Insurance analysts are being pressured to downplay climate dangers in their models to help cut the price of cover and enable brokers and underwriters to sell more policies, whistleblowers have told the FT. Five professionals from the insurance industry said it was commonplace for underwriters, brokers and senior staff to urge those working in catastrophe risk-modelling teams to alter their analysis in order to artificially lower prices, even when the risks of a disaster were high. The allegations are “exceptionally serious” and, if true, would likely mean significant breaches of financial and prudential regulation, according to a legal opinion shared with the UK’s Financial Conduct Authority that was seen by the FT.
One junior catastrophe risk modeller at an insurance and reinsurance provider said policies were “being underpriced”. “Every single person I work with all say the same thing — that we shouldn’t be altering the numbers for these accounts in the way we do,” he said. The FCA told the FT it would “consider carefully the information provided to us, including the legal advice which is based on a number of hypothetical scenarios”, adding that it encouraged “anyone with information on potential wrongdoing to report it”.
Researchers typically use models to help price the risk of natural catastrophes, such as hurricanes, fires or floods, across an insurance or reinsurance policy, which often groups together hundreds of properties or covers large commercial or infrastructure projects. The analysts interpret the model findings and provide estimates for how risky coverage might be, which influences the cost of a policy. Four of the people the FT spoke to acknowledged that modelling was open to interpretation and there were at times legitimate reasons to rerun or alter an analysis. However, they also warned of pressure to tweak inputs or outputs in the risk model in order to reduce the premium to a price the customer was willing to pay in spite of concerns from the analysts.
For example, an analyst could be asked to mark that properties at high risk of flooding had defences in place, even when they did not. “The number will be too high for the underwriter and they will say ‘how do you get it down’,” said the junior cat risk modeller. “There are times when I’ve drawn the line, but that line has been rubbed out by someone more senior than me.”
In an open letter earlier this month compiled by the non-profit Inside Track, more than two dozen anonymous senior insurance executives warned that short-term financial incentives were driving the sector to underplay and underprice the actual scale of physical climate risk. Those interviewed by the FT suggested such behaviour was creating systemic risks across the insurance industry and was leading to a situation where clients could suddenly see their coverage withdrawn because risks that had been building over years were suddenly deemed too high.
“The industry knows these policies are going to become quite vulnerable and might not keep us profitable and we will have to cut chunks off the policies, making streets or whole areas uninsurable,” said one senior risk professional from the reinsurance industry, who said she faced “pressure to fudge the numbers”.
Oliver Wing, chief scientific and product officer at risk modeller Fathom, was not involved with the whistleblowing effort but told the FT, “across the industry, there is an incentive and a pressure to produce models that are optimistic”, but that it was not “done in bad faith”.
“There’s no known benchmark [of climate risk] they’re reducing it down from,” Wing said. “These models have enough degrees of freedom within them to get largely whatever answer you like. Given the cripplingly large uncertainties, of course ...
Source: Financial Times Companies · Summarized by HeadlinesBriefing