Ban Ki-Moon, the Secretary-General of the United Nations, and President Obama of the United States, both made pledges to step up the role of insurance in protecting the most vulnerable against the impacts of climate change yesterday.
Speaking at the Paris COP21 climate talks yesterday, these two world leaders demonstrated the vital role that insurance, reinsurance and risk transfer has to play in helping to make the world more climate secure.
With weather and climate related disaster losses thought to be rising in many regions of the world, and with an expectation that this rise is exacerbated by and will continue as a warmer and more volatile climate contributes to increasing economic losses, the need to put in place insurance, reinsurance and risk capacity to protect the most vulnerable is becoming increasingly urgent.
The COP21 climate change summit, taking place in Paris over the next fortnight, features leaders and negotiators from around 195 countries who will try to reach an agreement targeting a reduction in carbon emissions and a limit on warming of 2 degrees C.
Alongside any agreements on carbon and warming are other key topics, one of which is the subject of loss and damages associated with weather and climate event frequency and severity.
There is agreement that more needs to be done to protect some of the most vulnerable nations from the impacts of severe weather, rising seas and potentially more devastating storms caused by our changing climate.
One of the sticking points in the negotiations previously has been the subject of loss and damage and how to protect the most vulnerable from climate effects which may have been caused by the most economically developed nations emissions. Insurance facilities and increased insurance penetration are one key topic likely to come up repeatedly at COP21 over the coming weeks.
During the first day yesterday (November 30th), UN Secretary-General Ban Ki-Moon launched an initiative which aims to build climate resilience in the world’s most vulnerable countries, aiming to “strengthen the ability of countries to anticipate hazards, absorb shocks, and reshape development to reduce climate risks.”
The UN Secretary-General’s Climate Resilience Initiative – Anticipate, Absorb, Reshape – aims to assist those living in at-risk coastal areas just a few meters above existing sea levels and those living in areas at risk of droughts and floods, communities for whom climate change or warming is perhaps the biggest threat.
Insurance and social protection coverage is a key area of this initiative and Ban Ki-Moon explained that the Secretary-General’s Climate Resilience Initiative will work with existing partners such as the Africa Risk Capacity (ARC), the risk pooling initiative that targets increasing insurance penetration and food security in the region.
Ban Ki-Moon’s initiative will aim to support the ARC to grow and increase its penetration into African nations, hoping that by the time a climate agreement comes into force in 2020, more than 30 countries benefit from $2 billion in coverage against drought, flood and cyclones, including $500 million in adaptation financing and that 150 million Africans will be indirectly insured.
That would signal significant growth for the ARC and clearly a much greater need for reinsurance and risk transfer capacity to assist it to reach these goals, with the UN Secretary-General’s initiatives help.
Ban Ki-Moon also cited the work of the World Food Program and Oxfam America, supported by reinsurance company Swiss Re, which already helps 31,000 rural households increase their food security through integrated disaster risk reduction, which includes microinsurance that is weather-index linked. Over the next 10 years the goal will be to increase the reach of this programme to an additional 500,000 farmers in 10 countries, a significant increase.
Additionally, Ban Ki-Moon’s initiative will look to work with the UNEP Principles for Sustainable Insurance (PSI), the largest collaboration between the UN and the insurance and reinsurance industry, to create a Sustainable Insurance Policy Forum. This Forum will aim to scale up policy progress made by insurance regulators in addressing climate and sustainability related risks.
Also speaking at the event yesterday, President Barack Obama of the United States raised the expectation that there will be an initiative announced for low-lying island states, some of the most vulnerable to loss and damage from climate and weather risks.
President Obama said that at the COP21 climate talks today an announcement would be made regarding a pledge for; “New contributions to risk insurance initiatives that help vulnerable populations rebuild stronger after climate-related disasters.”
That was seen as a signal that world leaders recognise the need to respond to the loss and damage issue and concerns of the world’s more vulnerable countries. At this time no further official announcement has been made, but something is expected today (December 1st).
The pledge to support the expansion and scaling up of the African Risk Capacity (ARC) by Ban Ki-Moon, as well as to help it expand to include coverage for flood and cyclone risks, at the moment it is just drought, is encouraging.
It’s a sign that the adaptation and resilience focus of ARC, while providing risk transfer, risk pooling and accessing the traditional reinsurance and capital markets for reinsurance cover, is a model that we will see grow.
This sustainable approach, to offering insurance to sovereigns to support their building of resilience, enabling greater support for microinsurance layers of protection for the population, while leveraging the risk transfer and reinsurance markets for protection of the pooled risks, is something we’re likely to see grow.
The capital markets will have a role to play here in future, as the needs for reinsurance and retrocessional capacity grow and insurance-linked securities (ILS) and catastrophe bonds become an appropriate set of tools to facilitate the transfer of risks to the most efficient capacity.
As the need to narrow the protection gap becomes increasingly apparent, while the world’s government s seek to cover more of their economic losses with insurance and risk transfer, the insurance, reinsurance and capital markets have an increasingly important role to play.
It is to be hoped that any new insurance or risk transfer business models and initiatives that emerge from the COP21 talks are rooted in sustainability, and ready to leverage the private market capacity which is currently so readily available and cost-effective.
Read our series of articles focused on the insurance protection gap – under-insurance in emerging and developing economies, the gap between economic and insurance losses, and transferring risk from public sector to private – the opportunity that is on every reinsurance CEO’s lips and which presents the largest opportunity to put excess risk transfer capital to use, requiring both traditional and capital markets support.