Swiss Re’s climate resilience under different scenarios
The TCFD requests companies to describe the resilience of their strategy, taking into account different climate related-scenarios including one of, or less than 2°C increase. In principle, it would be possible for us to compute the potential long-term effects caused by climate change on AEL based on today’s re/insurance book. However, we do not consider this to be meaningful as a stand-alone exercise, for the following reasons outlined below.
Looking at climate effects in isolation would mean ignoring the other factors that will shape Swiss Re’s future re/insurance book and thus also our future AEL. These include our strategy and risk appetite, market conditions, capital costs, insurance penetration, storm hardening and other climate adaptation measures. Since our re/insurance book and current AEL are the result of a complex interaction between all of these factors, any future scenario would have to consider all of them, in the process rendering the effect of climate change on the resulting AEL marginal.Moreover, the future AEL for Swiss Re’s weather-related re/insurance book will depend both on our future market share and scenario projections of overall business volume. Independent studies have shown a wide uncertainty range for future market business volumes (see eg Kunreuther et. al., 2012)1, thus rendering any long-term projections highly uncertain.
On a societal level, our Economics of Climate Adaptation studies have shown that climate change can lead to an increase of economic losses due to weather risks of up to 30% within the next 25 years. More importantly though, economic development, urbanisation, higher population densities and asset concentrations in flood plains are expected to be the dominant factors in increasing weather-related economic losses. As these factors become more pronounced, our models will gradually factor in this trend, since they are updated and refined at regular intervals.
To summarise, we do not consider climate change to be a single factor posing a fundamental threat to the resilience of our business. It is one of many equally important factors we will need to take into consideration when shaping our future business strategy. A key precondition for our ability to continue acting as an ultimate risk-taker is diversification, with regard to regions, lines of business, sectors and clients. In a world of strong or unmitigated climate change, however, the proportion of weather-related risks we could re/insure would decline and the protection gap would likely increase further. In light of the above, we are developing qualitative scenarios for physical and transition risks to be considered as part of our strategic business planning.
1 Kunreuther, Howard; Michel-Kerjan, Erwann; and Ranger, Nicola, “Insuring Future Climate Catastrophes” (2012). Published Articles & Papers. Paper 171.