International insurance industry research body and think tank, The Geneva Association (GA), has reported that 68 traditional insurance and reinsurance firms have shown their commitment to manage and reduce global risks associated with climate change.
The expertise, capacity, mechanisms and willingness to help of the global insurance and reinsurance industry is seen as a vital component of the global fight to build climate resilience and adaptation, as the severity and frequency of extreme weather, and climate-related events is expected to increase, signalling a need to improve disaster resilience efforts around the world.
“Re/insurance performs a vital societal and economic function by signalling the price of risks to raise awareness, underwriting risks and redistributing the cost both geographically and financially around the world,” explains the GA.
The GA notes that combined, the 68 re/insurers that have confirmed and signed their commitment to the progression of climate resilience and adaptation, represent $1.2 trillion of premium volume, and collectively manage assets of beyond $11 trillion.
Interestingly, however, no ILS players have committed as of yet, which is perhaps surprising owing to its recent expansion within the overall re/insurance landscape. However the GA does not have any insurance-linked securities (ILS) managers in its membership to date, something that with the growth of ILS will no doubt change in time.
In order to sufficiently address and improve global disaster resilience efforts, climate related or not, industry leaders and experts have said that the capacity, structures and willingness of the entire risk transfer space will be required, ILS included, which makes the sectors involvement in these discussions important (in our opinion).
The GA said; “However, re/insurers recognise that no stakeholder can succeed alone in solving the challenge of climate change.
“Through active engagement in public/private partnerships and in close cooperation with policymakers, governments, regulators and other stakeholders, re/insurers are dedicated to playing a key role as an integral part of the global prevention, adaptation, disaster risk reduction and mitigation efforts.”
The admission that the entire re/insurance industry, with the effort of further public and private entity involvement will be needed to significantly address the issue, does signal that the innovation, and expanding capital base of the alternative risk transfer market could be utilised.
The GA explains that commitment from 54 industry leaders was initially substantiated and formalised by the GA’s climate statements signed in Tokyo in 2009, which then increased to 64 with further climate statements being signed in Canada in 2014, with the number now jumping to 68.
The United Nations (UN) Convention on Climate Change is scheduled to take place in Paris, France, at the end of December, and the GA states that the re/insurance industry is “actively participating in global discussions… to foster a better understanding of the potential risks and associated costs of climate change and to demonstrate the benefits of market-based solutions.”
Building global resilience to the threats of natural disasters, whether pre-event mitigation or post-event recovery and sustainability, will also serve to bridge the growing insurance protection gap, another global trend that will need the entire reinsurance, insurance and ILS landscape.
In its press release the insurance and reinsurance entities that are part of the GA, sought to share their views on how they plan to tackle the issue, giving an idea of their commitment for customers, policymakers, the UN, and the insurance industry.
For customers, this includes a commitment to “enhancing our research capabilities in order to provide a better evaluation and management of climate risks,” and, a willingness to “design insurance products to support low-carbon energy development projects and to help attract investments to such projects.”
Concerning policymakers, the GA said the insurance industry is prepared to “help counter climate risks through active cooperation in implementing building codes or similar means which encourage the use of sustainable prices.”
“Insurance mechanisms (which we would hasten to add should include ILS structures such as sidecars, cat bonds and so on, to bring the depth of the capital markets into the picture) are an effective tool to promote climate-related risk management and reduction,” said the GA, adding that the insurance industry is “willing to play a major and concerted role in the global efforts to counter climate risks.”
So it’s clear that the insurance and reinsurance sector has a major role to play in the fight to reduce the impacts of climate-related extreme weather events and the impact of climate change, but we at Artemis feel it will likely also need the ILS and capital markets too.
As ILS continues to grow and become more widely accepted, highlighted by the increasing shift towards hybrid reinsurance models in recent times that utilise third-party backed capital, perhaps the GA will seek the commitment of these types of funds and managers in the future, which would certainly be welcome, as the depth of capacity and expertise available to marshal it can only help.
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 that presents the largest opportunity to put excess risk transfer capital to use, requiring both traditional and capital markets support.