COP26: An opportunity for re/insurance & ILS climate leadership

On Monday November 1st 2021 at the United Nations (UN) Framework Convention on Climate Change Conference of the Parties (COP26) in Glasgow, United Kingdom, it became clear that this is a moment in time where the insurance, reinsurance and insurance-linked securities (ILS) industries have an opportunity to display climate leadership.

One of the clearest signals of this is the inclusion of insurance and disaster risk financing in U.S. President Biden’s announcement of the President’s Emergency Plan for Adaptation and Resilience (PREPARE), which he called a “whole-of-government initiative” and the cornerstone of “the U.S. Government response to addressing the increasing impacts of the global climate crisis in order to enhance global stability.”

The PREPARE plan explains that the United States will integrate “climate risk considerations” into multilateral efforts, while also striving to “mobilize significant private sector capital for adaptation.”

Also of note is the fact Biden’s Plan acknowledges that knowledge, or information, is power when it comes to dealing with climate change, saying that, “The United States will support efforts to deepen global understanding of climate risks, vulnerabilities, and adaptation solutions while supporting expanded development, innovation, and delivery of climate information services, decision support tools, and early warning systems.”

On top of this, “PREPARE will strive to improve the capacity of national and local governments to assess and embed climate risks into their budgets, plans, policies, and operations with the ultimate objective of translating priorities into bankable projects.”

While on the financing side, the United States commits to support, “multiple climate risk finance strategies, strengthening capacity to access finance for adaptation and develop bankable investments, and striving to mobilize private capital.”

Finally and perhaps most telling of all, the plan states, “PREPARE will also support the development and implementation of climate and disaster risk financing strategies and instruments, ranging from forecast-based finance and insurance to social protection.”

These are significant in a White House plan that comes alongside the “largest U.S. commitment ever made to reduce climate impacts on those most vulnerable to climate change worldwide.”

The plan talks about strengthening the capacity of those climate vulnerable locations and populations, helping them to access financing for adaptation, while strengthening the enabling environment for private investment and leveraging the private sector and partnerships to drive climate resilience.

Hugely important words that show the top-table role for any sector involved in understanding climate risk exposures, managing climate exposure and building resilience, leveraging private market financing to reduce risk, transfer it and smooth the adaptation and transition to our climate future, while ensuring no one is left behind and lives and livelihoods are as protected as possible.

A second clear signal that this is a moment in time where the insurance, reinsurance and insurance-linked securities (ILS) industry can exert its influence, offer real and tangible solutions to assist in the climate transition and response to climate change from yesterday at COP26, is a little more personal, if you’ll indulge me a little.

This was the appearance of original co-founder of Artemis and good friend of ours, Rowan Douglas, Head, Climate and Resilience Hub at Willis Towers Watson, being interviewed on BBC News yesterday morning.

Rowan has been instrumental in many of the insurance and reinsurance industry initiatives around climate risk and resilience for over a decade and has been calling for climate risk disclosure from major economic actors for longer than anyone else I know.

His interview set the tone for the first day of COP26, with his appearance driving home the top-table role of risk financing and risk transfer, as well as what the insurance, reinsurance and of course private capital markets through insurance-linked securities (ILS) can do, to aid the transition and whatever climate goals are set by world government’s at COP26.

The role of the risk transfer product, be that in traditional insurance and reinsurance, or sophisticated capital market instruments, is perfectly clear.

There is climate risk that needs managing through whatever transition the world follows and there is an industry with the expertise and appetite to be able to bear a significant amount of it, particularly with the help of capital markets and ILS structures.

The world cannot decarbonise its way to net zero without considering the role of climate finance and climate risk transfer.

So it’s important this industry has its voice heard on how risk transfer and insurance-related products can help to offload and offset climate risks, and smooth the pathway, as well as the potential disaster and severe weather risks that climate change could cause, while economies work to decarbonise.

Rowan provided a clear voice on a global stage and explained all of the areas of importance the insurance and reinsurance industry can assist in global climate transition pathways, the need for decarbonising portfolios and to achieve net zero within the industry itself, as well as its utility as risk measurement, management and transfer experts.

With efforts to ramp up climate reporting requirements now also underway, such as the UK government’s moves on disclosure and regulator the PRA’s words on climate capital charges, plus how rating agencies might also respond on that, the industry is at the heart of both climate action and response.

While the insurance-linked securities (ILS) market stands ready to mobilise the capital needed, show others how risk and capital can be structured and matched, and absorb its share of global climate risk.

All of which means the industry’s we serve here at Artemis and Reinsurance News should see themselves as being challenged to provide a constructive response to this moment in time.

Net zero is a wonderful thing to strive for and a goal the industry must have. But it shouldn’t overshadow the constructive contribution the industry can also provide, in its core area of expertise, risk management and risk transfer.

Equally important, is that the insurance, reinsurance and ILS industry drives home how it can help not just in achieving its own climate goals, but in smoothing the pathway and managing or absorbing risk, to help the world achieve global climate goals as smoothly and with as little harm to people, property, lives and livelihoods as possible.

There’s a lot to do, but all the ideas, skills and financial mechanisms are already available, as too is the capital and the appetite.

The challenge for this industry, after COP26, is to put those elements together and offer economies, industries, communities and governments tangible risk financing and transfer solutions that enable a resilient climate transition, towards whatever goals are next set.