Resources

• Materials that Claudine references during the podcast
  • Aviva’s Building Future Communities report
  • Flood Re, a UK flood re-insurance scheme
  • UK Met Office Get Climate Ready website
  • WWF flood resources
  • The Wildlife Trusts: natural flood management
  • World Wetlands Trust: flooding and wetlands
• Aviva resources
  • UK businesses at climate change crossroads
  • Aviva: Acting on Climate Change
  • Aviva 2021 Climate Transition Plan
• Industry resources and news:
  • Deloitte: Climate Change and Insurance report
  • Association of British Insurers (ABI): Climate Change Roadmap
• HBS cases on Aviva and climate change:
  • Aviva plc: Examining Net Zero
  • Forecasting Climate Risks: Aviva’s Climate Calculus

Guests

Climate Rising Host: Professor Mike Toffel, Faculty Chair, Business & Environment Initiative (LinkedIn)

Guests: Claudine Blamey, Group Director of Sustainability at Aviva

Transcript

Editor’s Note: The following was prepared by a machine algorithm, and may not perfectly reflect the audio file of the interview.

Mike Toffel:

Claudine, welcome to Climate Rising. Thanks so much for being here.

Claudine Blamey:

Hi, hi Mike. Thank you very much for having me.

Mike Toffel:

So why don't we begin with a brief introduction to your role and how you got there.

Claudine Blamey:

Sure. So currently I'm the Group Director of Sustainability at Aviva. before coming to Aviva, I gained a broad range of experience as Head of Director of Sustainability across, I guess you could call real economy sectors, organizations, anything from transport to property, automotive, food and beverage. I was director of sustainability at EasyJet which is an airline in Europe. I set up the group sustainability function at Sainsbury's who are FMCG so kind of a food manufacturer but also they sell food, they have shops. And I started life as an environment manager at Honda, working for them in the UK. And that was great fun, working with all the cars and the bikes. And I've done various board roles. And by training, I am an environmental scientist. So I have two degrees in that.

Mike Toffel:

Wow. So that is an incredibly broad array of industries that you've worked on. How, with your background in everything from automotive to food , how did you end up at Aviva?

Claudine Blamey:

I was headhunted for this role. I thought, wow, what a fantastic organization, an organization that really believes in this space. It's a part of their strategy and they want to do a lot more for their customers. So I ended up coming to Aviva to deliver that strategy going forward, which is very exciting.

Mike Toffel:

Yeah. one of the things about insurance is how it needs to, folks who work there need to understand so many different industries. So it's interesting that you come with so many different industries in your background. So tell us a little bit about Aviva

Claudine Blamey:

So first thing to say is that Aviva has been around for a very long time. The last 325 years in fact and since then we've grown into the UK's leading diversified insurer across and I say diversified I mean it's insurance, it's wealth, it's retirement with over 375 billion of group assets under management. We the UK's leading general insurer, so GI, providing insurance solutions to over 6 million customers across the British Isles. We're also the largest life insurer in the UK, holding about 23 % share of the UK market. We have asset management arm as well. We also have a strong business in Canada, one of the 10 largest insurance markets globally. Our business holds the number 2 position there in property and casualty with around sort of 8 % of the market share. We have over 19 million customers in total. In the UK, it's interesting to know that one in four people are Aviva customers. we have 12 offices across the UK so north south east and west and we operate in those communities we employ people in those communities we have a place based to our social impact work, for example, and we think that that brings us much closer to our customers. It's also important to mention sustainability when talking about who we are. It's a part of who Aviva is, and it's really, really reflected in that purpose that I mentioned, which is here today for a better tomorrow.

Mike Toffel:

So let's hone in and talk about Aviva and climate change. And there's a number of ways in which insurance companies are engaging in climate change. And some of them I think are not so obvious. So I think people think, well, insurance companies need to really be aware of property and casualty risks, in particular flooding and hurricanes for the damage that might befall properties, and how do we price that, and which markets we be in. And for sure, I want to talk about that. But before we do, let's talk about some of the less obvious ways that insurance companies need to track climate. And one of the ways that's not so obvious, I think, is on the transition risk side, which is shorthand for the risks that changing customer preferences and regulatory frameworks might affect companies in light of climate change. So can we start with that and then we'll talk about some of the more physical risks side and the adaptation side.

Claudine Blamey:

Yes, sure, Mike. So we know that if we don't plan accordingly and change the way we do things, we'll face risks to our business as the global economy starts to shift towards net zero. These are widely regarded as transition risks, as you said so yourself. So to mitigate those risks, we need to take action ourselves to adapt to this new economy, so the green transition. That means setting targets, it means innovating with new products, it means developing new policies, and of course, anticipating government and regulatory policy changes, which are so, so important to drive this green transition. We have committed to be net zero by 2040. But breaking that down a little bit, we're aiming to have net zero underwriting and investments by 2040 and net zero operations and supply chain. That's our own supply chain, our own operations by 2030. So we're aiming to reduce the carbon intensity of our scope 3 category 15 investments by 60 % by 2030 from a 2019 baseline

Mike Toffel:

Can you remind us what that category 15 is?

Claudine Blamey:

Yeah, I knew you were going to ask me that. So, Greenhouse Gas Protocol has broken down scope three into 15 categories. And category 15 is basically investments, the investments category.

Mike Toffel:

And what's it take to make that, just looking far ahead, to make an investment portfolio net zero?

Claudine Blamey:

A lot. I think we've got some exclusion policies, for example, which means that if businesses have more than 5 % of their revenue coming from thermal coal, we will engage with them, but we will divest in time and we have divested from quite a lot of those organizations. It means engaging with organizations we invest in to make sure they have climate transition plans to become net zero themselves in time. And it does mean that sometimes none of that might happen and we might have to disinvest. I think that should always be a last resort because organizations like us can really engage, can really try and transform those organizations as opposed to if we disinvest, who's going to invest in them and how are they going to drive that change forward. So it's about that. And then it's about accelerating that green transition, trying to make that happen faster, quicker in any way that we can. It's hard. It's very, very challenging.

Mike Toffel:

And of course, banks are thinking about this and other investment houses are thinking about this all at the same time. But I think it's not everyone would know that insurance companies need to think about this and are actively thinking about this already. So that's on the that's transition risk as it relates to the portfolio and also your operations. Then on the physical risk side, it affects not just your casualty and property insurance, but other insurance lines as well, like for example life insurance and to the extent that you or others offer medical insurance, I imagine it affects that as well.

Claudine Blamey:

Yes, yes it does and as you'd expect from an insurance business we track a wide range of climate and obviously non -climate related risk factors. So on the climate side in recent forward-looking exercises we've prioritized risks associated with particularly flooding and storm surges in the UK and flooding in Ireland and flooding and wildfire in Canada. So a lot of flooding risk is involved here and we prioritize these ones as they are the most material, they're the biggest loss categories for our general insurance business in UK, Europe. Wind storms and flooding have been making up that material element. On the investment side of the business, although it's a bit different, it's a different kind of finance, the risks space is very similar. So that side of the business primarily track flooding, windstorms, heat waves, droughts, and importantly, they track their impact on physical assets, for example, on property and infrastructure and other investment classes. Where we're going further is by really moving towards modeling climate change to see what are then the results of that on the risks that we are facing.

Mike Toffel:

Yeah, so why don't we jump into that modeling question. So there's, of course, government models, there's academic models, there's proprietary models, all of which are tackling some of the same or overlapping set of issues. On the one hand, they're trying to figure out what will the world look like in a 2 degree scenario, a 2.5 degree scenario, a 3 degree scenario, all referring to global...average temperatures in centigrade compared to pre -industrial levels. And what does that look like, not just in terms of global averages, but in terms of variation across different locations in some of the dimensions that you just mentioned, heat waves, droughts, floods, wildfires. And some of this, of course, depends on which policies are going to be put in place and which technologies are going to be developed which circles back to the question of which world are we going to live in. So there's a lot of uncertainty around this. And so I can imagine a million different scenarios one can play out. And so how do you think through which scenarios are we even looking at? And then once you get to the end of a few different scenarios, what then? That's the part of scenario planning I've never actually understood. What decisions does that inform?

Claudine Blamey:

Yeah, now that's a really good question and actually a really tough question because the nut isn't completely cracked. So let me just delve into it a bit more. So in the simplest form, we use scenario analysis to support our risk management. That involves quarterly internal reporting processes, annual production of external disclosures, as well as our own risk and solvency assessment. So it's really crucial on all of those fronts that we use the right analysis. The analysis allows us to understand the extent to which climate change will impact our business based on different IPCC scenarios. From an asset perspective, we use scenario analysis to identify how we can change our capital allocation to reduce our exposure to both transition and physical risks. So that's how it then translates into what we do. And from a kind of a liability perspective, we have a modeled transition risks for our underwritten personal lines and commercial lines books. This is bespoke. It's a bespoke analysis, and it informs our future underwriting pricing strategies. So that's how we kind of use that. But as I said, it's not straightforward. It's challenging to find the right models. It's challenging to model the physical transition, litigation risks associated with the transition to a low carbon economy. And there are gaps and those gaps still exist in scenarios, in the models, in best practice for the financial services industry. So to plug that gap, we do work with our peers, for example, or our regulators, our supervisors. There is, I would say, a lot of work being done to develop best practice and that kind of macroeconomic climate scenarios. And the banks, the sort of more network central banks are doing some work in this space. But I do think it's a very, very difficult and challenging area.

Mike Toffel:

So are there dimensions here, it sounds like, that you are working with, you said, regulators and peers. There must also be dimensions that you might consider proprietary so that you can have a different perspective, presumably a more informed or more accurate perspective on some of these risks so that you can compete on pricing and on knowing which markets to lean into and maybe which markets to start moving away from. Is that a fair characterization? Some of this you're doing collaboratively and some of it you're doing competitively?

Claudine Blamey:

Climate risk has actually changed over time. It's been quite astonishing, actually, even in just the last few years. In 2023, for example, we supported UK customers through 11 named storms. And that was more than double the number we saw in 2022. I think looking forward, the main risk categories we track are expected to increase between 0 to 4 % per year over the coming years, directly as a result of climate change. So the single biggest increase is expected to be in the Canadian wildfires, with all the other categories going up about 1%. And in terms of how we price that, so insurance is an individually risk-based price product. It’s really important to stress that many different risk factors into this price for each customer, not just the physical risk of climate change. But climate risks are factors within these models. So they are models of lots and lots of different risks and climate is just one element. And we've built the possibility of extreme weather events into our general insurance pricing and reinsurance program design. So the models are continually updated to ensure we have the best insight both on past and what's happened before and those losses, and then using the models to look at what's future and what the future predictions are. But as I mentioned, that future prediction bit is challenging.

Mike Toffel:

So do you have a team, like a data science team or a climate modeling team within Aviva that's taking on the integration of these models and translating that into a proprietary pricing model that you can plug in some data based on locations and business lines of your customers and then it pushes out from the models the risks and some pricing recommendations? Is that how it works?

Claudine Blamey:

Yes, absolutely. We have a team in my team that are climate modelers and we work across the group to make sure we've got the right models in place, make sure we've got consistency across the board between investments and underwriting and insurance. We also have within underwriting teams that model this as well. So we do have quite a few different teams across the business that do this.

Mike Toffel:

You hear stories just in the media of folks who are facing dramatic increases in property and casualty insurance pricing in particular, people claiming their premiums doubled, for example. And of course, we hear, at least in the U .S., of states where some insurance companies are pulling out. Can you just provide a little bit of context on why that's occurring?

Claudine Blamey:

Yeah, I think there's a sense that things are going to become uninsurable and they are as you mentioned they are. It's hard to say definitively when and how things will become uninsurable. However, some in the insurance industry have warned that the world will become completely uninsurable if we reach that 4 degrees warming. And that's the kind of reality we're facing into. While that might be quite far away or hopefully is never going to happen because we hopefully will hit that one and a half degrees, we are starting to see the warning signs in the insurance sector in different parts of the world. And as you mentioned in the US, the most famous examples are in California and Florida. I think part of the answer to this is how you dilute the risk. So we talk about reinsurance and just to explain what that is, that's kind of insurance for insurers. So transferring to risk to another company to reduce the likelihood of large payouts for a claim that you would expect in those types of areas. That allows the insurer to remain solvent by recovering some of the costs that they've incurred from other insurers. So I think reinsurance firms generally have a global business model where they seek globally diversified portfolios to take those risks and to be able to pay those kinds of claims. Things like typhoons and hurricanes are a part of that kind of single event type risks. I think there's a downside to this though. The downside is that reinsurance rates will harden globally by losses. So they'll start to see more and more losses and therefore you'll start to see well how many times you have to reinsure something to then be able to pay out. And that puts a strain on capacity. We saw that in the 2023 renewals, as you say, when market prices go up. And this makes the business model of reinsurance particularly sensitive to change in terms of frequency and severity of extreme events from climate change. And the cover they offer to insurance companies around the world means that they become more expensive. I think this is particularly prominent in terms of developing countries with high exposure to physical risks at greater risks of being priced out of the global market which obviously isn't great at all.

Mike Toffel:

It does make me think that the angles on risk here, transition risk and physical risks, could have a big impact on how you think about your client base. Because if I think about this as a non-insurance person, I would imagine that a lot of the transition risk, for example, regulations that might affect automotive or power plants, has a big impact at the industry level, which might lead to new needs to diversify across industries so that if a transportation bill comes up, you have to think about, well, okay, that's going to affect all of my auto companies in my portfolio. But energy companies too, to the extent they're pushing for electrification, but in a very different way. Whereas physical risks is more geographically concentrated. Is that a reasonable way to think about that, where transition risk imposes the need to think through this at the industry level, whereas physical is more geographic?

Claudine Blamey:

Yeah, I think that's a really good way to put it. Some physical risks are, although geographic, they are much wider than floods. So heating, for example, we are seeing more and more heat days, severe heat days in the UK, where people are not used to it, properties are not geared up for it. So you tend to see health impacts from that. You tend to see infrastructure impacts from that. So roads are literally melting and you start to see a systems approach to this. So even cars now transitioning to EVs. EVs are a lot heavier than normal petrol cars. So hot days, roads are starting to melt, heavier cars on them, you get more infrastructure damage that way. So there's a lot of connections with these things and it is we see we're all still trying to get our head around. I think the insurance sector has got really got their head around flooding, flood risks, working with local authorities, working with customers, but I think heat is the next big thing and I think that's where we need a lot more thought.

Mike Toffel:

I think people think about heat as affecting, as you mentioned, infrastructure, which I think people think, well, that's a government problem. You know, the government owns a lot of infrastructure in most countries. Of course, there's private infrastructure as well, like airports, for example. And they also might think of it as an individual problem, like, oh, heat stroke is problematic, and that could affect your health. But how do these types of impacts affect an insurance company.

Claudine Blamey:

Well, it depends on what we've got insured and what we're investing in. So quite often on our investment side, we would invest in infrastructure alongside government. We would invest in social housing, for example. And in order to do that, we would make try and make sure that they are built in the right way, they have got flood risk as a part of their building, as a part of their land planning. But that's not easy because that requires regulation change in building regulations, for example, or planning regulations. And that means that we have to advocate for those things at the same time as we're investing in those types of infrastructure, those types of physical assets.

Mike Toffel:

So this is on the investment side more than on the liability side.

Claudine Blamey:

It is, but on the liability side, then if the investment hasn't happened in the right way, not necessarily just our investment, but generally, then you would incur claims costs because those properties would flood more, they would overheat, they would, you know, all the things that I talked about.

Mike Toffel:

So what are some new insurance products that are emerging in the era of climate change?

Claudine Blamey:

Good question. I think this is a really exciting space actually in terms of new products, people starting to think about that. So parametric insurance is a type of insurance product that ensures a policyholder against the occurrence of a specific event. So overheating over a certain degree, for example, and pays out the amount based on the magnitude of the event as opposed to what normal insurance does, which is the magnitude of the losses in that traditional kind of policy. We're piloting this with a company called Floodflash and that's on the flood side, which is a parametric based flood insurance for commercial property owners. So let's say a farmer needs some insurance to protect against flooding of their farmland and losses for their crops. Parametric insurance could ensure, say, if the flood reaches a certain level or if more than 80 % of their crop was damaged. So it's always based on a specific event happening.

Mike Toffel:

It sounds like there's less judgment involved and so less work to figure out exactly how much is the claim because rather than them saying, well, our roof got damaged from a hail storm and then you say, well, let's get a quote and how much it costs and how much of the roof actually needs to be replaced and then we negotiate, oh, is that a competent quotation, maybe get a second quote. Instead, you say, I think, If a hail storm arises of more than 20 minutes of more than 5 millimeter hail, then we're going to write you a check for this amount.

Claudine Blamey:

Yes, and it's much more clear from that perspective and you could say it's simpler as well. And there's another innovative piece which is catastrophe insurance that protects businesses and residences against natural disasters like earthquake, floods, hurricanes. And while we don't us as Aviva offer this as a standalone product, we tend to have almost sort of essentially offer this by default as we cover those kinds of risks as a part of the standard policy. So we integrated in as opposed to have it separate. But I know other insurance companies do have catastrophe insurance as well, which is I think a fairly new thing.

Mike Toffel:

Got it. So which customers are particularly interested and willing to have this conversation and understand how climate affects your models and therefore your pricing? And which types of customers are less amenable to that conversation?

Claudine Blamey:

So let's tackle personal lines first. So personal lines and majority of our small, medium sized organization customers, businesses, we don't tend to share details of how climate is impacting their premium. I alluded to this earlier, it's wrapped up in a complex risk-based pricing model which the industry as a whole tends to not share details of in sort of publicly, it's owned by the company. We have increasingly shared flood resilience advice with our customers. And in some cases, implementing these measures as the condition of the insurance that we provide. And this is particularly true for commercial properties, for example. And we should, I would say that remember that insurance, especially personal insurance in the UK is very, very price sensitive. They're usually one year contracts, customer who regularly shops around after that one year in that 12 months for a better deal. The rapid transaction nature of that process means building relationship with these customers and engaging with them as a part of a purchase renewal is really challenging. But we are starting a number of pilots to share flood resilience advice with our customers through technology, through apps and various other sort of engaging ways. And we're hoping that this will help them to really understand what they can put into place for flood resilience plans. And then hopefully that will help with their actual property not flooding in the first place.

Mike Toffel:

Right.

Claudine Blamey:

Even if a flood event occurs. So that's the kind of thing that we're trying to do. But it is difficult to get people to change their behavior.

Mike Toffel:

So this is, I presume, not a totally new idea. When I worked as an environment health and safety person years ago, our insurance broker arranged for some experts to come around every year or two to evaluate our fire risk and make recommendations how to mitigate fire risk. And their idea was if we put these steps into place, then they can help convince the insurers that our risk was lower.

Mike Toffel:

So it sounds like it builds on that type of advice that insurers or their brokers in the space have been providing for a long time. Yeah, okay..

Claudine Blamey:

And I would say it's the same so in Canada with the wildfires for example as well.

Mike Toffel:

Hmm. And so they're also talking about fire resilience?

Claudine Blamey:

Yes, yeah, or what happens, how do you evacuate quickly enough, but also how do you build better in terms of virus.

Mike Toffel:

So hardening the infrastructure of buildings, sprinkler systems, keeping the brush away from the building. So if there is a fire risk, it's less likely to inflame the building and securing evacuation routes so that the health insurance and life insurance premiums stay lower, things like that.

Claudine Blamey:

Yes, yup.

Mike Toffel:

So what about the policy environment? Now, some of the exit of the insurance companies in states that you mentioned earlier, the reporting of that has mentioned that those insurance companies might not have left if they had been able to price what they thought the risk actually warranted. And it's the regulator who's not letting those prices rise in the interest of consumer protection. But the result is then the insurance companies are pulling out saying, my models show that I won't make profitable policies if my price is capped. And so is that an issue that you face as well in Canada and UK and markets that you service?

Claudine Blamey:

Yeah, so just the policy environment is so important and that's why we do engage quite heavily in that environment. We have to understand that a single company or even a group of companies can't make the world net zero resilient in terms of climate change, it will take action from governments, from regulators and other actors who help shape that global economy and the financial market. And I think that's why we've taken an active role in the conversation around the future of insurance in a more climate uncertain world. So I think it's also important to say that as climate impacts become more frequent, which they're going to, that is what's predicted, naturally, those risks are going to increase, pricing is calculated accordingly, it's likely to go up. And that can create a hard to ensure place, as you say. And the key to ensuring affordable and fair access to insurance is through that adaptation and resilience and building more and more resilience to these impacts. So last year we did a piece of work on this called Building Future Communities which is available publicly. You can go on our website and see it. It looked at how climate change might affect us now and in the future and how we can better prepare our homes to withstand hostile weather. And in the survey element of that, it found that over a third of UK adults believe their homes are at risk of flooding, yet two thirds haven't put any flood resilience measures in place. So we know more needs to be done and actually regulators need to really come in on this. It also contained analysis using Aviva claims data, which showed that with simple flood resilience measures in place, depth of flood water is reduced by 64 % compared to one without. So what do we think will help? Well, I think homeowners can take action, obviously, themselves to provide some of these sort of flood resilience elements. But there's obviously, obviously a role for government here too. As a part of the report, we asked the government to take action to build homes that are more sustainable, can withstand extreme weather, in particular measures around the planning, the standards, and the standards for investment as well. So in order to attract investment, they need to have certain standards in place. I think the government has taken helpful policy action so far. For example. they've created the flood re in the UK. It's a joint initiative between government and the insurance industry. It's a type of a reinsurance scheme that makes floods cover more widely available and affordable as part of home insurance policies. It does this by charging a levy on every UK home insurance policy and working behind the scenes, the insurers cover the cost of the flood risk. So I do think that public and private partnerships are an effective way to ensure this continued, make sure that people have access to insurance.

Mike Toffel:

Very interesting. So let me ask you for those who want to learn more or get involved in this space, in particular, insurance and thinking about the relationship between insurance and climate. What advice do you give folks? Where should they look? What should they, what organizations should they think about or resources should they use?

Claudine Blamey:

That's a really good question. I was thinking about this and I thought actually, you know, the science element of this is really interesting and really delving into some of the IPCC reports. The Met Office do some incredible reports as well in terms of local flooding maps. The UK Environment Agency is really good at this too, to have a look at what's going on and to really understand how these things are impacting us in different geographies. I think the other thing is to research and look for how does nature enable us to build resilience, particularly around flooding. I think that's really interesting as well. So looking at organizations like WWF or in the UK, the Wildlife Trusts are very good. The World Wetland Trust is great to look at as well. And they have such interesting content which makes it a pleasure to read as well.

Mike Toffel:

Great, and we'll provide links to those materials on the show notes so that listeners can check them out. Great, well, Claudine, thank you so much for spending time with us here on Climate Rising. It's been a really interesting conversation.

Claudine Blamey:

Thank you, thank you Mike. Thank you for having me.