Hartford Business Journal

6 Hartford Business Journal • December 14, 2020 • www.HartfordBusiness.com By Liese Klein lklein@hartfordbusiness.com T he storms, fires and floods blamed on climate change that have devas- tated swaths of the world in recent years impact not only communities, but also the Hartford area's signature industry, insurance. Now Hartford-based Conning, a seller of risk and capital management software, has come up with a product to help companies, regulators, inves- tors and others measure the financial costs of climate change. "It's very topical in the industry. Everyone knows they have to do something, but they're not quite sure what it is they need to do," said Lor- raine Hritcko, head of risk solutions at Conning. Conning's new product — intro- duced in November — overlays tech- nology the company already uses to predict risks onto a range of climate models. The soft- ware uses sto- chastic economic projections, or modeling using random vari- ables based on historical data. The company began develop- ing the product, called the Climate Risk Reporting and Scenario Service, in response to growing demand from customers, said Matt Lightwood, Con- ning's Germany-based director of risk solutions. "We developed some very specific quantitative risk metrics … to help [customers] quantify these risks and start to talk about climate risk at the board level," Lightwood said. Euro- pean clients especially are feeling pressure from regulators to comply with tenets of ESG, or Environmental, Social and Corporate Governance, he added. "The 'E' in ESG, particularly climate risk, has now become a real focus in the insurance industry, but generally in the institutional investment space," Lightwood said. Nations and states are coping with the aftermath of a record run of glob- al disasters, including catastrophic storms, wildfires, floods and droughts. Average insured losses from catas- trophes worldwide in 2020 were estimated at nearly $100 billion by Reinsurance News, with the biggest losses coming from Australia's bush- fires, the derecho storm in the U.S. Midwest and the Atlantic hurricane season's impact on the Southwest. And although the issue of climate change has become politicized in the U.S., companies and regulators are realistic about the impact of increas- ingly severe weather. "You will still be exposed to the risk, regardless of what a particular geography's politicians are doing," Lightwood said. "The product's been designed to be agnostic." Modeling risk The software offers users three possible scenarios relating to climate change: First, that the global economy transitions to carbon-neutral in a very short period of time; second, that the transition happens over 30 years; and third, that no action at all is taken on climate change, resulting in global temperatures rising 4 degrees Celsius or higher. Each of the three scenarios is mod- eled to measure the risk to a com- pany's portfolio in terms of transition risk and physical risk. Conning's signature product, its GEMS Economic Scenario Generator software, was adapted to measure the impact of climate change. "That was a very natural thing to do since there's a lot of uncertainty around what a particular climate scenario might do to the economy," Lightwood said. "The [new software] is very good at capturing that uncer- tainty." About 75 companies already use the GEMS software and have expressed strong interest in adding a climate component to their risk assess- ments, Light- wood said. Weather events have hurt the bottom line at many area insurers this year, including The Hartford, which reported pre-tax catastrophe losses of $229 million in the third quarter of 2020. The Hartford CEO and Chairman Chris- topher Swift called the third-quarter financial impact from wildfires and storms "unusually high." Property and casualty insurer Travelers Cos., which has major Hartford operations, said its third- quarter catastrophe losses were up 65% to $397 million, which was well above the 10-year average, according to company Chairman and CEO Alan Schnitzer. Even as risks mount, however, insurers and other companies have struggled to adapt to unpredictable weather events that appear to be growing in intensity. "Climate change poses material risks for investment portfolios and the global economy as a whole, yet we have found that many institutional investors have struggled to mea- sure these risks, mainly because of a lack of a reliable and standardized methodology," Conning's CEO Woody Bradford said. Software like Conning's gives in- surers across the globe another tool to protect their portfolios, Lightwood said, as pressure mounts on all sides to quan- tify the risk of climate change. "We're expecting that to gain momentum over the coming year," he said of concern about climate. "In 2021 we expect this to really ramp up and really start to bite." Hartford firm's latest software assesses growing climate-change risks for insurers, investors The Connecticut shoreline houses shown above were badly damaged by Superstorm Sandy in 2012, a costly weather event for insurers. PHOTO | CONTRIBUTED Lorraine Hritcko Matt Lightwood Woody Bradford Catastrophe losses mount for Hartford insurers Two of Hartford's most well-known property and casualty insurers have seen significantly higher catas- trophe losses recently. Climate change is sought to be a factor in worsening storms and other natural disasters around the world. 3Q 2020 pre-tax 3Q 2019 pre-tax catastrophe losses catastrophe losses % Change The Hartford $229M $106M 116% Travelers Cos. $397M $241M 64.7% Source: Company U.S. SEC filings

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