Push for natural disaster stress-tests and disclosure of risks gains pace

by Artemis on December 1, 2014

The “1-in-100” initiative which looks to integrate climate and natural disaster risk into the financial system, through a process of stress-testing and disclosure, continues to gain pace as it gathered support and endorsement from the United Nations recently.

The initiative, which is led by global insurance and reinsurance broker Willis Group alongside both public and private sector organisations, seeks to integrate natural disaster risk into the financial system, promoting disaster resilience and protecting against climate risk. This would encourage a system of disclosure of both risk and the resilience measures being taken to protect against risks up to the 1-in-100 year return period.

Rowan Douglas, CEO of Willis’s Capital, Science and Policy Practice, and private sector lead of the 1-in-100 initiative, commented; “We believe that many lives can be saved and billions of dollars in potential losses from extreme events can be avoided if we succeed in integrating climate and disaster risk into the very heart of our economic decision making. Working alongside the UN and our initiative partners, we will engage with regulators, accounting bodies, ratings agencies and the wider business community to develop adoption of these standards.”

At its core, the initiative seeks to introduce the 1-in-100 year financial “stress test”, similar to that developed in recent decades by the insurance sector to assess its own ability to underwrite risks, more widely across the public and private sector.

The test evaluates the maximum probable annual financial loss that a company, city, or region could expect once in a hundred years, which enables them to manage their risk in a more informed and effective way, better measure their resilience initiatives and encourage greater use of insurance and reinsurance risk transfer tools to ensure recovery after events is possible.

Dominic Casserley, CEO of Willis Group, commented on the initiative at the recent UN Climate Summit at the UN Headquarters in New York.

He said; “Over a quarter of a century, the insurance industry has developed metrics and regulatory frameworks that have transformed our resilience to natural disaster risk, enabling us to meet our commitments to the global economy and society during years of unprecedented natural catastrophe losses. We are sharing the lessons we have learned during this process with the financial sector and the wider economy.

“Applying a one in one hundred year solvency ‘stress test’ to current assets and current climate conditions can help organisations to truly understand their risk and manage it in an economically rational way. Working closely with the UN Secretary General’s Office and regulatory authorities, we aim to apply these tried and tested principles within the global financial system by 2020.”

This initiative will receive further attention at a series of UN & Insurance sector organized events in 2015, including the IIS Annual Seminar in New York in June, and also help shape the future legislative and regulatory frameworks of disaster risk reduction, including the UN Hyogo Framework for Disaster Risk Reduction (March 2015); the UN Sustainable Development Goals (June 2015) and the December 2015 Climate Conference in Paris.

The movement pushing this initiative forwards is growing in strength and consensus all the time. The insurance, reinsurance and insurance-linked security (ILS) markets need to view this initiative as a way to help the world become more disaster resilient, while also seeing it as an opportunity to advance the development of new risk transfer markets.

Weather, climate and natural disaster risks are a cause of major economic burden on governments, people and corporations. By responsibly taking a resilience focused approach, the financial markets can help corporations, cities and regions to better protect themselves. The 1-in-100 year stress test could become a valuable tool for helping exposure to climate and disaster risks to be better understood, while also providing an opportunity for the re/insurance and capital markets to demonstrate their skills as providers of contingent disaster risk financing.

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