase awareness about the importance of climate scenarios.

However, I would also put a plea out there for people to keep thinking for themselves. As an investment professional, you need to stand by your choices. You need to be aware of the assumptions in the models and their limitations.

I am quite afraid of unintended consequences of all these regulatory scenarios causing complacency and potential tick box behaviour, which will not help in taking responsibility for risks. It could even lock people into taking very similar decisions because they are all using the same models and assumptions.

On the flip side of this, we have advanced clients with personal views about the way climate pathways may play out, and we are able to build bespoke scenarios for them.

Are there any ESG insurance solutions Ortec Finance would like to highlight?

I would really like to highlight the ClimateALIGN tool that we are bringing to market. ClimateALIGN generates an Implied Temperature Rise score as a forward-looking portfolio net-zero alignment metric via an on-demand self-service platform.

It allows financial institutions to measure, manage and monitor their net-zero portfolio alignment. As Ortec Finance is independent and serves as a third-party analytics provider, it allows for an objective perspective on true alignment progress. While ClimateMAPS identifies the impact of climate change on investments, ClimateALIGN identifies the impact of investments on climate change. Both solutions can be used independently, but also complement each other.