Modern catastrophe cover was born with your decision to stand by policyholders after the San Francisco earthquake. And Lloyd’s pioneered aviation insurance. 1 With eyes constantly on the horizon, Lloyd’s has remained at the forefront of global insurance. Today, you are insuring new classes of risk in new parts of the world – from cyber to climate, from space to specie, from Curitiba to Chengdu. And you are doing so in market conditions as challenging as any in the last 20 years. The need to manage emerging, mega risks is as important as ever. Alongside major technological, demographic and political shifts, our very world is changing. Shifts in our climate bring potentially profound implications for insurers, financial stability and the economy. I will focus on those risks from climate change this evening. 1  The first aviation policy was written in 1911, followed in 1919 by the founding of the British Aviation Insurance Association. That venture closed in 1921, with underwriters concluding that “there seems to be no immediate future in aviation insurance…” www.lloyds.com/lloyds/about-us/history/innovation-and-unusual-risks/pioneersof-travel. BIS central bankers’ speeches  1  The tragedy of the horizon There is a growing international consensus that climate change is unequivocal. 2 Many of the changes in our world since the 1950s are without precedent: not merely over decades but over millennia.
Due to time constraints, I cannot be exhaustive today. But, there are four important structural changes to the financial system that are worth highlighting. First, the tri-party repo system—which matches institutional investors with bank dealers that need to fund their securities portfolios—has been made much safer. Before the crisis, each morning the two large clearing banks provided huge amounts of intraday credit to their tri-party repo borrowers when cash invested overnight was returned to lenders. These temporary extensions of credit have been largely eliminated. This is an important structural reform because these exposures had proven to be destabilizing during the financial crisis. In particular, when a major dealer became stressed, the clearing banks were motivated to reassess their large overdraft exposures to the dealer, and that turned out to be an important channel of contagion. Another important change has been the shift in over-the-counter derivatives activity from bilateral settlement to central clearing. Although this shift was already underway at the time of the financial crisis, it has now been underpinned by important changes to the capital and collateral regime, which has accelerated the process by strengthening the incentives to structure and clear trades centrally. When banks settle their trades with central counterparties (CCPs), it reduces risk in the system. Exposures can be netted, and the counterparty risk is shifted from many individual firms to the single CCP that clears the trades.