Lancashire is committed to understanding risk and helps companies and people around the world to deal with the various threats that our societies face.
We deal with the effects of unexpected events, including major disasters like earthquakes, floods, windstorms and terrorist attacks. Our industry plays a unique and vital role not just in repairing damage, but in giving the confidence to invest, or to start a new enterprise. The Lancashire Group values its relations with, and works to support, its stakeholders to ensure the success of the business.
Principles for Sustainable Insurance
The UNEP FI Principles for Sustainable Insurance (‘the Principles’) serve as a global framework for the insurance industry to address ESG risks and opportunities. The Principles are directed at achieving a better understanding of environmental, social and governance risks, with a view to promoting the prevention and reduction of harm and enhancing opportunities for effective risk protection and reporting.
The Board has reported against the Principles since 2019 and seeks to monitor and embed the Principles in the delivery of its strategy. This table summarises how the business applied the Principles during 2020 and directs readers to where the relevant activities of the Board and business in embedding the Principles are discussed in more detail within this Annual Report and Accounts.
We will embed in our decision making environmental, social and governance issues relevant to our insurance business.
We will work together with our clients and business partners to raise awareness of environmental, social and governance issues, manage risk and develop solutions.
We will work together with governments, regulators and other key stakeholders to promote widespread action across society on environmental, social and governance issues.
We will demonstrate accountability and transparency in regularly disclosing publicly our progress in implementing the Principles.
We offer clear and transparent ESG reporting through multiple channels, including our Annual Report and Accounts, our website and our work with the CDP.
We are committed to being transparent and accountable, by publicly disclosing the business’s implementation of the Principles.
Our TCFD journey
The Financial Stability Board created the Task Force on Climate-related Financial Disclosures (TCFD) to improve and increase reporting of climate-related financial information. The TCFD comprises four pillars, under which sit 11 recommendations for disclosure. Lancashire supports the aims of the TCFD, and we have detailed below our progress against both the pillars and the recommendations.
Disclose the organisation’s governance around climate-related risks and opportunities.
Describe the Board’s oversight of climate-related risks and opportunities.
As part of the approval process for our underwriting strategy, the Board approves and monitors performance against probable maximum losses (’PMLs’) and Realistic Disaster Scenarios (’RDS’). Both of these include modelling of the Group’s underwriting exposures to climaterelated catastrophic loss events and quantify our risk appetite with respect to how much capital the Group is willing to risk for a specific event – be it a natural catastrophe (in particular climate-related events such as hurricanes, windstorms, typhoons and floods) or a nonelemental event.
The current PML and RDS levels are reported to the Board on a quarterly basis as part of the Group CRO’s quarterly ORSA report to the Board. The Group CUO and CRO regularly review current and emerging risks. Directors are apprised of any development of business strategy, including the monitoring and effective control of PMLs for climate-related catastrophic weather events.
The actual business underwritten within the Group is monitored against the strategic plan and the Board-approved risk tolerances (including those linked to climate-related catastrophe loss events) are reported to the Board quarterly.
The Investment Committee oversees the management and performance of the Group’s investment portfolio including investment risk parameters. During 2020, the Investment Committee reviewed an analysis of the Group’s investment portfolio’s exposure to a range of carbon pricing scenarios and will continue to develop analytical tools for the understanding of the impacts of climate change risk, including transitional risk, on the Group’s investment portfolio.
Describe management’s role in assessing and managing climate-related risks and opportunities.
The CRO is responsible for the overall management of the risk management framework, which includes facilitating the identification, assessment, evaluation and management of existing and emerging risks by management and the Board; ensuring these risks are given due consideration and are embedded within management’s and the Board’s oversight and decision-making process.
The Group’s modelled underwriting PML and RDS risk exposures are presented against the Group’s tolerance levels to the management Risk and Return Committee (’RRC’) on a monthly basis as well as to the Board each quarter as part of the CRO’s ORSA report. Lancashire underwrites predominantly short-tail business, with loss exposures usually crystallising within a policy period of 12 months. As a result, with PML levels updated monthly and shared internally, we ensure we closely track the market conditions.
The management investment risk and return committee (‘IRRC’) is increasingly alive to the potential impacts of climate change related transitional risk on assets within the Group’s investment portfolio. The CRO has convened a climate change working group, which will work on areas for enhancement in the assessment and management of climate change risk and related opportunity over the coming year to inform the work of the IRRC and the Investment Committee.
Disclose the actual and potential impacts of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning where such information is material.
Describe the climate-related risks and opportunities the organisation has identified over the short, medium, and long term.
Lancashire underwrites predominantly short-tail business, and so the principal impact is on short-term strategy. We recognise that climate change does also impact the longer-term strategy in terms of emerging risk and as such management works with some of the leading external catastrophe model providers to understand the science supporting developments in the short and long-term assumptions in their stochastic models. These developments are included in the Group’s management and Board approved annual three-year strategy document.
The Board also regularly discusses cycles and trends within the insurance sector as well as within the natural, commercial and political environment to which the Group’s business is subject. We also recognised the potential impacts of transitional climate change risk on the Group’s investment portfolio and investment strategy. Whilst detailed strategic planning is based on short to medium-term horizons (over a period of three to four years) the Board’s strategic discussions are informed by consideration of potential future trends in the longer term such as the make-up of global energy demand (which may be influenced by climate-related factors) or the potential for political instability (for example over a period of up to 10 to 15 years). During 2021 work will continue in this area with a broader focus on transitional risks and articulating what transitioning to net zero means for the Group.
Describe the impact of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning.
Lancashire’s purpose is to sell bespoke risk solutions which help our clients manage the threats they face, including those presented by climate change. We monitor our assumed risk, manage our capital and we track and mitigate our own environmental impacts, fostering an engaged, sustainable and open business culture.
As a (re)insurer Lancashire is affected by the severity and frequency of weather-related losses which may be influenced by climate change. Data is collected using the stochastic models from third-party vendors which are adapted based upon our views and our clients’ exposure data, to create aggregate loss scenarios. This data is closely monitored by executive management and the Board on a quarterly basis as part of strategic risk and capital management, with the testing of these leading to changes in risk levels, reinsurance purchasing and structuring strategy as required.
As a business with an office in Bermuda we recognise that this is an area of the world that is vulnerable to catastrophic windstorm events and may be affected by any future climate change trends. Both Lancashire offices have disaster recovery and business continuity plans (BCP) in place. Specifically, the Bermuda management team and Board consider hurricane and tsunami risk within the Bermuda office’s BCP.
As Alex notes in his CEO’s review, Lancashire has been a risk partner of businesses operating in the energy sector across the world, including oil, gas, nuclear and other renewables, for many years. The risk solutions which we provide to the energy sector help deliver the wider social benefits of safer operations in a properly regulated environment with access to capital resources to quickly repair and remediate damage in the event of accidents or catastrophic failure. We share with our clients the journey required by the necessary transition away from carbon-based forms of energy to a net zero state. But there are no simple solutions to both meet global energy demand and reduce carbon emissions and we remain committed to supporting our clients across the energy sector as they address these challenges.
We also recognise the potential impacts of climate-related risks and opportunities upon the Group’s investment portfolio, in particular the potential impacts of the transition away from a carbon intensive economy. Although our current analysis suggests that there is a good level of resilience within the investment portfolio to these risks, we will be developing tools for the identification, measurement and management of these risks and opportunities through the work of the climate change working party, the RRC and the Investment Committee.
Describe the resilience of the organisation’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario.
Stress and scenario tests and reverse stress tests are performed as part of the business planning process and the annual ORSA reporting process. The capital impacts from a range of scenarios, including climate-related risks and opportunities, are presented to the RRC and Board for review and discussion.
One of Lancashire’s key operating principles, which supports the Group’s strategy to produce an attractive risk-adjusted total return to shareholders over the long term, is to ‘Operate nimbly through the cycle’. Climate change may influence the severity and frequency of losses that impact our policyholders and Lancashire’s quick response to such post-loss situations can therefore be seen as a competitive advantage. A similarly ‘nimble’ approach to the management of climate change transition risk helps inform asset allocation and investment portfolio management.
The Group CRO has established a climate change working group, which will, inter alia, discuss and agree a methodology for analysing a range of future climate scenarios. The Group expects to report in more detail on likely scenario impacts in future years. Nonetheless, given the Group’s ability to model the geographical and economic impacts of climate risk on the insurance products it sells and to price insurance premiums on the basis of a flexible and fluid risk analysis, the Board and management consider that there is an intrinsic resilience in both the Group’s underwriting and investment strategy and its business model to the challenges of increased frequency and severity of physical damage and the effects of transition risk, as a result of climate change risk.
Disclose how the organisation identifies, assesses, and manages climate-related risks.
Describe the organisation’s processes for identifying and assessing climate-related risks.
Describe the organisation’s processes for managing climate-related risks.
We recognise the potential environmental effects of carbon emissions and in a global commercial and political environment which currently remains reliant on carbon-based forms of energy production, we will work with our clients through a period of global energy transition to help manage their operational and catastrophe-exposure risks in a controlled and responsible way.
Nonetheless, climate-related risks (and opportunities) are a constituent part of the Group’s underwriting risk. Such risks are managed in the same way as other risks: they are identified, monitored, mitigated and reported upon against tolerance as appropriate. Opportunities are monitored and taken advantage of where it makes sense to do so.
Describe how processes for identifying, assessing, and managing climate-related risks are integrated into the organisation’s overall risk management.
The RRC considers all aspects of risk for the Group at a management level and reports through the CRO to the Board. The Board of Directors is responsible for setting and monitoring the Group’s risk appetite and tolerances, whereas the individual entity boards of directors are responsible for setting and monitoring entity level risk tolerances. All risk tolerances are subject to at least an annual review and consideration by the respective boards of directors.
The Board considers the capital requirements of the business on at least a quarterly basis. The Group’s exposures to natural catastrophe risks are one of the key drivers of the capital held by the Group to support its underwriting activities.
The management IRRC is alive to the potential impacts of climate change related transitional risk on the Group’s assets within the Group’s investment portfolio and its work is reported to the Board level Investment Committee. During 2021, we expect to build on our early climate sensitivity analysis work to further develop tools for the understanding of the impacts of climate change and transition risk on the investment portfolio as well as potential opportunities.
Coronavirus and the subsequent and ongoing pandemic spread of COVID-19 (whilst not directly attributable to climate change) does demonstrate both the nimbleness and the resilience of the Group during a market moving event. Its response to this ongoing pandemic is as a result of effective and efficient business continuity planning, which was quickly deployed and has resulted in very little impact upon the business operations. This event has also influenced the Group’s disaster recovery planning and has helped illustrate the use and resilience of a home working model in the management of disaster recovery scenarios.
Metrics and targets
Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material.
Disclose the metrics used by the organisation to assess climate-related risks and opportunities in line with its strategy and risk management process.
We define our risk appetite for underwriting risks as a percentage of capital we are willing to lose in a specific event, and we set a capital loss tolerance for and track the Company’s modelled PMLs to weather-related hurricane perils. We note on page 133 of this Annual Report and Accounts that at 31 December 2020 the actual largest 1 in 100 year modelled exposure to a Gulf of Mexico hurricane stood at $166.5 million, or about 9.7% of capital.
Similarly, with respect to our investments, we have taken steps in 2020 to advance the previous approach for assessing our portfolio’s exposure to climate-related risks. Our portfolio at 31 December 2020 consisted of the following:
|Fixed maturity securities||82.8%|
|Private investment funds||4.7%|
As shown in the table above, we have 91.3% allocated to managed cash and fixed maturities. The majority of the fixed maturities consist of government-related securities: U.S. government treasuries, non-U.S. government sovereign debt, U.S. agency debt and U.S. agency mortgage-backed securities. In addition, we have 33.5% allocated to corporate debt, of which we have a small amount of exposure to climate-related risks. The Group itself does not hold any equities (although we have exposure to a small number of equities in the hedge fund portfolio).
As noted in the principal risks section on page 37 of the Annual Report and Accounts, during 2020, we performed a review of our investment portfolio against the MSCI ESG Index. The Investment Committee has carried out a carbon pricing sensitivity analysis of the Group’s investment portfolio on the basis of three scenarios. This ESG and climate change work will be further developed in 2021 to define some climate change related investment metrics.
Disclose Scope 1, Scope 2, and if appropriate Scope 3 greenhouse gas (GHG) emissions, and the related risks.
The Group is committed to managing the environmental impact of its business. We measure our carbon footprint to minimise its negative impact through mitigation strategies and by offsetting 100% of our greenhouse gas (GHG) emissions, in order to remain carbon neutral. Please see page 53 of the Annual Report and Accounts where we report our Scope 1, 2 and 3 GHG emissions. The Group also recognises the challenges posed by climate change and considers its impact as part of the risk management and strategic planning processes, as discussed above. The Group CRO and the Board oversee the Company’s annual submission to the Carbon Disclosure Project and note that the information which is requested as part of that reporting process is aligned with the recommendations of the TCFD.
With operations in London and Bermuda, and with clients and brokers around the globe, the Lancashire Group has (prior to the COVID-19 pandemic) incurred the bulk of its carbon footprint as a result of airline travel. We utilise a number of technologies to reduce inter-office travel, including full video and telephone conferencing facilities in all of our offices and our meeting and boardrooms. The use of such technological solutions has greatly increased in 2020 to address the communication challenges posed by COVID-19. However, we acknowledge the benefits of physical meetings and will expect to return to a more normal pattern of travel when possible during 2021, should it be safe for our employees to do so.
Describe the targets used by the organisation to manage climate-related risks and opportunities and performance against targets.
In terms of an emissions target, we have established a travel policy to reduce our impact on the environment whilst balancing the needs of our staff and Directors. Our target is to not ordinarily book a business class airline ticket, if the duration of the flight is less than five hours long. This is intended to assist the Group in managing one of its climate-related risks, with a measurable target. The Group also commits to continue to offset 100% of its Scope 1, 2 and 3 emissions, in order to remain carbon neutral as well as to source and utilise 100% renewable electrical energy for its London offices. Please see page 54 of the Annual Report and Accounts for more information.