Sean McGovern, CEO, UK and Lloyd’s at AXA XL
Building resilience to climate change; the London insurance market’s role
The past year-and-a-half has been a period of immense challenge and tragedy, but we have also witnessed a remarkable display of resilience and adaptability as companies, societies and individuals have grappled with the effects of the global COVID-19 pandemic. Against this backdrop, however, the pressing need to address the changing climate has not gone away. Businesses and governments have continued to try to find ways to reduce carbon emissions and mitigate the risks associated with this existential threat.
At the United Nations COP 26 summit in Glasgow in November, attendees will debate ways to again accelerate global action towards achieving the aims of the Paris Agreement. That agreement requires signatories to commit to the goal of reducing global greenhouse gas emissions to limit the global temperature increase this century to 2°C – or lower – above pre- industrial levels. It not only requires countries to adhere to existing commitments to reduce greenhouse gas emissions; it behoves them to progressively strengthen those commitments
– and after November we can expect even more stringent international targets.¹¹
I’m a keen sailor and enjoy taking a boat out onto the water and experiencing that feeling of being close to nature. Sailors, of course, have always been acutely aware of the effects of the weather. And our own London insurance market traces its roots back to the days when our economy was dependent on maritime trade and fortunes could be made or lost depending on how the wind blew.
For many years, AXA XL has been engaged in research into the effects of climate change on the world’s oceans.14 Our Ocean Risk Initiative draws on the expertise of academics and risk and finance experts to try to highlight and define ocean risk whilst also working to find solutions to the threats to the – often vulnerable – communities that live on or close to the shoreline of developing economies across the world.
This work has examined the movement of fish populations, the degradation of coral reefs, the destruction of mangrove forests and much more, to better understand the effects of climate change on the ecosystems of the oceans. This research is not only helping us and others to better understand new and emerging threats and to put in place measures to protect marine life and communities directly affected by these changes, it also gives us valuable insight to devise financial solutions to transfer risk.
Insurance driving change
The insurance industry – and the London Market, in particular – has an important role to play in supporting companies across all industries to adapt to reduce carbon emissions and manage the risks associated with climate change. The London Market has a centuries-old reputation for innovation. And this expertise means that our marketplace is at the forefront of public-private efforts to help communities build resilience to climate change. Collaborative projects such as the insurance industry-led Insurance Development Forum and the UK government-backed Centre for Disaster Protection are working to provide training, tools and concrete plans to develop resilience through risk mitigation and transfer.¹²
Our parent company, AXA Group, is a leader on climate action. As an insurer and reinsurer, we are powerfully placed to make a real difference on this issue. Re/insurers can meaningfully contribute to the wider understanding of changing climate driven by our understanding of the changing hazard, the collaboration that we have with the scientific community and the unique position we have in the disaster recovery chain. We have also made -and continue to make – a real difference through the underwriting and investment decisions we take.
AXA has aligned its business strategy with the Paris Agreement and we have targets across every aspect of the business, from investment to underwriting to our own operations, to reduce carbon emissions. Those goals include reducing the “warming potential” of AXA’s investments to below 1.5°C by 2050. AXA also has a green investment target of €24 billion by 2023, a target which increased recently to €25 billion with an issue of green bonds. AXA has also committed to developing so-called “transition bonds”, which aim to fill the gap between those projects that already are eligible for green bonds and those which are not but which nonetheless are making big strides towards reducing carbon emissions.
As the P&C commercial division of AXA, we at AXA XL have an important role to play in helping our company, our industry and our clients to transition to a low-carbon economy.
For example, we have underwriting restrictions for power generation and mining clients developing new thermal coal capacity or with significant coal business, as well as coal industry partners, such as manufacturers and infrastructure players. ¹³ This is part of an AXA-wide, long-term exit strategy to reduce exposure to the thermal coal industry to zero by 2030 in the European Union and OECD countries, and by 2040 in the rest of the world.
Specialists
Bellwethers
It’s clear that insurers recognise the need to act on climate change. Our clients, our investors and our colleagues demand it. It makes business sense as well as being the right thing to do for our planet.
Some of the biggest risks facing our planet are directly attributable to changes in climate. Challenges such as water shortages, for example, are areas where the insurance industry can play an important role in trying to find risk prevention mechanisms and financial solutions to help affected communities recover.
I am proud to be part of a marketplace that is committed to playing its part in creating a greener future.
A greener future
Awareness of Environmental, Social and Corporate Governance (ESG) topics has grown in recent years, and it now forms part of the risk presentations that clients across many lines of business make to us. We are working with these organisations to help them to better understand the nuances and challenges inherent in ESG and the ways in which it impacts their risk profile, risk management, and risk transfer needs.
Our industry needs to adapt to these changing client profiles. Fortunately, the London insurance marketplace has always been a place where innovation thrives. The intellectual capital gathered in the Square Mile and within the underwriting room at the iconic Lloyd’s building makes it easy for ideas to take flight and become tangible risk transfer mechanisms for challenging, emerging and sometimes unusual risks.
While the Square Mile has – physically at least – been less busy than usual during the COVID-19 lockdowns, the players in our market – brokers, insurers, reinsurers, risk experts, actuarial scientists and so on – have continued to drive forward discussions on the very pressing issue of climate risk. Innovative risk transfer solutions and risk mitigation techniques are being devised and developed every day.
11 The exact wording on the 2°C limit goes beyond the original objective, targeting a temperature limit of 1.5°C, “holding the increase in the global average temperature to well below 2°C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5°C above pre-industrial levels, recognizing that this would significantly reduce the risks and impacts of climate change”.
12 For more information, see Insurance Development Forum and Centre for Disaster Protection.
13 1AXA (2018), The new division AXA XL adopts AXA Group’s sustainability and climate strategy
14 AXA (2020), AXA’s Ocean Risk Initiative