Climatic loss, damage & risk transfer to top COP23 agenda

Topping the agenda at the current COP23, 23rd Conference of the Parties (COP) annual UN climate conference held in Bonn, Germany over the coming fortnight, is the topic of climatic loss and damage, providing an opportunity for risk transfer and re/insurance practices to take centre stage.

The use of risk transfer tools, from traditional insurance and reinsurance, to alternatives such as derivatives, parametric risk transfer, and catastrophe bonds, has been regularly highlighted in relation to the world’s goals of increasing climate resilience, while reducing the impact from climate related severe weather disasters on lives and livelihoods, particularly of the poorest and most vulnerable.

Impressive steps have been taken in recent years, with loss and damage sitting at the heart of recent discussions on climate related risks, and numerous insurance initiatives being founded to bring more affordable protection to the world’s poorest, but there remains significant work to do.

“2017 is on track to become the year with the highest natural disaster losses ever,” commented Peter Hoeppe, Chairman of the Munich Climate Insurance Initiative (MCII), an organisation backed by reinsurance firm Munich Re and heavily involved in efforts to increase risk transfer or insurance penetration.

The COP23 meetings will provide another opportunity to bring the need for more protection to the fore, Hoeppe explained, “The global protection gap – the divide of global damage that is not proactively managed for instance through risk transfer mechanisms – is widening at a rapid pace especially for the poor and vulnerable countries. COP23 needs to bring the impacts of climate change to the limelight of the international community.”

“COP23 is a critical litmus test for moving forward the Paris Agreement,” agreed Jakob Rhyner, Board Member of MCII and a Director of the United Nations University Institute for the Environment and Human Security (UNU-EHS) that hosts MCII.

Rhyner stressed the importance of focusing on the destruction that is caused by climate change, “Setting up meaningful activities for the international community to address climatic loss and damage in the next five years needs to be on top of the agenda for the climate summit.”

MCII expects that climate insurance solutions will gain increasing attention from the member states signed up to the Paris Agreement.

“Climate insurance can become one of the key strategies to better prepare countries and their citizens for the risks that climate change presents,” MCII explained.

The impacts and damage caused by climate change and extreme weather can drive vulnerable populations further into poverty, holding back their sustainable development.

Where as, “Timely and reliable payouts from climate insurance allow them to recover more quickly – and be better prepared for future disasters.”

Because of this, MCII expects that the use of climate insurance (call that weather, catastrophe, or whatever you prefer) will “be a deliverable of the climate summit.”

“While there have been positive but not yet sufficient trends of stabilizing emissions and a decline in coal use worldwide for the past two years, countries and communities need to increase their efforts to become more resilient,” explained Christoph Bals, Vice-Chair of MCII. “Pro-poor climate insurance has received momentum as a new way to manage the damages caused by and prepare for tropical storms, flooding and droughts. COP23 should harness further support for moving forward this agenda.”

It’s expected that there will be a number of announcements at the COP23 meetings related to climate insurance, disaster risk transfer and weather index insurance or reinsurance initiatives.

Whether the capital markets will be highlighted remains to be seen, but as our readers are aware the ILS market and its capital market investors are well-positioned to be the capacity providers of choice behind some emerging insurance schemes as they scale up.

The efficiency of capital market backed reinsurance capacity, coupled with the robust structures of the securitization markets and ILS, as well as the broad distribution of risk possible through the capital markets, makes ILS solutions such as catastrophe bonds a natural fit for backing efforts to expand access to climate insurance and weather risk transfer.

In recent years too many of the initiatives we’ve seen have ended up backed by a single large company balance-sheet.

Broadly distributing climate, weather and catastrophe risks through both reinsurance and capital markets will be a better and longer term solution to protect the vulnerable against loss and damage. The ILS market stands ready to assist as these efforts grow in both importance and size.

Join us in New York in February 2018 for our next ILS conference