[2023-Oct-11] WG2 : Towards Greater Resilience: Understanding Physical Climate Risk

On October 11, 2023, the GIP Environmental and Climate Risk Assessment Working Group (WG1), co-chaired by Swiss Re and the Industrial and Commercial Bank of China (ICBC), held a seminar themed “Towards Greater Resilience: Understanding Physical Climate Risk,” inviting experts from banking, insurance, reinsurance, and professional services sectors to discuss how financial institutions can address physical risks.

In his opening remarks, Martin WEYMANN, the Head Group Sustainability at Swiss Re, emphasized that while transition risks and climate mitigation remain critical focus areas, it is equally important to address physical risks and adaptation measures. He highlighted the challenges posed by a rapidly changing climate, including rising sea levels, more severe natural catastrophes, and shifting water availability. Weymann noted that addressing these risks requires significant investment from financial institutions and active collaboration with governments through public-private partnerships (PPP) to better manage exposures and reduce risks, particularly in vulnerable areas.

DAI Xin, the Chief Economist China at Swiss Re, analyzed the global trend and impact of natural catastrophe in 2022. She pointed out that economic and insured losses caused by natural disasters continue to rise. Currently, the frequency and severity of natural disasters are increasing, and the combined effects of inadequate resilient infrastructure and high inflation induced by the pandemic have exacerbated these losses. It is expected by Swiss Re that in the future, insurance losses from natural disasters will grow at an annual rate of 5% to 7%.

Annie XIONG, the Head Public Sector Solutions China at Swiss Re China, shared how Swiss Re builds climate resilience through public-private partnerships. According to Annie, insurance companies has three major advantages in addressing climate risks: first, their strong quantitative assessment capabilities; second, their ability to participate in industry standard-setting; third, they can support social sustainability and economic resilience through insurance leverage. Leveraging their partnerships with stakeholders such as governemnt agencies and development banks, Swiss Re has been working to develop more innovative insurance solutions to jointly address the challenges of climate change.

TAO Lei, Assistant General Manager of China Pacific Property Insurance (CPIC), shared how CPIC actively addresses challenges posed by climate change to its operational resilience. She noted that as a direct insurer, CPIC focuses particularly on the direct impact of physical risks on its liabilities. Key actions taken include: first, leveraging technology tools to enhance risk prevention capabilities; second, deepening professional expertise to improve risk management levels; third, strengthening disaster management teams to enhance cross-regional coordination; and fourth, innovating product models, such as agricultural catastrophe insurance, livelihood protection insurance, and weather index insurance, to enhance the company’s resilience under climate change and support its sustainable development.

The panel discussion explored how financial institutions identify, assess, and manage physical risks. The session featured speakers, including LE Yu, Division Chief of Risk Management at ICBC; JING Mingzhou, Senior Manager of the Underwriting Department at Ping An Property Insurance; John ZHANG, Chief Risk Officer of Swiss Re China; and Elaine HUANG, Partner for Climate and Sustainability at PwC Hong Kong.

Panelists agreed that physical risks for financial institutions primarily stem from impacts on their operating locations and the value of their assets. On the liability side, financial institutions need to build robust catastrophe models and toolkits, diversify and transfer risks, and expand professional teams. On the asset side, incorporating ESG considerations into investment portfolios is essential.

All panelists emphasized that addressing the challenges posed by physical risks requires improved sharing and availability of climate data. They also highlighted the need for more financial instruments and adjustments to pricing mechanisms to account for the increasing intensity of disasters.