EC seeks feedback on cat bonds for climate risk transfer & financing

The European Commission (EC) has launched a consultation on sustainable finance, as it plans to “ensure a sustainable and resilient economic recovery following the coronavirus outbreak.”

The European Commission (EC) will factor the feedback into its work to mobilise private capital to support sustainable projects.

Climate related risk is clearly a huge consideration, as to is availability of insurance and reinsurance to support projects, hence the discussion on catastrophe bonds.

But raising the profile of this within the EC, is the fact the Commission is also seeking to ensure “a sustainable and resilient economic recovery following the coronavirus outbreak.”

The EC explained, “The ongoing coronavirus outbreak highlights the critical need to strengthen the sustainability and resilience of our economies in the future.”

As a result this Renewed Sustainable Finance Strategy is seen as critical to maintaining the focus on sustainable finance strategies and climate related issues in the wake of Covid-19, with the EC saying it hopes to adopt the Strategy in the second half of 2020.

Valdis Dombrovskis, Executive Vice-President for an Economy that Works for People at the EC commented, “We are currently battling the coronavirus outbreak, but we must not lose sight of our long-term sustainability objectives, including making Europe climate-neutral by 2050. Creating a more sustainable and resilient economy will be a key focus of the recovery phase and the Renewed Sustainable Finance Strategy will be essential to mobilising much-needed capital. This consultation is an opportunity for all Europeans, companies, civil society organisations and public authorities to contribute to the EU’s sustainable finance agenda, and how it can contribute to the economic recovery.”

As part of the broader European Green Deal Investment Plan, this strategy aims to: 1) create a strong basis to enable sustainable investment; 2) increase opportunities for citizens, financial institutions and corporates to have a positive impact on society and the environment; and 3) fully manage and integrate climate and environmental risks into the financial system, the EC explained.

Point 3, on fully managing and integrating climate and environment risks into the financial system is where catastrophe bonds comes in, with the EC’s consultation paper highlighting their importance as an alternative source of reinsurance capacity to support climate and sustainable finance goals.

The EC highlights that, “The (re)insurance sector plays a key role in managing risks arising from natural catastrophes though risk-pooling and influencing risk mitigating behaviour.”

Insurability though is a consideration and the EC acknowledges that affordability of insurance and reinsurance coverage could be diminished by rising climate risks.

“Measures to maintain and broaden risk transfer mechanisms might hence require (potentially temporary) public policy solutions,” the EC said.

The EC also highlights that the current Covid-19 pandemic also demonstrates clearly that diseases can impact economic development, making the proactive management of financial risks associated with them important as well.

“Catastrophe bonds could play a crucial role,” the EC explains. Adding that they can help to, “Broaden the financing options that are available to insurers when it comes to catastrophe reinsurance.”

“Such instruments would help mobilise the broadest possible range of private finance alongside public budgets to contribute to the resilience of the EU’s health and economic systems, via prevention and reinsurance,” the EC further said.

The consultation asks whether the European Union (EU) itself has a role to play in supporting the development of alternative financial products such as catastrophe bonds, that help in protecting against and hedging financial losses stemming from climate- or environment-related events.

In addition, the EC’s consultation explores other issues related to catastrophe insurance and reinsurance, asking whether it should create a European climate-related disaster risk transfer mechanism.

It’s encouraging that the EC sees the potential for catastrophe bonds to play a greater role in provision of catastrophe insurance and reinsurance risk capital, as well as the fact it clearly recognises the need for greater availability of disaster insurance coverage in general.