7 Questions for Demex’s Chief Climate Officer Stephen Bennett
For the past five years, an increase in the frequency and severity of climate risks has plagued commercial property insurance markets.
But weather and climate are two risks Stephen Bennett believes the insurance industry is poised to manage. Bennett is the cofounder and chief climate officer of Demex, a firm that models, assesses and provides risk transfer solutions for climate-linked risks.
Risk & Insurance® sat down with Bennett to discuss the climate risks businesses are facing, how he expects those exposures to change over the next few years and how his company is helping to address non-catastrophic climate risks.
Risk & Insurance: Can you tell me a bit about how you came into your role as chief climate officer of Demex?
Stephen Bennett: It stems from my background.
Back around 2005, I was a meteorologist working for Citadel Investment Group, a hedge fund in Chicago. Citadel started an energy trading business after Enron collapsed, and they tapped into a team of us to come build their energy business. Through Citadel, I had an opportunity to work with several of the other cofounders of Demex.
It’d be 15 years before we actually formed Demex, but we all met at Citadel. Flash forward to late 2019. I had started a company that identified weather risks to global supply chains, and it was in the process of being acquired by a group that included global shipping company DHL.
This presented an opportunity for me to do something new. I met back up with several people that I worked with at Citadel who were working on the concept that would become Demex. We launched Demex really at the start of 2020, and I am on the founding team.
R&I: What an interesting career trajectory. To dive into it, how does Demex help companies manage climate risks?
SB: We’re in a pretty unique position to help companies mitigate their financial climate risk. Any company that suffers some sort of a financial loss due to weather is where we start. The climate element here is that climate change is causing the distribution of those loss-causing events to shift. Someone who’s been in business 20 years or 50 years has a good working history of how the weather affects their company and line of business.
Our key realization is that businesses can no longer look backwards over a 20- or 50-year history. In the case of an insurance company, they can no longer rely on the 100-year data sets or 50-year data sets that they were conditioning their loss estimates on. Climate change has changed that.
We started with the notion of connecting weather risks to the financial impact on the business. Then, the next step that we do is we try to understand how climate change is affecting the distribution of business outcomes. Then we will go on to form a financial protection for the business for that specific exposure.
So, whether that’s an insurance policy, whether it’s a reinsurance policy, whether it’s some form of a financial derivative, we will come all the way through to the risk management discussion and help form a financial product to protect against the risks companies face.
It’s important to add in this part of the conversation that Demex is focused on non-catastrophic risk. The CAT space is very well served and has been for quite some time. The risks we’re focused on are not the Hurricane Ians of the world. It’s not the $50 billion insured loss across the industry. We’re talking about the events that used to happen once every 10 years or once every 20 years. Now, they’re starting to happen maybe once every five years or once every 10 years. That’s a new space in the market that is incredibly underserved.
R&I: What hole is this filling in the risk management and insurance industries? Why is this an applicable tool for today and tomorrow’s climate risks?
SB: One of the best ways to answer that question is to think about an example. One of the examples that’s pretty well known in the insurance market today is that, over the past five to 10 years, the Upper Midwest United States has begun experiencing losses from severe thunderstorms — wind, hail, tornadoes, those kinds of things — in months that it’s never happened before. I think it was last year we saw a tornado outbreak in December. It’s incredibly unusual for severe weather to affect those regions that deep in the winter.
So, what’s happening is the weather patterns are changing. Severe thunderstorms are now becoming something that can possibly happen in winter because winter weather is coming in a little bit later than in the past.
The insurance industry built their business knowing that there’s a quiet period in severe thunderstorms and have set their rates based on that, the profitability performance for these companies is based on that. So when we wind up having loss-causing events in December and January, it begins to affect the financials of the insurance company.
Then, the market reacts. Reinsurance rates begin to rise to reflect that they will begin to price that risk in accordance with an increase in likelihood of an event. What that means is that the insurance companies wind up retaining more risk on their own balance sheet, which affects their credit. When the credit agencies look at the risk of loss and how much cash the insurer has available to pay claims, they’re basically finding a significant disconnect.
What we’re doing is putting coverage into that gap to help the insurer remain solvent, but also to keep their credit where it needs to be by providing new layers of protection.
R&I: In addition to your role with Demex, you serve as chair of the American Meteorological Society’s committee on financial, weather and climate risk management. What does that position entail?
SB: The American Meteorological Society is a professional society of scientists, practitioners and governments focused on meteorology and climate. If you turn on your news in the evening, your meteorologist on TV may have an AMS seal if they’re certified by the American Meteorological Society.
It’s our professional society, and it’s many thousands of members strong. We probably have over 10,000 members. The society is broken up into interest groups — into committees, commissions or boards. Our members span the full spectrum of people involved in climate and meteorological work, from world-class rock-star scientists in climate research centers doing work on the physical relationship between the oceans and the atmosphere, all the way through to people like me, and to the TV meteorologists.
The committee that I chair was formed between five and 10 years ago with the specific motivation of connecting the professional community of climate scientists and meteorologists with the professional communities of financial risk managers, business practitioners, executives, lawyers and people in other fields.
When we formed the committee, we knew that those fields were going to be dealing with weather and climate risks in the years ahead. So, having a connection directly to the community of meteorologists or climate scientists would help everybody enhance their knowledge and start putting pieces together to apply the information that’s going on in science to the real world of business.
The committee was formed specifically to provide interconnection between the communities. And we do that through conferences, virtual meetups and education initiatives. We’re all volunteers. It’s an all-volunteer effort trying to bring these communities together.
R&I: Why do you think it’s important to represent the insurance and risk management industries within the Society through this committee?
SB: The market need has changed so profoundly over the course of the past five to 10 years. The community of risk professionals needs help. Weather and climate science data is all very complex, and most people don’t really understand exactly how complex even just weather information is.
If you just say ‘What’s the temperature forecast for tomorrow in Philadelphia,’ you’re going to get 100 different answers. So, it’s really important for this community of risk professionals to understand which data sets are intended to be used for what purposes, and which ones are best for underwriting certain types of risk.
How much should you rely on historical information versus how much should you use forward-looking information? And if you want to use forward-looking information, what forward information should you use?
For just a simple two-week weather forecast, there are between 150 and 200 different information sources. There are 200 different weather models that are freely and publicly available that will give you the forecasts two weeks from now. Estimates for a high temperature may be 40 degrees apart. One forecast would say it’s going to be 20 degrees in Philadelphia and the other would say it’s going to be 60 degrees in Philadelphia.
Our committee exists to try to help someone who needs that information take those 200 answers down to a set that is reasonable for their application and have an accuracy level that they can deal with.
The coming community of risk professionals that we’re talking about here, they’re not dealing in two-week weather, right? They’re dealing with underwriting risk that is at least a year in length, and in many cases, they are looking multiple years out.
When we go from weather information to climate information, there’s a whole new set of complexity. Risk professionals are being required to think about climate as they’re doing their risk assessments. Consider the proposed rule by the Securities and Exchange Commission task force on climate disclosures. There are various regulatory bodies now that are basically saying, if you’re going to provide a risk assessment, you must include climate change as part of that risk assessment.
R&I: You mentioned at the beginning of your answer that the market has become profoundly different in the past five to 10 years. What do you think the next several years will hold when it comes to weather and climate risks?
SB: It’s a great question. I think the trends that we’ve seen over the past five to 10 years are just going to continue. If I could characterize the past five to 10 years, they’ve been about businesses being impacted in ways that they didn’t expect. Surprise!
I think the next 10 years is going to be all about management. The next 10 years is going to be about not being surprised that certain events are occurring, and not only not being surprised, but also having protections in place so we’re going to be able to recover more rapidly.
R&I: So, in your view, what efforts are being made by the risk management and insurance industry to ensure businesses are able to more rapidly recover from these risks, which we know are only going to continue?
SB: We’re in a period now where we’re starting to see an exponential growth in sophistication in this area. Look at the job market. If you look across the insurance and risk space, most major players have added entire divisions who have a focus in this area. As I look across the weather and climate community, we’re noticing that people whose careers would have taken them through the academic and research complex are now working for places like Guy Carpenter. They’re working for places like Willis.
Insurance and risk companies are hiring divisions of people who are focused on the climate implications for their portfolios. Outside the insurance community, global consulting firms and accounting firms are adding divisions looking at these risks. Boston Consulting Group, McKinsey, Accenture — all those groups are also beginning to add divisions where this kind of expertise is important.
And then, finally, you can come to companies like ours, like Demex. There’s validation in how much investment is going into the climate tech startup space. Ten years ago, you would not have seen a single venture capital firm that would have invested more than $10 million into a climate tech startup. Now, we’re seeing over $100 billion of investment come into new ventures to approach this issue. &