Risk transfer & re/insurance key to raising world’s disaster resilience

by Artemis on March 15, 2015

The world is meeting in Sendai, Japan over the coming days to discuss disaster risk reduction and how the world becomes more resilient to them. Risk transfer and re/insurance remain vital components of any disaster risk reduction initiative.

The talks held in Sendai Japan are a key step on the route to a new global agreement on climate and disaster risk reduction, an agreement which is required to maintain concerted pressure on governments and businesses to increase their resilience.

The event in Sendai is arranged by the United Nations Office for Disaster Risk Reduction and hosted by the Government of Japan. With more than 6000 delegates expected to attend the event, from over 190 countries, the meetings hope to emerge with an agreed upon ‘Framework for Action on Disaster Risk Reduction.’

The Framework hopes to crystallise the world’s thinking on how to encourage countries and corporations to become more responsible for disaster risk reduction and building resilience. Creating safer communities is ultimately the long-term goal, but encouraging risk reduction and resilience efforts are the steps along the way, steps which will need to be supported by disaster risk transfer.

The insurance and reinsurance industry is well represented at the event, with seats at some of the key meetings on disaster risk and resilience, as market players seek to explain the importance of including risk transfer, alongside risk reduction and resilience, as part of the overall solution.

Getting a Framework which everyone can agree upon is no easy task, with 190 countries involved and the looming issue of climate change a piece of the puzzle which it is hard to get agreement on. However, the world seems united on the need to build resilience to disasters, lessen the economic and social impact and to ultimately better protect communities.

Whatever the outcome, it’s important for those meeting in Sendai to appreciate that the risk transfer markets, including re/insurance, insurance-linked securities (ILS) players and capital markets or institutional investors, stand ready to support any progress on key issues related to disaster risk and resilience.

Building resilience to disasters, extreme weather and climate events is clearly the ultimate goal, but risk transfer can be an important helper along the way.

Allow risk transfer to help with plans to build resilience, to financially support reconstruction, to enable communities to recover more quickly when the worst happens. Investing in resilience without investing in risk transfer could result in investments being lost after disaster events, meaning financing has to be raised again for the resilience projects to continue.

Embedding risk transfer into resilience and disaster risk reduction efforts means that financial liquidity is available when the worst events happen, enabling efforts to be re-started, re-doubled and protecting the investments that countries and corporations make in DRR (disaster risk reduction).

Risk transfer is also an answer to concerns that large corporations are not taking responsibility for their exposures to weather and catastrophe risks. Requiring global business players to protect themselves, their infrastructure, their supply chains and partners, their workers and the communities they live in, will help to build resilience organically.

However, to help these corporations and the global business community to pursue DRR projects, insurance, reinsurance and capital markets capacity will be required. Contingent sources of disaster risk transfer can help to encourage the business community to invest more in resilience and also be a positive step in enabling more rapid recovery when climate, weather or natural disasters strike.

Where will the capacity come from to support the insurance, reinsurance and risk transfer needs of the world’s countries and corporations as they seek to become more resilient to disasters? Clearly the insurance and reinsurance markets are key players, but they will require support and greater liquidity from even deeper pools of capital.

Catastrophe, or natural disaster, and also weather risks are already an accepted asset class, with capital market investors willing to support the role of insurers and take on risks that perhaps cannot be borne by communities, governments or even the traditional re/insurance industry in some cases.

The government and global representatives attending the meetings in Sendai would do well to remember this, and also be ready to take advantage of the fact that the appetite to access more risk among capital market investors has perhaps never been higher.

Make use of investor appetite in order to financially cover as much peak disaster and weather risk as is possible, while the efforts to build resilience continue apace. Use the deepest pools of efficient capital that are available in order to support and enable DRR and resilience efforts to be completed more rapidly and with lower risk of funding being drained when disasters occur.

The planet will not stop throwing disaster and weather extreme events at us while risk reduction and resilience efforts are ongoing. So do what is necessary to protect these efforts and ensure when the worst happens a rapid recovery and continued progress can be made.

The result, over coming years, should be access to risk capital when it is most needed post-disaster, in the knowledge that the reliance on and use of risk capital markets should reduce as resilience increases.

While DRR and resilience increases, the need for risk transfer may be reduced. Where risk transfer may be most needed is during the early years of major risk reduction and resilience projects, in order to secure financing and replenish it when events occur.

Follow models that have been proven to work, such as the African Risk Capacity (ARC) initiative which seeks to reward resilience efforts and codify them into the policies that countries take out, meaning that those making best efforts to enhance their resilience can ultimately pay lower premiums for their risk transfer.

Risk transfer will also become cheaper as resilience and the exposure being transferred is reduced, because risk reduction efforts are beginning to reduce the potential for losses.

Importantly, make use of the capital markets, the largest and most liquid pool of capital available and which is willing to take on catastrophe, weather and climate risks. Engage the insurance-linked securities (ILS) market, as these players can access capital to help finance the transfer of risks.

Make use of the established ILS market product suite, with its structures such as catastrophe bonds, parametric triggers and other mechanisms that allow risk to be transferred and assumed. ILS can support traditional insurance and reinsurance to ensure disaster risk transfer meets the levels of protection required to really stimulate resilience. This needs to be a concerted effort across to the risk, insurance and capital markets.

The risk transfer markets, of insurance reinsurance and ILS, stand ready to support the resolutions reached at the important Sendai WCDRR meetings in the coming days. Make use of them.

Encourage risk transfer in order to encourage resilience (and vice versa). The two naturally go hand in hand and on their own both would be less efficient.

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