Maurice:

Hello everybody and welcome to the latest edition of C & F Talks, which is a series of interviews with speakers at our upcoming events. Today, I have the pleasure of having with me, Bruce Carnegie-Brown, who is Chairman of Lloyds of London, and Bruce is going to be speaking at the Climate Change and Natural Capital Leaders’ Summit. It's part of City Week 2024 and is being held at the Guildhall in London.

Thank you.

It's good to have you with us, Bruce, so let's turn to the first question.

Maurice:

How is the increasing physical risk of climate adaptation affecting Lloyds of London in terms of the cover that you can provide to clients?

Well, I think at Lloyds we feel that we're already fully invested in the impacts of climate, because 25% of our capital at Lloyds supports natural catastrophe insurance risks around the world. And so, as frequency and severity increase over time, so it has an impact clearly on our claims, it has an impact on the availability and affordability of insurance. So it's something we believe we have skin in the game for already and something we watch very closely.

Maurice:

Are there any types of insurance that are likely to be uneconomic to provide as the climate worsens or perhaps geographical areas where you'd be less keen to write cover?

Well, a couple of comments on that really would be it's much less about the type of risk than really how expected the risk is, because insurance really performs well in protecting people against unexpected outcomes and to the extent that outcomes become expected clearly either insurance becomes unavailable or it becomes unaffordable. But what we are observing is that countries that didn't used to be in what you'd call natural catastrophe zones, Europe would be a good example of that particularly places like Germany, are seeing greater frequency of flooding for instance, hailstorms and these are relatively new factors. There are traditional geographies around the world, the southeast of the United States being a very good example, where of course natural catastrophes happen pretty regularly mostly in the form of hurricanes during the third quarter of the year and so not only are planning rules better in those places there's greater resilience to those issues than in other parts of the world and so they continue to be able to afford and have insurance. But even in those places some of the challenges are increasing in terms of the affordability and availability of insurance.

So, I suppose you know that in essence insurance is a matter of pricing risk and is it a challenge to price risk when historical climate data sets are no longer a good way of predicting future climate change.

Maurice:

You mentioned that insurance is a matter has value when it protects you against unexpected events. How does all of this link up? I mean is it hard to price risk? Some of these changes are a bit more predictable but we don't know how predictable. How do you square all of that?

Well essentially in terms of the management of risk one of the positive factors within the general insurance industry is of course we re-look at these things annually so typically people buy a one-year policy and so we have a chance to reassess the cost of the risk and indeed the terms around which the cover is provided on an annual basis and in that sense insurance should be able to re-price and restructure itself on an annual basis. The challenge a little bit for us, is that what we're doing is adding one new year of data to a very long data set and if something exponential is happening with respect to climate, then it may be that the insurance industry remains behind the curve of where it needs to be consistently over time.

The positive about adding one year of data to a long data set is that we're not overreacting to any particular year when we re-price these things and we do recognise that, of course even pre-climate change impacts weather can fluctuate dramatically, and we already are pretty used to El Niños and El Niñas and the impacts of those in terms of weather cycles. But what is happening is that the climate is beginning to show signs of amplification of those impacts, and as I say a greater occurrence in places that didn't used to be exposed to these kinds of weather events. So the compounding of all of that must mean that we're on guard for those kinds of issues and to make sure we're taking in the right kind of data and doing the right kind of analytics on these things and it is probably true that models are slow to respond to some of this new data.

Yeah, I guess that's inevitable isn't it.

Maurice:

Aside from the potential impacts of climate change on the insurance cover that Lloyds can provide clients, does the corporation have its own transition plan and what have been the challenges involved in implementing that?

Well, so, clearly for things like scope one and scope two emissions it's pretty straightforward we're a financial services business our carbon footprint is pretty low, so most of our activity focuses on the scope three emissions. So, what are the things that we're investing in with our cash and what are the things that we're underwriting in terms of the risks, and of course one of the most obvious observations would be that climate related issues are increasingly becoming politicised. And because we're international in our orientation and we host countries, sorry, companies from many different countries around the world there is a very different approach to climate in those countries and in those companies.

And indeed as you know in the United States sometimes states get quite hostile, the insurance commissions in states get quite hostile, if we try to introduce strictures on what kind of risks that we will ensure and Lloyds of course, is a host it's a marketplace rather than an individual company and so while we can issue guidance to the market we've got to be very careful about behaving in anti-competitive ways.

And so, typically at the moment it's down to each operator at Lloyds to develop their own policies around this and what we're trying to do at Lloyds is to aggregate this, so that we properly benchmark our exposure to the risk. Where are we today in terms of our scope through emissions? We all know where we need to get to by 2050, and can we create a portfolio effect in terms of looking at how that portfolio changes over time.

And to the point you've made, what we want to do is to is to support customers transitioning their own business models we think that's the fair and reasonable thing to do. And even big oil majors are doing a lot to invest in renewables and reduce their own carbon footprints, and we think if those transition plans are credible that we should support them. But, of course, if you're a thermal coal mine you're not going to transition to anything else than a thermal coal mine over time, and so these kind of single asset project financing assets will increasingly become harder and harder to finance and to insure.

So, transition absolutely means transition, we need to be confident that people are moving in the right direction, but that seems to me to be a developing theme across financial services that most organisations are trying to adopt a very similar practice to be supportive of customers, provided customers are trying to do the right thing.

Yeah and absolutely, and of course the City of London has a great role in supporting transition finance and being a centre of transition finance, and we now have a review I think undertaken on that at the present time. So at least that's a positive to take from the current situation. Our time is up, so just to say to my viewers very much hope to see you at the Climate Change and National Capital Leaders’ Summit, it's part of City Week and the event's being held at the Guildhall, London you'll hear more from Bruce and from an array of exceptional speakers alongside him.

So, it just remains for me to say, Bruce, thank you very much for sharing those thoughts with us today.

It's a pleasure.