Risk transfer and insurance focused public-private partnerships as well as the use of parametric triggers can assist in building global resilience to climate risk, reinsurance giant Munich Re said at the COP26 UN climate conference in Glasgow today.
But funding promised by governments needs to flow faster and Munich Re is the first in the industry to highlight the failure of world leaders of the major industrialised nations to deliver on the promised $100 billion of climate funding, they promised as part of the COP process.
The original plan, agreed on twelve years ago at a COP climate conference in Copenhagen, had been to deliver on $100 billion of climate finance per year for less wealthy nations by 2020.
That target has not yet been hit and the UK’s Prime Minister said yesterday it still may not be reached until 2023.
It’s one of the failings of the COP process that has been broadly highlighted by the media and activists around this year’s COP26 and Munich Re rightly highlights this, as part of this climate finance funding was expected to go towards setting up much-needed risk transfer arrangements and provisions of capital to support them.
This financing could have delivered on more national and supranational risk pooling, or public-private risk transfer partnerships by now, helping to boost the resilience of the nations most vulnerable to climate change in the world.
Another angle of the climate finance goals was to encourage better management of climate risk and embed climate into finance decision-making, while disaster risk financing for vulnerable nations was also supposed to benefit from the contributions.
It is important as climate risk is too large an issue for the insurance and reinsurance industry to tackle on its own and it does require government support, intervention and leadership as well, while we also believe it requires the capacity of global capital markets to help underpin the risk as well.
Munich Re explains, “From economic and humanitarian standpoints alike, a larger percentage of natural-catastrophe risks should be borne by insurers, i.e. spread across more shoulders. The insurance gap in industrialised countries has shrunk over the past 40 years. Today, half of all losses are insured, compared to a quarter of them in the 1980s. It’s a different story in developing and emerging countries, many of which are especially hard hit by climate change; as has been the case for decades, more than 90% of all natural catastrophe-related losses in such countries remain uninsured.
“In many of these places, national or supranational public-private partnerships could help – with insurance solutions being jointly developed by the private insurance sector and governments, plus the support of donor countries or the IMF. Munich Re bolsters such PPPs by engaging in numerous international initiatives, including the Sustainable Markets Initiative (SMI) and the Insurance Development Forum (IDF).
“Increased international financing is an essential building block that means more people in many countries can afford the insurance that will ensure their livelihood if disaster strikes. As part of the COP process, several years ago the world’s industrialised countries pledged to provide US$ 100bn a year for mitigation and adaptation measures. Part of this money was to be earmarked for risk-transfer solutions. However, the overall sum has not been reached, and partnerships with their governments, which are essential to finding needs-oriented insurance solutions for low-income countries, have not yet been sufficiently developed.”
However, the reinsurance firm believes that progress is being made and highlights positive steps, with initiatives like the CCRIF SPC in the Caribbean a successful example of a risk pooling arrangement that leverages private reinsurance and risk transfer markets to provide an important source of insurance capital to those nations exposed to climate change and natural catastrophe risks.
Munich Re CEO Joachim Wenning said this morning that his company is “ready to do more of these initiatives.”
“Experience shows that risk prevention, in the form of risk-transfer solutions, can also work in countries with low mean incomes. In this regard, parametric covers may be good candidates,” Munich Re explained this morning.
Wenning explained Munich Re’s thinking on the COP26 event and its importance, “The fact that this year’s Nobel Prize for Physics went to climate researchers shows that the world should have listened to the experts sooner. Now time is running short, but in many cases we’re still lacking the reliable framework needed to efficiently protect the climate. Together with market incentives, the proper conditions can drive the development of new technologies to transform the global economy into a climate-neutral economy. It’s a good thing that the role of businesses in climate protection is being discussed here in Glasgow. One of Munich Re’s main priorities – both as an insurer and as an investor – is to help new technologies for a low-carbon economy achieve true breakthroughs.”
“The longer we as a global community fail to properly combat climate change, the worse the risks posed by natural catastrophes and consequent losses will be,” added Ernst Rauch, Chief Climate and Geo Scientist at Munich Re.
The reinsurer calls for “structured risk management” at the national level and cooperation at the supranational, to ensure countries are ready for climate change related risks, enhancing their resilience to them and also financing their exposures, including through risk transfer and insurance.
“Having a governmental CRO of sorts would mean having someone who knows all the main risks to society – and who is responsible for the requisite preventive measures and disaster recovery alike,” Wenning said.
Wenning also said that private markets need to work in tandem with clear government roadmaps on climate risk, but also noted that everyone needs to play their role and pay their part of the bill.
“It is only by making sufficient investments in the net-zero transition and in the decarbonisation of industrialised societies that we will be able to maintain our standard of living and mitigate societal hardships – while also paving the way for greater prosperity in poorer countries. Climate policy will succeed if it takes into account the needs of businesses. For the business world, transparency and reliability are vital,” Wenning said at COP26 today.