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November 29, 2023

Jupiter November Climate Risk News Wrap-Up: Pressure Mounts in the Banking and Insurance Industries

November 2023 was a pivotal month for climate change as COP28 kicks off on November 30 with a resounding call for climate action. This month’s climate-related news focused on two industries -- insurance and banking -- and what their risks could do to our economic stability.

1. ECB threatens 20 banks with fines 

According to this Bloomberg article, The European Central Bank has given warnings to 20 lenders that fines will be imposed unless they address shortcomings in their management of climate risk. The ECB sent letters this month and in October giving banks deadlines to fix the issues it has identified. This sent strong warnings to the so-called “laggards” according to the ECB. 

2. Governments may have to step in as insurers start to pull out of high-risk areas

Concerned about insurers pulling out of risky markets because of the fallout of climate change and extreme weather events, governments are now at risk of having to foot the bill according to the Bank for International Settlements and According to the article, “A major complicating factor is the uncertainty over future climate change impacts, which may unleash extreme events that have not occurred in the past for example due to climate tipping points,” the researchers said. “There could also be spillovers to other financial sectors — including the banking sector — if insurance is no longer available.” What’s more, insurers aren’t generally making climate considerations explicit in their pricing and underwriting policies, according to the BIS report. 

3. New global rules forthcoming for banks? 

On Wednesday, November 28, the international bank regulatory body launched a process to develop rules for lenders to report their climate-related risks in a bid to boost transparency and financial stability according to a Barron’s article. The Basel Committee on Banking Supervision is working to promote a disclosure baseline for climate-related financial risks across global banks and issued a preliminary proposal for public disclosure of climate-related risks. It is seeking comment from stakeholders and has a target date of 2026 for implementing the disclosure rules.

4. Fires, Floods, and Loans: How Banks Can Deal with Increasing Climate Risks
To better understand the risk and trends accompanying these perils, Bain & Company analyzed data provided through a unique strategic partnership with Jupiter Intelligence.

In collaboration with Jupiter Intelligence, Bain & Company showcased a new report with compelling data that highlights increasing risks and how banks can handle them. Wildfires, droughts, and other climate-related perils threaten banks’ loan portfolios, yet many have only a general sense of their vulnerabilities. We expect real estate assets’ exposure to physical risk to rise over the next couple of decades, likely reducing the value of collateral and damaging banks’ mortgage business profitability. Therefore, banks that take the right steps soon could improve their financial stability, customer retention, and compliance with emerging regulatory standards. Measuring physical risk requires new tools, capabilities, forecasting horizons, and data—all of which have been challenging to source and embed.

5. AI for Insurance! 

This month’s TheMessenger article talks about how as violent weather becomes more common, the insurance industry is turning to artificial intelligence to warn of dangers such as wildfires, flooding and droughts. Rich Sorkin, CEO and co-founder of climate risk analytics firm Jupiter Intelligence, agreed that insurers can no longer rely solely on "backward-looking" historical data models given the unprecedented threats of climate change.

Jupiter uses AI to integrate data from leading climate models, local terrain, infrastructure vulnerability assessments, and damage estimates. This helps insurers understand risk over the lifetime of assets, rather than just annually.

Jupiter fills a gap that emerged around a decade ago as traditional "stationary" risk models broke down, according to Sorkin. Those backward-looking assessments poorly matched climate change impacts over long-lived assets' lifetimes.

“The assumption is that the risk of the future looks like the risk of today, which we know is not correct,” Sorkin said. “But that's the way risk has operated for hundreds of years.”

Jupiter also helps companies disclose climate risks to comply with strengthened regulations. But Sorkin said the most sophisticated clients now embed forward-looking climate intelligence into risk models and investments. Some even harden infrastructure and relocate assets.

Beyond better data and help from AI, Sorkin pointed to needed systematic reforms in the industry, like long-duration insurance to manage climate risks over assets' lifetimes rather than year-to-year. Without pricing that reflects intensifying risks, markets break down, as has already happened in California and Florida where insurers have been pulling out.

Sorkin also believes regulators, who tightly control the marketplace, must also allow more risk-based pricing and long-duration insurance contracts to create a sustainable market. “If the regulators aren't on top of this issue,” he said. “The insurance companies can't do anything.”

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