Investors increasingly ask about climate change: Adam Beatty, Nephila

Capital market investors that participate in the insurance-linked securities (ILS) or reinsurance linked investing space are increasingly asking questions about the potential impacts climate change could have on the risk landscape.

This is according to Adam Beatty, Managing Director of Nephila Advisors, a division of the world’s largest ILS manager, Nephila Capital, who recently spoke with Clear Path Analysis, publishers of the annual Insurance Linked Securities for Institutional Investor’s report.

Beatty explained that investors in the ILS and reinsurance space are increasingly discussing the changing climate, and more specifically, the impact of climate change within the catastrophe risk sector and whether climate change is changing the current risk landscape.

“In particular, we get asked a lot about whether hurricanes are occurring more frequently and with more intensity, as this is quite a widely held perception and is certainly fuelled by most media coverage of hurricane events,” said Beatty.

The increased severity and frequency of hurricanes as a result of climate change is often discussed in the catastrophe risk and reinsurance sector, especially since the high levels of insured losses as a result of the peril in both 2017 and 2018.

However, and as noted by Beatty, prior to 2017, a major hurricane had not made landfall in the U.S. for 12 years. Ultimately, Beatty said that there is not yet a discernible longer-term trend of more frequent or severe hurricane events.

While insured losses as a result of hurricanes has certainly increased over the last two decades or so, Beatty highlights this isn’t only driven by more intense storms.

“That has actually been driven more by there being greater exposed property values rather than actual changes in the hurricane hazard itself. To simplify this, there are more buildings that are being built in the path of hurricanes that have the potential to be damaged rather than the hurricanes being particularly different,” said Beatty.

It’s worth remembering that this isn’t only true for hurricanes, but also other perils in the U.S. and around the world, such as wildfire and flooding. Coastal urbanisation, rising asset values in places highly susceptible to natural catastrophe events, and the rebuilding of properties in hazard prone areas, continues to drive up insured losses from natural catastrophes.

As a result of the above, Beatty explained that investors are increasingly eager to understand what impact climate change might have on their overall portfolios of ILS and reinsurance assets, which is in turn driving a greater focus on responsible and sustainable investing.

Environmental, social and governance (ESG) investing is increasing rapidly, and Beatty explained that this is also something being talked about more and more by ILS investors.

“We do feel that climate change is something that we can monitor and factor into our investment process over the longer term. It could also be a driver of increased demand for protection from rare, high severity events. Our investors can earn a diversifying return for providing the re-build capital that makes economies more resilient to these large natural catastrophe events. We feel that this can be an attractive fit with responsible investment and ESG strategies,” said Beatty.

As a result of climate change and the potential opportunities for the ILS sector and also more ESG related investment opportunities, new solutions have come to market designed to offset the risks of climate change.

Beatty explained that the fund manager’s weather, climate, environmental, social & governance risks focused unit, Nephila Climate, is itself starting to see more opportunities to offer hedges to renewable energy investment projects.

“These facilities usually need to raise quite significant debt finance as part of the original investment. They therefore face the significant risk that the wind won’t blow at their chosen location or that the sun won’t shine on their particular solar farm, which undermines the business case for the bank to provide a loan.

“Our colleagues in NCx have been able to structure a hedging product to facilitate the management of this risk, and hence the financing of those loans. We see this business growing more as the world shifts further towards renewable energy and away from fossil fuels.

“This is an exciting part of the business that has clearly got some ESG benefits for investors who are particularly interested in making these sorts of allocations,” said Beatty.