Climate change is recognised as a serious issue for the insurance industry, for our customers and for the wider economy. Our business model provides protection to our customers from many of the risks that climate change will bring.
The financial risks posed by Climate Change are recognised as an emerging business risk within the Group’s risk management framework. The risks can be divided into three categories:
- Physical risks include many weather-related risks arising directly from climate change. These include changes in the frequency or severity of flood, storms, freeze, subsidence or wildfire. Whilst these effects are predominantly a risk to the household and commercial property portfolios, periods of extreme weather can also have an impact on motor and rescue claim frequencies. The influence of climate change is difficult to isolate from the complex oceanic and atmospheric processes driving UK weather. The Group’s use of catastrophe excess of loss reinsurance mitigates against many of the worst potential impacts. Furthermore, the group regularly reassesses its use of catastrophe models within the actuarial and capital modelling functions to ensure they fully capture the expected trends in climate-related risks.
- Transitional risks arise from efforts to mitigate or adapt to climate change. These include the strategic and operational risks from the transition towards electric-powered vehicles. Whilst insuring electric vehicles doesn’t fundamentally change the business model, electric vehicles have their own unique risk profile, and pose different challenges to motor underwriters, accident repair centres, and to rescue products. The business continues to work with key business partners to develop the new processes, skills and technical knowledge required to keep pace with these changes in technology.
- Liability risks arise when parties, who have suffered losses from climate change, seek to recover from those they believe may have been responsible. There is some potential exposure to liability risk through commercial liability insurance. However, Pollution and Professional Indemnity covers, which carry higher risk, are almost fully reinsured.
The impacts of potential physical, transition and liability risks arising in the wider economy can also have an indirect impact on our investment portfolio through their influence on the value of our assets. DLG’s largest asset portfolios are focused on corporate bonds and during 2018 a significant new investment initiative was approved to ensure that environmental, social and governance issues gained greater prominence in stock selection.
The Group also monitors its own impact on the climate and has an established environmental management programme. The Group scores ‘B’ in CDP’s annual assessment of carbon management and disclosure. An emissions-reduction target for 2020 (based on a 2013 baseline), was established in Q1 2018.