Climate risk management

Climate-related risks can be categorised into physical risks and transition risks. Physical risks can be further classified into long-term weather changes (chronic risks) and extreme weather events such as storms, floods, and droughts (acute risks). Transition risks refer to risks arising from the shift to a low carbon economy, such as changes in technology, legislation, and consumer sentiment. The main risk categories at Sampo Group are underwriting, market, counterparty default, operational, and business risks. Climate-related risks, transition risks as well as physical risks, can have a potential impact on all risk categories.

At Sampo Group, physical risks linked to climate change are identified, assessed, and managed as part of the general risk management practices within the business. Business operations identify and assess the magnitude of each risk on a regular basis. The influence of physical risk factors on the defined risks are assessed on a severity/likelihood basis using the same scale and principles as with any other risk. In addition to the daily work involving short-term risks, long-term risks, including physical climate-related risks, are identified by different specialist groups who assess the impact of such risks on Sampo Group. Using the risk assessments within all risk categories and from different units, risk management units summarise the most severe risks and report them to risk committees.

Insurance operations

Physical risks are risk factors affecting the financial position and results of non-life insurers. The increasing likelihood of extreme weather conditions and natural disasters is included in internal risk models of Sampo Group. Daily risk management processes include prudent underwriting and price analysis. Climate-related risks (i.e. increasing natural catastrophe claims costs) are also managed effectively through a combination of reinsurance programmes, pricing, and diversification. The sufficiency of reinsurance levels is constantly evaluated, customers’ insurance terms and conditions are adjusted, if necessary, and experiences gathered through these actions are incorporated in tariffs and underwriting on an ongoing basis. The need and optimal choice for reinsurance is evaluated by comparing the expected cost versus the benefit of reinsurance as well as the impact of reinsurance cost on result volatility and capital requirements. Since climate change can increase the frequency and/or severity of physical risks, Sampo Group conducts sensitivity analyses using scenarios in which the severity of natural catastrophes is assumed to increase.

At Sampo Group, the risk of a higher frequency in natural catastrophes within premium risk has been closely followed over the years. Catastrophe risk is defined as the risk of loss or of adverse change in the value of insurance liabilities, resulting from significant uncertainty of pricing provisioning assumptions related to extreme or exceptional events. A key tool in assessing physical risks is an internal model, which includes modelling of natural catastrophes for the upcoming year. The model acknowledges portfolio (the geographic locations and the characteristics and value of the insured objects) while simulating windstorms, floods, and other natural catastrophes to estimate the magnitude or frequency of potential losses. The model is constantly updated using the latest scientific methods.

The transition to a low carbon economy will also result in risks, especially for sectors dependent on fossil fuels. The European Insurance and Occupational Authority (EIOPA), has identified transition risks linked to policy, legal issues, technology, market sentiment and reputation for non-life insurers. Depending on the nature, speed, and focus of these changes, transition risks may pose varying levels of financial and reputational risk to organisations.

Sampo Group also helps its corporate and private customers to manage physical climate risks. Extreme weather events can, for example, damage properties, lead to crop failure and business interruption. Loss prevention and risk management services are an essential part of insurance services, as they help customers to reduce economic losses and mitigate the impacts of climate change.

Investment operations

Sampo Group’s investments can be exposed to both physical risks and transition risks, depending on the investment in question. Investments are particularly exposed to physical risks in the form of losses incurred from extreme weather events. The transition to a low-carbon society with potentially increasing environmental and climate regulation, more stringent emission requirements, and changes in market preferences could in turn cause transition risks for the Group’s investments and possible revaluation of assets as operating models in carbon intense sectors change.

Sampo Group has different approaches to managing climate-related risks, such as climate targets related to investments, exclusion of certain sectors, and supporting investee companies that contribute to the transition to a low carbon economy. Investment opportunities are carefully analysed before any investments are made and climate-related risks are considered along with other factors affecting the risk-return ratio of individual investments. Methods used include, for example, analysis of the carbon footprint, sector-based screening, ESG ratings, monitoring the geographical distribution of investments, and engagement with investee companies. Breaches against the Paris Agreement, such as failure to mitigate climate change impacts and opposition to climate change mitigation are monitored as part of norms-based screening.

Supply chain

Transition risks in the supply chain are, to some extent, identified using supplier codes of conduct and sector-specific environmental requirements, as well as through due diligence processes for suppliers and business partners.