Axa XL’s Andrew MacFarlane: Bridging the gap between economic and insured losses in climate risk
A Bermuda company is playing an important role in efforts to mitigate climate change, and Bermuda’s young are a part of the generation that will be the key.
The Bermuda insurance executive whose company has tasked him with a lead role in the corporate challenge to blueprint climate solutions going forward believes that many of the answers to climate change are all around us.
Axa XL head of climate Andrew MacFarlane sees ocean risks as one focus, especially for Bermudians completely surrounded by the Atlantic Ocean.
His company was a key player in putting together the Ocean Risk Summit in Bermuda in 2018.
The aim was to highlight the stresses and the strains of the oceans, and their importance to the global economy. The climate changes and rise in sea level, have led to environmental risks, including to islanders here at home.
Arising out of that is work on the Coastal Risk Index, a tool to estimate risks to areas exposed to rising sea levels.
The information is to be globally available to facilitate the development and construction of new products to meet the needs of populations, as their risks change.
MacFarlane said Axa XL was also a co-lead in the Youth Climate Summit in November.
He said: “I think we've identified the opportunity that we have in terms of engaging our youth around the subject of climate and probably more specifically through oceans, in Bermuda, given where we live.
“That’s what we want to achieve – promote an understanding of the impact a changing climate has and get our youth involved in creating some of the solutions and solving the problem.
“Through engaging young people and teaching them that the earth does not have infinite resources, I think we will have the opportunity to accelerate some of the change that we need.”
The Axa XL work is just a part of the efforts of corporate parent, Axa, which has committed to climate and biodiversity, including divesting from certain carbon-intensive industries alongside launching and chairing the Net-Zero Insurance Alliance to accelerate the transition to net-zero emissions economies.
The Axa Group is an insurer that has 153,000 employees in 54 countries serving 105 million clients.
MacFarlane’s work will allow the group to advance understanding of the evolving climate change and understanding that can lead to better responses and better strategies.
His work includes embedding Axa’s climate strategy across Axa XL from underwriting to claims and operations, ensuring that the company meets its climate leadership ambitions.
One of the initiatives in MacFarlanes’s efforts is a focus on the need to close the “protection gap” between economic and insured losses.
He said: “It's the difference between the economic loss after a catastrophic events and the loss that is covered by insurance or reinsurance.
“It is more prevalent in developing economies. But it also exists in developed economies. In the US, after Hurricane Ike, there was a significant protection gap between economic and insured losses.
“We see an opportunity of bringing that value of insurance protection to those communities, an opportunity through the insurance development forum, the IDF.
“A lot of work is going on there, trying to provide insight to people in those areas as to the value of insurance. There's an education piece there, helping people to see the value of insurance and what it means in terms of disaster recovery.”
MacFarlane said that a partnership with the Cambridge Centre for Risk studies had produced a report on optimising disaster recovery, showing the value insurance had on disaster recovery, not only in terms of paid-for restoration, but also in terms of the time it took to recover.
He said increased insurance penetration as a percentage of GDP reduced significantly the time for an affected region to recover.
“Disaster recovery is a complex, multifaceted process, but insurance has a large part to play in it.
“So using bodies like the IDF, using research like that, helps us raise the awareness of what insurance can bring. Another difficulty we have is the ability to model and price those risks in different locations.
“The modelling agencies focus on perils where there is already an existing market. What we need – and there is a working group within the IDF focusing on that – is to develop models that are open source, publicly available, to allow us to model risks, hazards, exposure, vulnerabilities in other areas which don’t necessarily have that detailed modelling.
“As soon as we are able to price and reflect those risks; as soon as there is an acceptance and understanding of the value that insurance can bring, I think we have an opportunity there to close the protection gap.”
MacFarlane said that for this to happen, there had to be a partnership between industry and governments.
“We want to help communities. That’s what we do. We help them get back on their feet after a disaster. We are “the invisible force” in the global economy.
“By demonstrating that value and making people more aware of it, we have an opportunity to help solve some problems. And it is not going to be easy.”