Paris COP21 agreement to lead to reinsurance sector expansion

by Artemis on February 12, 2016

Agreements and frameworks established to tackle the global threat of climate change during the COP21, Paris meeting of governments, emphasised the importance of risk transfer, highlighting an opportunity for the international insurance, reinsurance and ILS industry to expand its reach.

Following the COP21 meeting last year, leaders noted that improving disaster resilience for developed and emerging economies across the globe is vital in the fight against climate change. With risk transfer solutions being viewed as a necessity to increasing global economic stability and sustainability against climate related risks.

“It seems inevitable that by 2020 the re/insurance sector will not only be providing a wider range of risk-transfer solutions, but also be supporting emission reduction efforts and transitioning to a low-carbon economy through its investment strategies as well as actively managing its carbon footprint.” said the Geneva Association (GA), in a new report on the implications of the COP21 agreement on the re/insurance industry.

The GA, an international insurance industry research body and think tank, highlights how protection against extreme weather and climate related events is needed to ensure financing for rebuilding, increasing resilience efforts and strengthening economies.

The knowledge, expertise and experience of managing risks the insurance, reinsurance, and insurance-linked securities (ILS) markets offers will likely prove invaluable to the COP21 agreement, but it also provides the industry with an opportunity to create innovative, affordable solutions, helping it to expand its reach across new perils and regions.

In order to expand and offer affordable solutions to those in developed regions like the U.S., and emerging, underserved places like parts of the Asia-Pacific, the most efficient capital is required.

This means utilising the wealth of traditional and alternative insurance and reinsurance capital that’s in the sector, and deploying it through products, schemes and solutions that improve societal sustainability and recovery, which will require both private and public sector support.

Apart from providing the capacity, structures and features such as parametric triggers that are utilised by the re/insurance industry could also benefit emerging regions, as a lack of modelling due to minimal historical loss data can create difficulties with pricing and limit the understanding of potential risks.

Furthermore, initiatives like the Caribbean Catastrophe Risk Insurance Facility (CCRIF) and the African Risk Capacity (ARC), which were highlighted at the COP21 meeting and by the GA as examples of successful risk transfer mechanism, show that features such as a parametric trigger structure enable rapid payout post-event, mitigating the impacts of extreme weather and climate related events.

Regional risk pools as mentioned above, the G7 insurance resilience initiative and Ban Ki Moon’s framework on disaster resilience all utilise, or stress the importance of using re/insurance solutions to create a more sustainable planet against the rising threat of climate change related risks.

Regarding extreme weather events, re/insurance pools and other risk transfer mechanisms alleviate some of the pressure from governments by providing the financial support post-event. In places with low insurance penetration levels governments often foot the bill post-event, meaning it can take time to get back to a place of financial stability.

“The Paris agreement offers both opportunities and challenges for the insurance industry, especially in the areas of risk transfer for extreme events, sustainable energy and public-sector risk financing,” says the GA.

It certainly won’t be an easy task, as the risks are plentiful and the needs in terms of coverage and financing for regions vary throughout the world.

But as stated by the GA, the insurance and reinsurance industry is best equipped to provide the solutions and help create a more financially stable global economy, whether before or after an extreme weather event, or in response to the growing threats of climate change.

Insurers, reinsurers and ILS players are increasingly looking for new profit avenues, and emerging economies are increasingly being viewed as viable, profitable markets as agreements like the COP21 enhance the scope for market access, while also highlighting the broader, global benefits.

Modelling capabilities are also improving all the time, adding new perils and regions to their capabilities, which combined with a desire to expand and enter new risks and markets, should prove beneficial to both the re/insurance sector and the economies in need of greater protection and resilience measures.

“The insurance industry has the potential to contribute significantly to making societies more resilient with respect to the adverse effects of climate change and, at the same time, creating new business,” said the GA.

Also read:

Canada joins countries contributing to climate risk insurance at COP21.

FSB launches Task Force on Climate-related Financial Disclosures.

Cat bonds can help provide $200-300bn for climate change shocks: Rockefeller Foundation.

Ban Ki-Moon, Obama in insurance pledges at Paris COP21 climate talks.

Reshaped reinsurance can support sustainable development goals: PwC S&P.

68 traditional re/insurers commit to Climate Risk Statement.

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