Re/insurance & ILS can help close climate risk protection gap

by Artemis on December 16, 2016

Analysis and accompanying reports from ClimateWise stress the need for the insurance industry to do more to close the $100 billion annual climate risk protection gap, which, presents an opportunity for the insurance, reinsurance, and insurance-linked securities (ILS) space to improve protection and resilience.

Mind the Gap sign (Source: Autoprotect)ClimateWise, a global network of 29 leading insurance industry organisations that was formed in 2008, explains that analysis by ClimateWise member Swiss Re, shows that the annual climate protection gap has increased to $100 billion, from a reported $23 billion in the 1980s.

Two comprehensive reports by ClimateWise, ‘Closing the protection gap: ClimateWise Principles Independent Review 2016’ & ‘Investing in Resilience,’ stress the importance of the risk transfer industry continuing to innovate solutions that enable increasingly vulnerable societies to be protected against the threats of climate change.

Additionally, the report strongly recommends the need for the insurance sector to invest in resilience measures and schemes across the world in order to improve global climate-risk resilience, and not just be the providers of valuable risk transfer.

“Industry leaders now have the opportunity to step up to the challenge outlined by the Paris Climate Agreement. In particular, the industry must help shift capital flows into climate-resilient assets and resilience-enhancing investments rather than simply struggling to maintain its current underwriting exposure,” said Tom Herbstein, Programme Manager of ClimateWise.

Whenever disaster strikes, be it climate-related or not, and insurance isn’t in place to cover part of the overall loss, the burden falls on governments, and ultimately the taxpayer. At the same time, and with the expectation that climate related events are increasing in severity and frequency and becoming far more costly than in the past, the economic impact of these nat cats is growing.

ClimateWise explains that total losses from nat cats has increased roughly five-fold from the 1980s, to approximately $170 billion today.

With the costs so vast, the opportunity for the re/insurance industry and the ILS space to create solutions to protect against those exposed to climate related risks, ultimately helping to close the protection gap, is huge.

Features commonly used in the ILS industry such as parametric triggers, which ensure rapid payout post-event, and weather risk transfer mechanisms such as catastrophe bonds, have the ability to address the global climate protection gap problem.

Combined with the insurance and reinsurance industry the ILS space has the skillset, experience, and capacity to start to have a more meaningful impact on issues like this and, could also look to play a part in building resilience.

“The insurance industry’s role as society’s risk manager is under threat. Our sector will struggle to reduce this protection gap if our response is limited to avoiding, rather than managing, society’s exposure to climate risk. As a risk carrier and risk manager, the insurance industry has significant, and as yet untapped, potential to lead others, in reducing this gap,” said Maurice Tulloch, Chairman of Global General Insurance at Aviva and Chair of ClimateWise.

The transfer of risk that the re/insurance and ILS space facilitates is clearly an invaluable part of the equation, but in light of higher expected losses ClimateWise urges for the underwriting and asset management side of the industry to work more collaboratively, and do more to tackle climate change threats.

“Recommendations include support for green bonds, resilience impact bonds and investments in resilience-enhancing infrastructure,” explains ClimateWise.

Jon Williams, Partner, Sustainability & Climate Change at PwC and member of the FSB Task Force on Climate-related Financial Disclosures, said; “Climate change presents many risks and opportunities for insurers. This year’s review highlights clearly that insurers can and need to do more, specifically within their own investment activities, in response to climate-related perils.”

The challenge is clearly huge, but so to is the opportunity for insurers, reinsurers, and ILS players to play a greater role in both developing adequate and effective solutions, but also improving resilience so the reliance on risk transfer, which is still showing to be unattainable for some peril regions, reduces.

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