Twelve Capital founding partner and chief investment officer Urs Ramseier expects an increase in natural catastrophes and insured losses due to climate change over the next 40 years.
But the insurance industry had assessed the probabilities to price in risk thanks to modelling catastrophes in the highest concentration of insured assets in the United States, Japan, Europe and Australia, he said.
“If the expected losses that are adopted will increase due to climate change, we still are sufficiently so far well-compensated for the risks,’’ Ramseier told Investment Magazine’s Fiduciary Investors Symposium.
“There is enough buffer to absorb climate change even in the current pricing and if the pricing will increase, then the spreads above the expected risks are still very good and we get a premium for the risk we take.”
Using traditional climate models, Ramseier says new techniques such as machine learning, have asked the question: ‘to what degree will the number of storms increase due to climate change in 2020-2060?’
“Our prediction is there will be a significant increase due to climate change of the number of storms depending on the region,’’ he said.
This included up to 15 per cent higher risk of hurricanes on the US East Coast, Florida and in the Gulf of Mexico.
“Obviously the most natural protection we have in society against natural catastrophes in particular but more so on climate change, is insurance and then, off insurance and then reinsurance,” Ramseier said.
“Reinsurance risks are transferred to the financial market in insurance-linked securities or catastrophe (CAT) bonds.”
Ramseier said developing countries and emerging markets would benefit from the modelling of highly insured zones.
“The question is can we transfer these models and approach to other areas where people do not buy protection or cannot afford protection. The answer is yes,’’ he said.
“It’s the next leg of development (for example) Bangladesh is more exposed to the impact of climate change than the east coast of the US.”
Ramseier says transferring structures in the capital market so that these risks can be protected and given protection and mitigated going forward, is possible.
“I believe the strong growth over the next 20-30 years is thinking about mitigating the risk of climate change in areas where people cannot afford insurance,’’ Ramseier said.
“We believe that climate change has a significant impact on assets and what keeps CIOs of pension funds awake at night is thinking about what it means for their portfolios,’’ Ramseier said.
“What assets will lose value in the context of climate change, and on the other hand, where are the opportunities?’’
While buying insurance and reinsurance was key, expectations are that some exposures will become uninsurable because the risks are simply too big or the premium is too high and nobody will be willing to pay a premium above the expected return of a certain asset, he said.
“Insurance-linked securities provide protection for people in these exposed zones – so far in the developed world where people buy insurance protection, but these instruments are also well-suited going forward where people don’t have the money especially with the type of parametric triggers, new modelling techniques.”
Ramseier says insurance-linked securities are attractive for fiduciary investors because they are not correlated to the traditional financial markets and provide attractive returns in the area of 5-6 per cent for the CAT bond market which is a spread about 4 per cent above risk or the expected loss.
He says yields in the CAT bond market were at a 10-year high in 2020 and well priced about 18 months ago which attracted a lot of money into the asset class recently.
“(there are) strong inflows so spreads are coming in a bit but we’re still much higher than we were 3-4 years ago and still much above the expected loss of the risk,’’ Ramseier said.
“It’s an attractive segment especially in relative terms to other asset classes.
“We’ve just heard spreads in the CCC (rated) high-yield market are at an all-time low (whereas) CAT bonds are still above the long-term average in terms of spread despite strong inflows over the last few months.’’
Over the next few years, the CAT bonds would provide protection against climate change, he said.
“We had the pandemic bonds issued by the WHO which were triggered in the Corona-Crisis in Africa and helped mitigate the impact of the pandemic in Africa,’’ Ramseier said.
“Clearly the CAT bond markets are instruments that are well suited in the ESG context. “Two thirds of the CAT bonds are US hurricanes and 20 per cent is California quake but the instruments are there to be applied in the areas where ESG impact is much higher.
“That’s something we’re working at Twelve Capital to develop.”