ART & ILS can support human rights against catastrophe risks

International insurance and reinsurance markets, including alternative risk transfer instruments and insurance-linked securities (ILS), have a vital role to play in ensuring basic human rights for people against the world’s catastrophe risks, according to a recent study.

The study, titled ‘Insurance regulation for sustainable development – Protecting human rights against climate risk and natural hazards,’ was published by the University of Cambridge Institute for Sustainability Leadership, and explores how insurance, its regulations and the wider risk transfer industry can protect human rights against rising natural disaster, climate and severe weather risks.

The study claims that over the last two decades natural disasters have affected 4.4 billion individuals, and that in 2013 three times as many people lost their homes to natural disasters than to war, a startling revelation.

For various factors, including increasing global asset values, climate change, rapid urbanisation, the interconnectedness of the world today and a rise in extreme, adverse weather events, “the overall economic losses and displacements from natural hazards has risen significantly in recent decades,” says the report.

And, as science and technology has advanced over time, so too has the risk transfer sector’s understanding and capabilities of modelling, predicting and estimating potential impacts and losses of global natural disasters, whether this is a hurricane in the U.S., winter storms in the UK or flooding in Asia.

The resulting argument is that as the technology, capital base, understanding and realisation is now advanced and sufficient, the general and alternative risk transfer markets have become a mechanism to protect the human rights of live, livelihoods and shelter of billions against the planet’s catastrophic risks.

The UN Human Rights Council highlights this point; “Natural hazards are not disasters in and of themselves. Whether or not they become disasters depends on the exposure of a community, and its vulnerability and resilience, all factors that can be addressed by human (including State) action.

“A failure (by governments and other actors) to take reasonable preventative action to reduce exposure and vulnerability and to enhance resilience, as well as to provide mitigation, is therefore a human rights issue.”

Insurance, reinsurance and most notably to us here at Artemis, alternative risk transfer and insurance-linked securities (ILS), can enhance development and sustainability of sectors such as agriculture, finance and health in emerging and developed markets, while also serving to boost risk awareness, reduction and shock resilience, notes the report.

The issue, and where alternative risk transfer mechanisms, including catastrophe bonds, ILS and so on can help, is to provide innovative, affordable protection to the poorest people of the world, who are often the most susceptible to extreme natural disasters.

“Insurance should receive higher emphasis to ensure delivery on various policy commitments across the Post 2015 agenda. Our research shows that the protection of human rights and preservation of community capital from climate risk via insurance regulation are aligned and mutually reinforcing.

“This has profound implications for policy makers seeking effective and practical solutions to these urgent and complex challenges,” said Dr Ana Gonzalez Pelaez, Lead Author of the report.

The report highlights several case studies, including the successful Africa Risk Capacity (ARC) as an example of using risk transfer to protect once underserved people of the world, and granting them with the basic human rights of life, livelihood and shelter.

In fact, it was recently noted by G7 leaders that ARC’s structure and model should be replicated globally to bring adequate, affordable insurance protection to many more vulnerable people across the globe.

The study largely focuses on how improved and solid insurance regulations, which can also be attributed to reinsurance, ART and ILS, can and should become “a recognised mechanism for enabling human rights, and human rights should be a guiding principle for insurance regulation.”

Without proper, sound regulation of all types of insurance protection schemes for human rights against catastrophe risks, the industry isn’t able to expand sustainably into underserved, developing markets, notes the report.

Furthermore, regulation encourages prudent capital management by the re/insurers, sound market conduct and ensures industry development, the report states.

The regulation of re/insurance, ILS or similar contracts can also serve to introduce and implement disaster resilience plans for societies and communities, ensuring that in the future developed resilience systems result in less insured losses post-event.

Co-author of the report, Dr Sebastian von Dahlen, Chairman, G-AWG, International Association of Insurance Supervisors, Basel said; “Effective insurance systems play a critical role in supporting the resilience of communities exposed to natural disasters.”

While CISL Director, Sustainable Economy, Dr Jake Reynolds added; “The financial system has unique potential to drive sustainable development if properly incentivised and regulated. Building resilience to climate and natural hazard risks is just one example of this; there are many more across banking, investment and insurance.”

There is clearly still a very long way to go as an industry, and as a planet if we are to ensure everyone, even the poorest and most vulnerable of the world, against the perils of natural disasters.

But the tech, analytics, knowledge and capital-rich insurance, reinsurance and wider ILS risk transfer markets are more than equipped to begin tackling this issue, and granting the most basic of human rights to those in most need.