AXA XL wants to create tradable Ocean Risk Index

AXA XL, the global specialty insurance and reinsurance unit of the AXA Group, continues to work on initiatives related to climate risk and our oceans, with one area of work being pursued an Ocean Risk Index that could be used for risk transfer.

AXA XL has been involved in a range of ocean focused initiatives over the years, having sponsored and driven forward a range of projects looking at the health of oceans, their sustainability in a changing climate and how those reliant on oceans for lives and livelihoods can be supported through better science and risk analytics, leading to risk mitigation and ultimately risk transfer.

Speaking yesterday in Hamilton, Bermuda during a panel session at the the Convergence 2019 conference, Andrew MacFarlane, Chief Actuary for Bermuda Reinsurance and a Managing Director at AXA XL, discussed his firms perspective on climate risk and areas it feels it can make a difference.

Asked what he is prioritising, in terms of peril or region and collaborative efforts in the climate risk transfer arena, MacFarlane focused in on the oceans.

“One of the areas we’ve started work on is around ocean risk. In 2012 through the SeaView Survey we initially set out to map and chart coral reefs globally. That developed into the Deep Ocean Survey in 2016 and then last year we hosted the Ocean Risks summit in Bermuda as an opportunity to bring together, science, academics, insurers, bankers, regulators, governments, to highlight the issues or the risks that our oceans are under from a changing climate,” he explained.

The mission with this work is to increase the levels of education and focus, providing insight on oceans and their health, as well as weather, as a key climate signal.

The ultimate goal is to encourage and find new ways to “mitigate and then transfer some of that risk,” MacFarlane said.

Part of this is the Ocean Risk Index, an initiative that AXA XL has supported for a number of years that began by getting together relevant and actionable metrics that help us understand the drivers of change and deterioration in our oceans and also measure the vulnerability to that change for different countries.

By establishing the Index as a body of knowledge and data on ocean health and the impacts of a deteriorating ocean, including impacts from climate change, the hope is to identify routes to address and mitigate these risks.

MacFarlane highlighted the potential of such an Index, saying, “One area of work that we’re pushing forward is around the Ocean Risk Index, which is an index that we’re trying to develop to capture some of that risk in a financially quantifiable way, which will then allow us to trade it, price it and transfer it out into the private sector.”

Specifically, the Ocean Risk Index project has worked to identify and quantify the financial risks of storm surge linked to sea level rises and ocean ecosystem degradation.

Sovereign risk transfer is part of the goal here, helping vulnerable countries to transfer the risks associated with storm surges becoming increasingly more impactful as sea levels rise, climate change related or not, and marine ecosystems are degraded reducing coastal protection.

Risk transfer instruments, backed by insurance and reinsurance capital, calibrated to respond to rising storm surge risks due to our changing climate and ocean degradation, triggered parametrically off an Index could prove a very useful tool for countries to secure financing for when disasters happen.

If linked to restoration projects, you could almost see a financial instrument akin to a resilience bond (almost like a catastrophe bond merged with a natural infrastructure development bond), but with a parametric trigger linked to the Ocean Risk Index, which could have a sliding risk linked return depending on how the restoration of coastline projects are progressing.

It’s a similar idea to the Nature Conservancy backed parametric coral reef insurance initiative, which is also focused on coastal resilience through natural assets. There are other projects also focused on mangrove restoration which could also benefit from a parametric sovereign risk transfer product linked to an Ocean Risk Index like this.

AXA XL’s work on ocean risk in general is a great example of insurance and reinsurance expertise, alongside advanced risk analytics and modelling, coming together with science and research in attempts to deliver risk transfer tools that could be truly responsive to the needs of society in a changing environment and climate.

Tradable indices can facilitate the flow of risk capital, insurance and reinsurance to regions of the world where currently they are underserved, helping to make financial protection more affordable by more closely dovetailing it with the needs of local communities through its calibration to real-world parametrics and indices.

By being able to quantify the value of these natural assets, as well as calculate the risks posed to them by climate change and other environmental or weather factors, risk transfer tools of real social value can be created, likely with parametric triggers and indices at their heart (backed by efficient and appropriate sources of reinsurance capital).