Insurance 2021 - the year ahead report [s]

Insurance 2021 - the year ahead report [s]

Insurance 2021: the year ahead

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Contents

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Introduction

Overview

As many of the world’s politicians and pundits have discovered, making predictions can be a risky business. With such an abundance of uncertainties and unknowns thwarting the efforts of businesses and governments to make long-term plans, a willingness to ‘stick one’s neck out’ this year may be in short supply. But the team at Clyde & Co have attempted to do just that. Our experts from around the world have pooled their collective insight to throw light on what 2021 has in store for the insurance sector. Reading through these predictions, one is immediately struck by the barrage of powerful influences converging at this point in time. Chief among them are the pandemic, the UK’s departure from the European Union and the new political administration in the US. But there are many others. The pandemic has unleashed a series of changes that are progressing at speeds that would previously have proven impossible. The pace at which electronic trading has advanced in the London insurance market since lockdown is just one example.

We have seen dramatic shifts in both social and economic patterns of behaviour. Commuters have forsaken their offices for remote working and a very different work-life balance. Many do not wish to return to the old status quo. Industries have questioned the wisdom of international supply chains, with many moving manufacturing back to their home territories, replacing relatively expensive human labour with artificial intelligence and automated production lines. While the pandemic has accelerated some changes, it has slowed human activity in other areas. Healthcare systems, both state-run and private, are creaking under the strain; backlogs of criminal and civil litigation that may take years to clear are building up. And all of this while the pandemic will continue to drive claims into and through 2021. But there are familiar touchstones in these predictions. Climate change is one. New regulations and a sense that the pandemic has created a window of opportunity for change is galvanising activists, pressure groups and politicians alike. Regulation is another. Out of disarray and conflict comes a desire seen internationally for clarity, transparency and fairness. 2021 may well hold the dubious distinction of being the most unpredictable year we have experienced for decades, but it is not beyond the realms of human

experience. Seismic shocks are always accompanied by reverberations. In the case of the pandemic and Brexit, these may take years to play out, but their effects can be calculated. What will prove harder to gauge, as risk modellers frequently tell us, is the human response. We live in interesting times and we hope these predictions help us all prepare for what may be in store.

James Cooper Partner and Chair of the Global Insurance Practice Group

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SECTION 1: Climate change

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2021 will see regulators adopt a united front on climate change

SECTION 1: Climate change

The change of administration in the US will super-charge the hotly anticipated global climate change conference, COP26, which will now take place in Glasgow in November 2021. In particular, it will accelerate the willingness of insurance and banking regulators around the world to co-operate in setting expectations and enhancing regulation regarding climate risk. US regulators are increasingly focusing on the topic. For example the US Federal Reserve has applied to join other banking and insurance supervisors in the growing Network for Greening the Financial System (NGFS) – a “coalition of the willing” committed to managing financial risks from climate change. New York’s Department of Financial Services, which joined in 2019, recently told the state’s banks and insurers that it expects them to integrate climate risk into their governance, risk management and business strategies (broadly in line with the Bank of England’s approach). 2021 will see more developments on this front. In Europe EIOPA is urging national regulators across the EU to ensure insurers take a longer-term view on the climate risk they face and integrate this into their risk assessment and strategic planning. Expect climate risk scenarios to be adopted across the EU and, ultimately, reporting to be made mandatory.

In Australia, Covid forced ASIC to pause its rollout of vulnerability assessments on climate change for banks and insurers. They should come out during 2021. UK regulators have been leading the way. Authorised re/insurers will have to meet the expectations set out in Supervisory Statement SS3/19 by year end and the very largest of them will take part in the BoE’s Biennial Exploratory Scenario (BES), involving detailed climate stress tests. UK re/insurers will also be gearing up for TCFD-aligned disclosures, which will become mandatory for most of them by 2023. Against this backdrop, we predict 2021 will be the year when re/insurers in many more countries will be making plans to improve climate governance, strategy and risk management.

Authors:

Nigel Brook Partner

Jacinta Studdert Partner

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Re/insurers will be on green-watch in 2021

SECTION 1: Climate change

Regulators in Europe and the US are expected to crack down harder on greenwashing in 2021 as so-called ESG stocks – those perceived to perform better against environmental, social and governance metrics – demonstrate superior market performance and attract ongoing high levels of investor interest. Greenwashing is the practice of making unsubstantiated or misleading claims about the environmental status of a business or its products, practices or services. Both the TCFD (Task Force on Climate change Disclosure) and SEC (Securities and Exchange Commission) are running consultations on how to improve ESG and climate change financial disclosures which are expected to report in 2021. In addition, 2021 will see regulated businesses, including re/insurers, required to give detailed consideration to how they will comply with the Supervisory Statement on TCFD reporting requirements, or alternatively to explain their non-compliance – a move that could invite significant reputational damage.

Already, examples of greenwashing are being brought to light. In January 2020 ENI, a state-backed energy company, was fined €5m by the Italian Competition and Market Authority for claiming its palm oil-based diesel was “green” when the production of palm oil is driving deforestation. In February, the UK Court of Appeal ruled in favour of green campaigners’ case against the Heathrow Terminal 5 runway decision, citing a failure to consider its commitments under the Paris Accord. At this time of mounting consumer expectation (and protection), ESG misstatements constitute a legal and reputational vulnerability. In a world of increasingly accessible litigation funding and an ever more sophisticated claimant bar with access to collective consumer redress remedies and class actions, consistent and accurate reporting around climate, sustainability and ESG promises will be essential. Businesses that get it right will be much more attractive to insurers both from a liability and an investment perspective. Carriers will need to exercise caution to identify those that stray into greenwashing as the cost of association with those businesses could be high.

Author:

Simon Konsta Partner

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2021 will see the heat turned up on companies and executives

SECTION 1: Climate change

2021 will see a sharp rise in climate change litigation against companies and their executives around the world as cases begin to impact more individuals across a broader range of sectors. Underpinning the rising concern around climate change are a range of cases – in the US more filings by cities and states seeking remediation from companies considered to be contributing to climate change impacts such as rising sea levels or increasing flood risks. In the UK, European, Canadian and Australian courts, by contrast, we are seeing more human rights cases typically brought by young people seeking to hold businesses and governments to account for failing to protect and preserve the environment for their and future generations. In the past three years, the number of instructions received by specialist climate teams at Clyde & Co offices as far afield as London, Europe and the US has more than doubled. Re/insurers are keen to work on responses to notifications and are starting to think about the position they will want to take as potential liabilities and losses rise, not just relating to oil and gas majors, but to businesses in other sectors too.

Banks, financial institutions and other regulated industries are coming rapidly into focus as the requirements for financial disclosure become more exacting around investment in fossil fuel assets. Now that some re/insurers are starting to pull back from supporting legacy industries including oil and gas, coal and dependent infrastructure, so the carriers and reinsurers that continue to be involved with these industries can also expect to come under fiercer scrutiny. With lobbing against climate change growing in scale, sophistication and impact, it is anticipated that the next few years will see an acceleration in the pace and scale of climate change related claims and losses and consequent coverage disputes. As the firm coordinates its activities across territories and disciplines, it has become apparent that re/insurers will need to be very clear both about their future underwriting strategy, as well as their investment strategy. Otherwise, like frogs in a warming pan, they are at risk of being overcome by the changing conditions.

Author:

Emma Ager Partner

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US insurance regulatory responses to climate change will accelerate in 2021

SECTION 1: Climate change

In 2021, the increasing effects of climate change and the response fromUS insurance regulators will create both challenges and opportunities for insurers. US insurance regulators will increase scrutiny of insurers’ disclosures regarding and efforts to manage potential climate change risks. Such risks range from unprecedented losses from climate-related natural disasters to concerns about hits to insurers’ investments in certain asset classes (such as fossil fuels as the shift to alternate energy sources proceeds in coming years). In 2021, US insurance regulators will continue undertaking various actions designed to encourage insurers’ climate change risk management. At the same time, US insurance regulators will likely increase their demands on insurers to accommodate the needs of insureds who are already being adversely affected by climate change. For example, the California Insurance Department’s mandatory one-year moratorium on insurers non-renewing or cancelling residential property insurance policies for policyholders living near a declared wildfire disaster may serve as a model for other US insurance regulators seeking to retain the availability of insurance coverages for policyholders hit by climate change effects which coverages might not otherwise be commercially sensible for insurers.

US insurance regulators will also increasingly facilitate the development of innovative insurance products to mitigate the risk of climate change for prospective insureds. For example, some US insurance regulators may follow a similar approach to the New York Department of Financial Services, which recently entered into a memorandum of understanding with the New York State Energy Research and Development Authority whereby the two agencies will cooperate to spur the development of new insurance and financial products “with the potential to de-risk and accelerate the development and deployment of key low-carbon technologies”. Whatever the future holds in terms of climate change impacts, we are confident that US states will look to retain insurance coverage options for their insureds and try to attract and nurture the growth of new insurance products that could help address the impact of climate change in their jurisdictions.

Authors:

Vikram Sidhu Partner

Jared Wilner Partner

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Ten features will set top re/insurers apart in 2021

SECTION 1: Climate change

As the industry gears up to deliver against the heightened expectations around climate change that COP 26 will set in train, we predict ten factors will differentiate global best in class re/ insurers from the pack. 1. The tone at the top will focus consistently on the risks and opportunities of a changing climate. 2. Re/insurers will focus not just on their own action on climate change, but will raise expectations of employees, clients and other stakeholders including agents, brokers and third-party service providers. 3. There will be a genuine whole of business appetite to understand and quantify the impact of physical, transitional and liability risks arising from climate change and increasing weather and natural catastrophe exposures. 4. Significant investment will be made in mining and analysing deep scientific >Page 1 Page 2 Page 3 Page 4 Page 5 Page 6 Page 7 Page 8 Page 9 Page 10 Page 11 Page 12 Page 13 Page 14 Page 15 Page 16 Page 17 Page 18 Page 19 Page 20 Page 21 Page 22 Page 23 Page 24 Page 25 Page 26 Page 27 Page 28 Page 29 Page 30 Page 31 Page 32 Page 33 Page 34 Page 35 Page 36 Page 37 Page 38 Page 39 Page 40 Page 41 Page 42

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