Looking more ahead and less behind

Looking more ahead and less behind

Munich Re’s Scott Hawkins explains why the solutions to understanding and dealing with future climate risks won’t be found in the past

By John Deex

Adecade ago the local insurance industry’s approach to climate change could be summarised quite simply. Insurers relied on solid evidence, not predictions of what might be, and as products are reviewed annually the industry could adapt as necessary.

Not any more. Recent years have seen the industry take a much more proactive stance – and none more so than Munich Re.

The giant German-based reinsurer carries out its own research into possible risks and acts on it, with its Australasian Managing Director Scott Hawkins saying the old ways don’t work when there is a stepchange in the scale of the threat.

“[The approach] is changing for a couple of reasons,” he tells insuranceNEWS. com.au. “With climate, it’s easy to say it’s incremental, so therefore I can adjust every year. But then what you can end up with is a step-change.”

He gives the example of Hurricane Katrina in 2005, which caused destructive floods that covered more than 80% of the city of New Orleans.

“The levee was breached and the water could not escape. Given this was unexpected it changed views instantly rather than gradually over time.

“I think there are a couple of reasons why everyone’s looking more to the future. There’s plenty of evidence to say things are going to change, and not in the positive. Also, we now have the technology where we can be more predictive.

“In the past we relied on more standard actuarial techniques looking at what has happened previously to predict the future. Now we have the capabilities to predict the future based on the current data and evolve going forward.”

Munich Re uses its research to inform its products and pricing, but also aims to be an opinion leader “to help shape what others should be doing to improve the landscape”.

It has the expertise to be able to advise governments on where they should be building, for example.

Mr Hawkins is circumspect about the upcoming cyclone reinsurance pool devised by the Federal Government, and suggestions that it should be expanded to cover all flood risks.

He says reinsurance pools make sense when there is no capacity available, such as with terrorism after 9/11. But there is capacity for floods and cyclones.

Pools are one way to improve affordability, but they don’t address the underlying risk, and caution is required.

“It’s not a capacity problem,” he says. “It’s more of a discussion around whether the price is affordable for people to buy those products. That’s one reason to put things into a pool.

“But what I would say is, you need to be mindful that you make the right decision for the long term.

“We just need to be mindful that it creates a long-term sustainable product, that we don’t have the wrong risk signals, [and] that people don’t stop trying to improve their risk, or else you’re delaying the inevitable.

“In the end any arrangement, whether it’s self-insured, given to the private insurance market, or pooled and put on a government balance sheet – the losses are the same.

“It’s just who pays for those losses in the end.

“What we absolutely as an industry, and also as Munich Re, are encouraging governments to focus on is mitigation and resilience. It’s not just about making something slightly more affordable.”

Mr Hawkins sits on the Insurance Council of Australia (ICA) board and shares ICA’s belief that increased spending on resilience is vital.

That includes better land-use planning, so that “we make the right decisions on where we build going forward”.

It’s a message that, in the wake of the devastating east coast floods, appears to be getting through.

Mr Hawkins notes that when the cyclone pool plan was announced, so too was significant mitigation funding.

“The Government is publicly more committed than it has been in the past.

“We will watch with interest, and we also want to help inform the Government on where is the best place to put those funds for maximum impact.

“But I think, in the end, we need to come back to the premise of a long-term sustainable product.”

But what about those communities where no amount of resilience spending will reduce the risk to an acceptable level?

Mr Hawkins says tough discussions about relocation may be necessary.

“It’s a really hard one, to move someone from where they maybe have lived their entire lives to somewhere else.

Future focus: Munich Re’s Scott Hawkins

“It’s always good to use an example of where that’s happened somewhere in the past, and that was a decision that had to be made in New Zealand.

“After the Christchurch earthquake, there are parts of Christchurch where you had liquefaction and [the land] can’t be repaired, so it was termed the ‘red zone’.

“The New Zealand Government determined that it shouldn’t rebuild in that area. So there was a compulsory acquisition of properties. Then new suburbs were designed and built elsewhere.

“Now, that’s a really hard one. That’s not one for a reinsurer or the insurance industry to decide on its own. But if your property’s going to be that exposed, and if you can’t make it resilient or mitigate it, it may be a discussion that has to be had going forward.

“Particularly if things evolve and get even worse from a climate change perspective, then there could be some areas in Australia that become unliveable.”

If climate change is causing a “stepchange” in natural catastrophe risk, and carbon emissions are causing climate change, then shouldn’t more be done on this issue?

Mr Hawkins points to the latest report of the United Nations Intergovernmental Panel on Climate Change, saying that it shows that “the longer we take, the less likely it is that we’re going to be able to limit global warming”.

“That window of time to act is also starting to close, and some of the effects will not be able to be reversed.”

Enabling transition: Mr Hawkins wants to help protect green technology

But he does believe Australia has ramped up its response in recent years and there’s now “real action”, illustrated by the number of companies that have “signed up to net-zero 2050 type agreements and targets”.

It’s a tough one to do quickly, he says, and no industry can do it by itself, but the insurance industry “is steadfast in helping to make it happen”.

“We certainly have already done our own work in terms of coming out of a lot of fossil fuels, on the asset side of the balance sheet, and also continuing to go down that path on the underwriting side.

“But I think the biggest role to play would be in helping companies transition to the new technologies. So it’s one thing to say we will stop fossil fuels and start green technologies. We all agree that’s what we have to do.

“But those things also need to be insured. There’s no point having solar farms if you can’t insure them. That’s our focus – how do we provide products and services to help that transition, whether it be wind, solar, or hydrogen?”

As to whether the transition should be moving faster, Mr Hawkins says people will “see more coming from the industry shortly”.

“If I think about the overall debate in the past five years, it’s gone very much from trying to push the Government, to shareholders pushing all companies to create that change.

“It’s shareholders, it’s lobbying groups, so I’m sure that there will be faster change. It’ll be driven from multiple angles – regulators, shareholders, governments, and the companies themselves wanting to do the right thing.”

Mr Hawkins acknowledges the move away from the fossil fuel industry is “a really difficult debate”, due to the country’s historical reliance on it.

He also refers to last year’s Senate inquiry into regulation of investment in export industries, which has been critical of insurers and banks for “abandoning” the fossil fuel sector.

“But it’s not an essential service in the sense that you have to provide it,” he tells Insurance News. “So my response would be, it’s not about supporting or not supporting that industry, it’s about doing the right thing for the whole country.

“If we want a sustainable country to live in going forward, we can’t stay being reliant on [fossil fuels], because we know what the impacts are.

“I think Australia’s actually in a good place because we have an alternative. We have lots of open space. We have a lot of sun, and we have lots of wind.

“So as a producer of green technology and green energy, we’re very well placed – we just need to transition the technology.”

Serving future customers

It’s not just natural perils where a future-focused approach is required.

Mr Hawkins’ 230-strong local team provides most classes of non-life reinsurance business, and the needs of policyholders are changing.

“As an industry we’re very good at servicing the ones that we always did in the past. But what are the new exposures? How do we bring in new ideas and new thoughts into our team to help provide that innovation going forward?”

Munich Re’s strategy includes growing its core business, but also exploring new areas. For example, it wants to grow its cyber presence and help a broader array of clients.

“What we’re also trying to do is leverage our skills to see what types of risks other businesses have that maybe they would like to transfer.

“Then we would look at pushing more into things like banking and other types of financial services who are exposed to similar risks that our insurers are, but maybe which they currently aren’t insured against.”

Like so many in the industry Mr Hawkins says he “fell into insurance”, but – also like so many – he’s glad he did.

A graduate position at GIO was followed by a stint at the Australian Prudential Regulation Authority, before he rejoined the industry with QBE.

He arrived at Munich Re in 2005 to run the casualty department locally, before rising up the ranks to take charge of non-life reinsurance, and finally a year ago, become Managing Director.

He replaced Ralph Ronnenberg, who returned to Germany to become head of Reinsurance Controlling for the Munich Re Group.

The appointment of an Australian to lead the Australasian office was seen by some as unusual – Mr Ronnenberg and his predecessor, Heinrich Eder, were Germans with long backgrounds in Munich Re – but Mr Hawkins says he’s not the first local to take up the role.

“When I joined, Rhys Withers, a New Zealander, was the managing director here. And there was a gentleman called Alan Drake way back in the archives.

“I can’t tell you if he was Australian or a New Zealander, but he certainly wasn’t German!”