California to work with UN on sustainable insurance for climate risks

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The U.S. state of California is getting increasingly serious about the use of insurance or risk transfer to provide financing against climate risks and financing to support climate adaptation and resilience building.

california-state-flagThe state is already in the process of putting into place legislation that would allow it to purchase insurance, reinsurance, insurance-linked securities (ILS), or other alternative risk transfer (ART) structures, to help fund the economic burden from natural disasters.

This legislation stalled recently though, as arguments emerged that the state can already purchase risk transfer.

At the same time, the state has formed a wildfire insurance fund, which as we explained will be backed by reinsurance and is set to be administered by the California Earthquake Authority (CEA), to provide risk finance for utility exposures to wildfire.

Broker Guy Carpenter recently won the rights to place a reinsurance or risk transfer program for the wildfire fund.

These steps have both been largely driven by the severe wildfire impacts experienced in California over the last two years, but the state is also aware that other climatic and weather phenomenon are a threat as well, especially as the climate changes over time.

As a result, the Insurance Commissioner Ricardo Lara said at a briefing recently that his team intends to work with an arm of the United Nations to put together guidelines on delivering sustainable insurance for climate related risks.

Commissioner Lara revealed that his team will work alongside the United Nations Environment’s Principles for Sustainable Insurance Initiative to put together a climate risk management and transfer plan for California.

In a statement made to the media Commissioner Lara explained, “We have a historic opportunity to utilize insurance markets to protect Californians from the threat of climate change, including rising sea levels, extreme heat and wildfires. Working with the United Nations, we can keep California at the forefront of reducing risks while promoting sustainable investments.”

Part of the work is expected to be related to resilience building and climate adaptation, in order to demonstrate to the insurance and reinsurance industry that the state of California is taking steps to address its climate related exposures.

But in addition, securing sources of insurance and reinsurance capital that can help the state as it adapts to the reality of a warming climate, potential higher sea levels, and more devastating storms, are all in scope as well, we understand.

Butch Bacani, leader of the UNEPFI Sustainable Insurance Initiative, commented on the work, “A sustainable insurance road map will enable California to harness risk reduction measures, insurance solutions and investments by the insurance industry in order to build safer, disaster-resilient communities, and accelerate the transition to a low-carbon, sustainable economy,” the LA Times reported.

The initiative is expected to involve work with insurance and reinsurance firms, as well as catastrophe risk modelling specialists, to help California understand its exposures and design appropriate solutions to enhance resilience, speed up adaptation and create insurance products or put risk transfer in place to support this.

Alongside the disaster risk transfer bill and efforts to better transfer the risks from wildfires away from taxpayers, California is clearly gearing up to become a major user of and hub for the development of climate risk transfer and insurance.

The future role of the capital markets, insurance-linked securities (ILS) and catastrophe bonds is already apparent here, being explicitly named in the disaster risk transfer bill and as possible sources of reinsurance capacity for the wildfire fund.

California could leverage the appetite of the ILS market to take on disaster related exposures, providing itself and its population with the necessary financial buffers to help in the transition and adaptation to climate exposure, while also reducing the direct financial impacts from climate related catastrophes as well.

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