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Climate to drive massive demand for contingent risk capital: Douglas, ILS NYC 2021


The deepening of the world’s understanding, measurement and valuation of climate risks is going to drive a massive demand for contingent risk capital, which parametric triggers and insurance-linked securities (ILS) will be well-suited to serve, Rowan Douglas of Willis Towers Watson explained during our ILS NYC event this week.

Rowan Douglas, Willis Towers Watson, ILS NYC 2021Rowan Douglas, Head of the Climate and Resilience Hub at Willis Towers Watson (WTW), joined us to discuss the role of capital markets in closing climate related protection gaps during our fifth and this time virtual ILS NYC 2021 conference.

Rowan had spoken at our very first ILS NYC event in New York in 2017, so this was an opportunity to hear his updated thoughts on the important stream of work his team are involved in, as well as its relevance for the insurance-linked securities (ILS) community and Artemis readership.

He highlighted the goal, “We needed to get the wider world to have to understand and disclose around climate-related risks in a similar way to the insurance sector had.

“We need stress testing for the wider economy in climate risks and once this risk is identified, it can’t be ignored.”

While boiled down as attempting to “drive the sort of regulatory revolution that we had in the insurance sector in the wider domain.”

The key was encouraging the accounting of climate risk, where it would be measured and reported against balance-sheets, providing something tangible that risk transfer can in future be applied against.

“Once climate risk became an input to broader credit risk, we knew that that would be the magic spark, that would do two things,” he explained.

“Until this risk is properly understood and managed we will keep building more and more risk in society and the result will be, in the decades ahead, we will literally lose millions of lives and livelihoods.

“But actually, if we properly account for this risk, resilience will be valued and structurally we will save millions of lives and livelihoods and billions of dollars of assets.

“So that’s, if you like, the social, purposeful reason, which I think everyone will sign up to.

“Of course, the other thing that will happen will be a massive demand for contingent risk capital of all forms to help capital, investment capital primarily, manage this risk.”

Which is where Rowan sees an opportunity for the entire insurance market in providing the needed risk capital to support transfer, financing and resilience against climate related risks.

With a key role for the capital markets and the insurance-linked securities (ILS) structures as vehicles for climate risk transfer and financing.

Rowan continued, “My view is that for the insurance sector generally, particularly for the parametric related insurance sector, particularly for the ILS capital bucket to serve that parametric based market, this is very exciting.

“We will see a convergence as mainstream investments, mainstream bonds, municipal bonds, corporate bonds, all sorts of mainstream investment instruments, suddenly have to take account of a climate risk factor within their pricing and that will have to be managed.

“That’s where I think the exciting opportunity is for the Artemis community.”

He went on to highlight some of the challenges and hurdles in gaining broad adoption of instruments such as ILS for climate risk transfer and financing, saying that an integrated approach is going to be easier to get buy-in for.

Particularly for investors, asset holders and owners, who are familiar with the capital markets world. If climate resilience risk transfer tools can be integrated with their own issuances, here Rowan sees a significant opportunity.

“They are going to be much more comfortable when our skills and capital are wrapped up in that. I would imagine that if people are issuing capital markets debt, they’re going to be naturally more at home with an integrated capital markets, climate resilience wrapper.

“I really feel, that, that’s when the big floodgates will open, because you’re talking the same worlds are coming together,” he explained.

Adding that, “Climate, physical, transition and liability risks, are just going to become a mainstream input to credit decisions. So that’s going to obviously require credit enhancement, or climate credit enhancement,” he suggested it could be termed.

Which Rowan believes could drive significant demand for contingent risk capital of all forms, boding well for the insurance, reinsurance and ILS community.

“But I think, particularly for ILS and related parametric solutions,” he explained.

There is work to do though, to ensure that the capital and risk transfer tools can be delivered.

Rowan said, “We’ve got to work quite hard I think, as a sector, to have the confidence to change some of the words and way we describe our world, which is a completely foreign language to the wider world.

“Our voice sometimes isn’t being adequately heard, I think that’s our collective challenge to change that, but we’ve got all the opportunity to do so.”

The session, which was broadcast first to event registrants on Wednesday 10th Feb, can now be viewed below:

Every session from ILS NYC will be made available more broadly via our Artemis Live video channel and audio versions will also be shared via our podcast as well.

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Please visit our sponsors page, as without the kind support they provide we could not bring these event broadcasts to you.

Register today for ILS NYC 2023, our next insurance-linked securities (ILS) market conference. Held in New York City, February 10th, 2023.

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