In reaction to the speech, David Gray, Senior Consultant & Actuary at Broadstone, said: "The recent speech by James Talbot provides a useful complement to the IFoA's work on climate change, inflation and interest rates. While discussions of climate risk often focus on the potential for higher inflation, Talbot highlights that the economic effects of physical climate shocks can be more complex. Heatwaves and droughts may reduce output while increasing inflation, whereas floods and storms could, in some circumstances, have the opposite effect on inflation if the resulting reduction in demand outweighs the loss of productive capacity.
“Perhaps the more significant message for insurers is the emphasis on resilience and insurance protection gaps. The speech highlights the role that insurance plays in helping households, businesses and communities absorb shocks and recover following extreme events. Where losses are insured, the economic consequences of physical risks can be mitigated; where losses increasingly fall on individuals, businesses or governments, the effects may be more persistent and widespread.
“This focus on resilience also echoes the FCA's recent work on protection gaps and improving access to protection products. While the contexts differ, both reflect a growing recognition of the role insurance can play in reducing financial vulnerability and supporting longer-term economic resilience.
“Taken together, the IFoA paper, Talbot's speech and recent FCA activity point towards an increasing focus on resilience. For insurers, the challenge is not simply understanding how climate change may affect inflation, interest rates and claims experience, but also how the industry can continue to provide effective risk transfer and support recovery as physical risks evolve. Maintaining the availability, affordability and value of insurance is likely to become an increasingly important component of economic resilience in the years ahead."
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