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Climate resilience & green finance seen as UK ILS opportunities


A report to the United Kingdom government from the Green Finance Taskforce urges it to consider placing catastrophe bonds, insurance-linked securities (ILS) and other instruments such as resilience bonds under a green finance focus, as it looks to unlock private capital for managing climate risks.

The report suggests numerous ways to expand the green finance market with the help of private capital and the ILS and catastrophe bond market is seen as a key component of this, which tied to the recently enacted UK ILS tax and regulatory framework is seen as an opportunity for the UK to further green finance development.

It states that the UK’s insurance and reinsurance sectors are already well-positioned to capitalise on the demand for so-called climate resilience insurance and risk transfer products, but it also cites the new ILS framework as something that expands the opportunity for the UK to play a key role here.

“This capability has been given opportunity to expand via the recent passage of legislation enabling Insurance Linked Securities (ILS) – financial instruments sold to investors whose value is affected by an insured loss event, including catastrophe bonds and other forms of risk-linked securitisation – to be issued in the UK,” the report states.

The UK Government has an opportunity to bring together insurance and reinsurance expertise, along with risk modelling and research, and the new ILS framework, to establish the country as “a centre of excellence on climate resilience and insurance as well as promote new trading opportunities globally.”

The report makes a recommendation that the government establish a new brand for green finance, under the Green Finance Institute, beneath which would sit an institution called the Centre for Climate Analytics.

This Centre for Climate Analytics would be a joint initiative between the government, academia and private sector participants, to build on methodologies used by the insurance and reinsurance market and develop advanced climate risk modelling tools and more.

Alongside a unit focused on climate risk analytics and modelling, this Centre would have a specific products and services company, tasked with creating new solutions and putting the resulting climate risk modelling work to practical use.

Within this is proposed a research and innovation program for insurance-linked securities (ILS) and the capital markets, “integrating industry, public sector and academic communities with a particular focus on application of recent UK legislation.”

Activities that could be undertaken here would include the development of climate resilience bonds for sovereign, public sector and corporate entities, as well as work to expand the role of ILS and related instruments in development finance.

“The establishment of the Centre would also help promote UK leadership in climate risk and insurance to close the insurance protection gap, further boosting trade opportunities,” the report explains.

The report goes on to explain that it is expected that the market for climate related re/insurance products is expected to expand and strategies to close the so-called protection gap will be under increasing demand and attention, meaning the UK should leverage its new ILS framework to “maintain and extend its role in this growing global market.”

Sir Roger Gifford, Chairman of the Green Finance Institute, commented, “The UK has established itself as a key international financial hub for green finance sector. It’s now time to move things up a gear.

“The opportunities for green investment are plentiful – London’s deep pools of liquidity make it the natural choice for financing these initiatives.”

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