Climate risk data needs linking to insurance & risk-transfer process

Climate risk data should be linked to the insurance, reinsurance and risk transfer process through the use of technology and risk models, placing it and financial products at the heart of climate adaptation and resilience efforts.

A new background paper from academics and insurance sector specialists highlights the importance of continued collaboration between the re/insurance and risk transfer industry with state policy makers.

This should include more investment in open-source risk models, the academic work suggests, which alongside greater collaboration can improve society’s ability to recover from disasters linked to climate change.

The paper is not groundbreaking, but it serves as another important reminder that insurance and more broadly risk transfer, including insurance-linked securities (ILS), have a vital role to play in helping to enhance resilience and society’s ability to respond to climate related disasters.

It has always been our view that by leveraging climate data (and weather or catastrophe data) and improving our understanding of it using advanced technology such as risk models, financial products can become more responsive and better linked to the reality of our climate, environment and lives today.

Insurance, reinsurance, ILS and risk transfer are a set of hedging tools that can provide financial protection and smooth climate related financial volatility, for governments, corporations, communities and people across the globe.

But in order to better link the outcomes of financial protection with the climate related risks they are designed to protect us against, work to better integrate risk transfer into our adaptation and resilience efforts is required.

Putting data at the heart of these efforts is vital, in our view.

The paper’s authors highlight the need for society to:

1. Invest in open-source models that provide a long-term view of climate risk and link to insurance solutions.

2. Joined-up policy-making to put climate-risk models at the heart of national adaptation strategies.

3. Develop consistent climate adaptation regulation and standards across countries.

4. Foster insurance innovations that can respond to a changing climate risk landscape.

5. Strengthen dialogue between insurers and policy-makers around Build Back Better.

6. Converge insurance, humanitarian and development agendas.

7. Promote and invest in risk literacy throughout society

The paper’s first recommendation is that improved risk data and analysis of the impact of climate change will enable modelling of the frequency and severity of climate events, as well as the potential financial losses attributed to them.

“The data should then be modelled according to differing projections of the rate of climate adaptation: in other words, by different estimates of how much the vulnerability of the natural and built environment may have been reduced, over various periods of time,” the authors explain.

“This will ensure that climate risk data, covering both a near-term and long-term view of climate adaptation, can be linked to insurance and the risk-transfer process.”

They recommend that risk models created with the data remain open and widely available, rather than proprietary and closed to many outside of specialist industries such as insurance.

“This will ensure that they can be used to support public and private insurance mechanisms, including the piloting of insurance innovations, without the pressure to recoup costs from commercial transactions,” explained lead author of the paper Professor Paula Jarzabkowski.

Additionally she commented, “We need joined-up policy-making between treasury, environment and disaster-management divisions within government. These divisions must also work collaboratively with development agencies to put climate risk data at the heart of national adaptation strategies.”

The paper also calls for consistent international standards for climate adaptation regulation, which the authors say could be established by the International Monetary Fund or a similar supra-national actor.

Explaining, “Consistency across countries is important as sound climate-risk insurance typically requires an appropriate balance between retaining risks in-country, and transferring to globally diversified international markets.”

Going back to basics on climate risk transfer, addressing issues within the insurance product itself, to create something more responsive and in tune with the way lives and businesses work today can produce better outcomes, we believe.

Making the climate risk transfer product set data-driven and informed by advanced risk models is a key part of this process.

As too are a focus on cost and efficiency, to deliver climate risk transfer and insurance products more accessible and effective for all.

This paper sets out a good intro to many of the issues that hold back development and broader adoption of climate risk transfer tools, including insurance and reinsurance, providing advice that industry and policymakers alike will want to explore.