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Capital + tech + data can help address climate risks: Schauble, Nephila


The use of efficient capital from the insurance-linked securities (ILS) market, along with advanced technology and expanding amounts of data, can help the world in addressing climate risk, comments by Barney Schauble, Managing Principal at Nephila Advisors suggest.

Barney Schauble, Nephila AdvisorsWith climate change rising up the political and social agenda all the time, the development of new products and use of data is going to be key to the insurance and reinsurance industry’s chances of helping to address climate risks, Schauble explained last week.

Speaking to an audience at the Marsh & McLennan Companies Rising Professionals’ Global Forum 2019 in London, Schauble, a principal at the largest ILS investment manager Nephila, highlighted the opportunity for the market to assist on creating a more resilient society.

Referring to new opportunities that are presenting themselves to help companies better manage and address weather and climate exposures, Schauble said, “It feels like the early days of the catastrophe ILS market.”

Of course, Schauble’s firm Nephila Capital has been addressing some of these risks for around two decades, having operated a weather risk insurance and reinsurance fund for many years.

But now, given the way climate is rising up boardroom agenda’s, as well as in political discourse regarding action, the urgency to address climate related exposures has risen significantly, which the ILS industry can certainly assist in.

The tools and structures to transfer climate and weather risk have existed for decades, but as the technology and data available is now significantly more advanced and abundant, there is a real opportunity to make a much greater difference and help in removing risk from corporate and government balance-sheets.

Schauble told the audience that “capital is no longer a rate limiting factor,” given the maturity and success of the insurance-linked securities (ILS) market, adding that this means it is now “possible to focus on other ways to improve the risk transfer sector.”

“As an investor, you now have a wide array of ways to think about how you would want to participate in the insurance market,” said Schauble explained. Adding that investors are now, “Thinking across that whole menu in terms of what gives them the best risk and return and transparency.”

“So now it’s about what that capital can enable. Climate change is a huge problem and it’s not one that’s being well addressed by the insurance industry.”

He continued, “If we can design new products or use new data to make better decisions, and not allow that risk to just default back to the government balance sheet, here in the UK or the US or other places, not only do we build a more vibrant market with more opportunity, but that’s a far more resilient economy than if we choose not to address those risks at all.”

Nephila has been prevalent throughout much of the development of the weather risk transfer market, with the solutions it offers becoming increasingly sophisticated and better aligned with the goals of corporate risk transfer buyers and CFO’s.

Highlighting the firms work in renewable energy related weather and climate risks, Schauble said, “With renewable energy the bank will make a very conservative assumption about how much wind is going to blow.

Nephila’s role is in the provision of the risk capital to take on this exposure that threatens renewable project financing and ongoing operations.

Schauble explained, “If we can take that risk, the bank doesn’t have to worry about it and a lot more wind farms get built, which is obviously a desirable outcome.

Adding, “It means they can focus on the operation and on the origination and they don’t have to worry about holding capital against the risk.”

Nephila can provide increasingly highly calibrated risk transfer solutions in this area thanks to the increasing sophisticaton of technology and the growing availability of granular data.

Schauble noted, “Launching our own satellite array [as suggested by a speaker earlier in the day] seemed expensive and time-consuming, but there’s a lot of satellite imagery out there to help when we receive submissions that might include a hundred thousand houses.”

In addition Nephila and its partners are starting to leverage advanced computer technologies such as machine learning, which can help to make sense of the huge volumes of data that are now available, distilling it into something more meaningful and which the catastrophe protection market can benefit from.

“It’s impossible to find somebody who will sit there all day and type each address into Google Earth to tell us exactly what each house is made out of, and we’ve tried,” Schauble said. “But you can teach a machine to do that very easily.”

Bringing advanced technology and data to bear alongside efficient capital can make inroads into the provision of risk transfer products that serve a real need, when it comes to customer focused climate and weather related risk transfer.

The next step is in leveraging technology to make the transaction and transfer of those risks more efficient as well, as this will also help the capital efficiencies to go even further, making the resulting climate and weather risk transfer products more widely affordable and accessible.


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