Climate risk management

Environmental issues and climate change are factors that are expected to have a mid and long-term effect on Sampo Group’s businesses.

Climate-related risks can be categorized 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.

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. Climate-related risks are also managed effectively with reinsurance programmes and price assessments. Since climate change could 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.

Sampo Group 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 is an essential part of insurance services, as it helps customers to reduce economic losses and mitigates the impacts of climate change.

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.

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, ranging from exclusion of certain sectors to 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, annual analysis of the carbon footprint and climate impact of investments, sector-based screening and ESG integration, 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. 

Company-level information

If applies the Three Lines Model to ensure efficient risk management and internal control, as well as a clear division of roles and responsibilities within the organisation. If’s risk appetite statement in the Risk Management Policy gives quantitative and qualitative limits for how much and what kinds of risks If is willing to take to pursue its business.

Identification of climate-related risks

At If, physical risks linked to climate change are identified and assessed as part of the existing risk management practices. The first line identifies and assesses the magnitude of each risk on a regular basis. When reporting to Risk Management, the influence of physical risk factors on the defined risks are assessed on a severity/likelihood basis on a heat map 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 a cross-BA specialist group, the Emerging Risks Core Group. The Group meets quarterly to assess the impact of emerging risks on If. Using the risk assessments within all risk categories and from different units across the company, Risk Management summarises the most severe risks on a consolidated heat map and reports them to the ORSA Committee.

A key tool in assessing physical risks in risk management is If’s internal model, which includes modelling of natural catastrophes for the upcoming year at company level. The risk of a higher frequency in natural catastrophes within premium risk has been closely followed over the years. At If, 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. The model acknowledges If’s 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.

Sustainability has been one of the focus areas for If’s risk management during recent years. If has developed an increased awareness of sustainability factors affecting other risk categories, which is also reflected in the Risk Management Policy. During the coming years, risk identification relating to climate-related risks will be further developed in the risk management processes. The main risk categories at If are underwriting, market, credit, operational, and other risks. Climate-related risks, transition risks as well as physical risks, can have a potential impact on all risk categories. 

Risk management processes

Physical risks linked to climate change are identified, assessed, and managed as part of the existing risk management practices within the business. Risk management actions depend on the type of risk. Daily risk management processes include prudent underwriting and price analysis. Increasing natural catastrophe claims costs can be mitigated through pricing. The economic impact of unexpectedly high levels of natural disasters is managed through a combination of reinsurance and diversification. The need and optimal choice for reinsurance is evaluated by comparing the expected cost versus the benefit of reinsurance, the impact on result volatility and capital requirements. The main tool for this evaluation is If’s internal model.  

Transition risks in the supply chain are, to some extent, identified using the If Supplier Code of Conduct and sector-specific environmental requirements, as well as through the new due diligence process for suppliers and business partners. In investment operations, transition risks are, identified and managed using ESG risk ratings, sensitive sector screenings, norm-based research, and active ownership. In the underwriting operations, transition risks are, to some degree, identified and managed using norm-based research. 

Risk management is a core competence for Topdanmark and the impact from natural catastrophes and weather-related events are integrated into general risk management procedures. The company’s Risk Committee is responsible for managing climate-related risks and opportunities. The results of scenario analyses, stress tests, and sensitivity analyses are reported to the Board of Directors annually as a part of the solvency reporting.

At Topdanmark, attention is directed to the developments in extreme weather, including consequences and necessary reactions and measures. Focus is on ensuring that the company should be able to handle a situation that is even worse in the future. This includes that the sufficiency of reinsurance levels is constantly evaluated, that the customers’ insurance terms and conditions are adjusted, if necessary, and that experiences are incorporated in tariffs and underwriting on an ongoing basis.

A number of risk mitigating measures have already been made to limit the financial risks connected to the expected development including the consequences of more and more severe weather phenomena and an expected steep phasing out of fossil fuels. 

Climate-related risks are assessed in line with Hastings Group’s risk management framework. All business areas consider climate-related, and broader sustainability risks within strategy and business planning. A horizon scanning exercise, including all ESG-related risks, is completed semi-annually. Any risks that are materially outside of tolerance are reported to governing body Risk Committees, along with mitigating action plans.

Hastings reviews ESG risks more closely as part of three-year planning cycles. At present, potential climate related risks have been identified within the claims process. These risks will be assessed in detail during this year.