Rewilding Tomorrow's Insurance Markets

Can insurers and reinsurers tackle tomorrow's "terrible" risks today?

When speaking at an off-the-record meeting of insurers and reinsurers earlier this month, I was asked during a fireside chat when I first became aware of the insurance sector? My answer: nearly half a century ago.

We had set up Environmental Data Services (ENDS) in 1978, and I had taken on the role of editor of our flagship product, The ENDS Report. The idea was to break open the world of industry—and one of the first companies I visited was Cape Industries. Theirs was had already been quite a story, because their core product at the time was asbestos.

I first came across that ill-fated asbestos even earlier, when I was eight or nine. On a visit to the Amiantos asbestos mine in the Troodos Mountains in Cyprus in the late 1950s, I was told that asbestos was a miracle material, preventing fires among many other wonders. So something that insurers tended to insist on building owners using.

That same enthusiasm still enjoyed currency when I engaged the main UK trade association for the material in the late 1970s—but even they could see that the writing was already on their walls and ceilings.

Later, though my role as a judge on the Royal Society of Arts’ Better Environment Awards for Industry (BEAFI), which I had originally proposed in a report to the then Department of the Environment, I became chairman of The Environment Foundation—set up by an insurance syndicate, Clarkson Puckle, using a percentage of the profits they had earned in selling insurance cover.

The irony was that they eventually went into liquidation, partly because of their exposures to rapidly accelerating risks in the US market in the wake of 1980’s so-called Superfund legislation.

Deaf ears

I remember hearing at the time from some of those involved that almost 20 percent of the losses that almost collapsed the Lloyd’s insurance market back then came from risks associated with areas covered by the Superfund, among them contaminated sites, asbestos and radioactive waste.

The insurance industry had been deeply complicit in what we might call the “dewilding” of our planet. And in underwriting the risks associated with the continued exploitation of fossil fuels, forever chemicals and the like, you could argue that it remains a notable—if often invisible—dewilder.

The coming risk tsunami in the 1980s was obvious to anyone with open eyes and a moderately independent mind. Indeed, I had warned the main firm of UK auditors responsible for doing key audits of risks in the USA that a half-day session with managements that had every incentive to cover up, was asking for trouble.

Deaf ears.

Later, while at SustainAbility, we engaged both insurers and reinsurers (who insure the insurers), among the latter SwissRe—who were taking a growing interest in climate change and other natural disasters at the time.

Insurance deserts

A key part of the recent insurance fireside chat was about the role of insurance in enabling the coming transitions in energy and other sectors. New solutions mean new risks, with the necessary data taking a while to emerge. We also discussed the growing risk of so-called “insurance deserts,” where insurers simply give up on co vexing risks like those involved in climate-related disasters like hurricanes and flooding.

While in Edinburgh I had a call with someone I first met at a CEO roundtable at the 2024 World Energy Council congress in Rotterdam in April. This was Jim Barry, with a track record of working with firms like Morgan Stanley and Bain, before spending twelve years alongside Larry Fink at BlackRock. While with the latter, part of his role focused on the emerging sustainability agenda.

Now he is developing a reinsurance platform to tackle the risks likely to be associated with the sort of economic transformations heralded by the likes of RethinkX. Too much of the financial world, he told me, is run by “dyed-in-the-wool investors”—who need to wake up to the fact that sustainability is not a “left-wing agenda.” Instead, he argues, “the world has changed."

As a result, investors and insurers will be faced “with overwhelm over the next twenty five years.” As the economic transition takes hold, inevitably, new types of risks will emerge. And many of them will be internal to the transition itself—as when the solar thermal sector was decimated by collapsing prices in the solar photovoltaic power systems.”

Whether we are dealing with technologies involved in renewable energy, energy storage or electric vehicles, the risk data are much less evolved than for better-known, incumbent industries.

To help drive the transition—and he describes himself as “a change agent”—Barry, with partners, is planning to launch a major new insurance firm dedicated to shaping the market in appropriate ways.

The big insurance groups, he says, “are talking about this, but—though some now have specialised units—most are not yet doing enough.” That is striking, he says, because “the market opportunity is huge.” In that spirit, he is “starting big,” staking hundreds of millions of dollars on the outcomes, in the hope that they can be “catalytic for the industry.”

Later, as I was brooding on all of this, I read Rana Faroohar’s “Lunch with the FT” interview with John Neal, today’s chief executive of Lloyd’s of London. And I was forcefully struck by his description of the risk landscape the industry is now facing as “terrible.”

“Where there’s a problem, there’s a solution”

To begin with, the FT interview is upbeat. Faroohar starts with the good news, noting that Lloyd’s of London is the world’s largest insurance market—and that their’s is “a business that is booming in an ever-riskier world; last year was Lloyd’s most profitable since 2007.” But then comes the bad news.

You’ll never find an insurer saying, ‘I don’t believe in climate change,’” Neal says.”The frequency and severity of weather-related losses are exponential. The US had the highest number of congestive thunderstorms in 10 years last year, and it’s already worse this year.”

One result is that the rising cost of insurance (Faroohar speaks of “nosebleed premiums”) is now encouraging some people to “self insure,” in the hope that they will have enough put by when the crisis comes to dig themselves out of the hole. Insurers are now seeing “a very bifurcated market in many areas, where both insurance and self-insurance are luxuries for the rich, while the most vulnerable can afford neither.”

Triple bottom line, anyone? Neal notes that as insurers become smarter about the risks involved, “the answer can’t be, ‘sorry we’re not going to insure it at all in places like California or Florida.’”

State Farm and Allstate aren’t the only insurers publicly pulling back from what are seen as higher risk markets in places like California. If this trend continues, Faroohar wants, “the end result of that will surely be massive and economic costs.”

Neal concludes that the insurance market is now “at a tipping point,” which will require very different types of partnership between the public and private sectors to managing what Faroohar describes as “skyrocketing risk.”

On top of all this, we now have what Neal describes as system risk, from financial crises to the fall-out of interest-rate hikes and inflation, to pandemics, war and supply chain challenges. “The complexity of what we are dealing with today is dramatically different than in the past, Neal confides. “It’s terrible.” But, he continues, “Where there’s a problem, there’s usually a solution.”

While Neal seems fairly confident that the insurance world can ride out the political storms created by the right-wing surge in the EU elections, and even a second Trump presidency, Faroohar is much less sanguine. “The reality is likely to be much harder-edged, insular, xenophobic and protectionist,” she concludes.

Time to look at climate advocacy?

So how will the insurance and reinsurance sectors need to evolve to cope with the coming challenges? And how can they ensure that they detect emerging risks associated with the energy and other economic transitions in good time and good order, helping insurgent innovators and incumbent businesses alike to do what they need to do?

Neal sees “more scientists, data analysts and mathematicians” as part of the answer. But it’s hard not to conclude that this whole industry needs to do a lot more to wake up both the public and citizens sectors to tomorrow’s very different risk landscapes. Neal may believe that there are no climate sceptics in insurance, but what about in linked sectors and in the relevant trade and industry federations?

As a first step, is it time for Lloyd’s to join companies like Unilever in taking a much closer at the line such federations are taking on behalf of their members in such areas as the climate emergency? I think it is.

And if you want to know more about the evolution of my thinking, June 18th 2024 saw the release of my 21st book, a memoir called Tickling Sharks: How We Sold Business on Sustainability (Fast Company Press). Available in good book stores and on Amazon, in hardback, paperback, Kindle and audio formats—the last being th first audio version of one of my books that I have voiced myself.