IDF members commit $5bn of capacity to support InsuResilience goals

Members of the Insurance Development Forum (IDF) have committed to provide up to US $5 billion of risk capacity to support delivery of the InsuResilience Vision 2025 goals, while the United Nations and other sovereign actors have committed to extending climate and disaster insurance to 500 million.

Announced yesterday in New York ahead of the UN Climate Summit for Action, the United Nations, Germany, the United Kingdom and stakeholders from the insurance and reinsurance industry announced new commitments to increase insurance protection in climate exposed countries of the world.

The goal is to increase climate change resilience for the most vulnerable countries through the use of risk modelling, risk management and disaster risk insurance and reinsurance techniques.

The United Nations Development Program (UNDP), the German Federal Ministry for Economic Cooperation and Development (BMZ), the UK’s Department for International Development (DfID) and the Insurance Development Forum (IDF) have come together to increase the commitments made two years ago at the COP23 climate meetings when the InsuResilience initiative and its goals were first announced.

Through a combined commitment of risk management expertise and risk capacity, the goal is to extend pre-arranged risk financing and insurance mechanisms to 500 million people as part of global resilience and adaptation ambitions, as well as to ensure that a greater percentage of annual climate and disaster losses are actually covered by risk finance and insurance, so narrowing the much-discussed protection gap.

“We stand at a pivotal moment in time with climate change causing more frequent; and more severe storms, floods and droughts,” commented Achim Steiner, UNDP Administrator. “Our environment, water resources and biodiversity are under assault from pollution, warming oceans, rising sea levels and ever-increasing temperatures — insurance and risk financing are critical means to help properly tackle these issues. UNDP is committed to markedly increasing its risk financing and insurance portfolio, working across inclusive insurance, insurance investments and natural capital while mainstreaming the fundamentals of risk, and risk-financing into key development processes.”

Of course, delivery of climate risk insurance to the most vulnerable requires funding as premium payment is often out of reach of those (people or sovereigns) in most urgent need of protection.

As a result, the German Development Ministry is to deliver EUR 450 million in order to expand climate insurance and risk financing more broadly.

Dr Maria Flachsbarth, Parliamentary State Secretary to the Federal German Minister for Economic Cooperation and Development, stated, “Today, we are turning the page onto a new chapter of the InsuResilience Global Partnership through a new program with UNDP, the private sector and the Insurance Development Forum. It will benefit up to 20 particularly poor and vulnerable countries through better data and technical assistance, and through the expansion of insurance specifically for poor people. In this context, we will enhance our bilateral engagement by 20 million euros and intend to enhance cooperation with multilateral partners and, in particular, UNDP at a similar magnitude.”

UK International Development Secretary Alok Sharma added, “Every year natural disasters force an estimated 26 million people into poverty. As the pace of a changing climate increases, the effect felt by the world’s poorest will only increase.

“Our increased support will make sure developing countries can better prepare for and deal with the devastation caused by extreme weather and natural catastrophes.”

The insurance and reinsurance industry will play a critical role in developing climate risk insurance solutions and delivering them, as well as providing much-needed capacity to underpin the risk financing products that are developed.

The Insurance Development Forum (IDF) provides a focus for key industry players in this, as a vehicle for generating consensus between those involved.

Denis Duverne, Chairman of AXA and IDF, affirmed the important role of insurance and reinsurance in helping to inform resilience and better adaptation to climate change and development.

Duverne said, “Given the risks countries face today, our industry has a responsibility to take the lead in driving action that is needed from both the public and private sector. Our industry commits not only to the offered USD 5 billion re/insurance capacity, but to develop and share openly accessible modelling platform and ecosystem infrastructure for climate risk models and our expertise to help build up risk management capabilities in those countries that need it the most. The IDF Practical Guide to Insuring Public Assets, which we are also launching today, represents a concrete tool to help countries benefit from the capabilities our industry can contribute.
We hope that the concerted efforts we announce today will truly contribute to build a more resilient world.”

The announcements made yesterday in New York will help to drive forwards schemes already in existence that are covering vulnerable people in climate exposed regions of the world with insurance, as well as to develop new ones.

The UNDP and German BMZ have announced a joint initiative to support UNDP’s work globally and at country level, aiming to drive inclusive insurance in seven particularly climate exposed countries from 2020 to 2023.

This will involve detailed in-country work to develop and deliver inclusive insurance solutions, as well as investment in evidence, research and sponsoring innovation at the country level.

They will work closely with the Insurance Development Forum, the InsuResilience Global Partnership and the International Cooperative and Mutual Insurance Federation (ICMIF) to deliver this goal.

In addition a public-private partnership between the UNDP, with funding from the German Federal Ministry for Economic Cooperation and Development (BMZ) and risk management expertise and insurance capital from the Insurance Development Forum (IDF) members will aim to provide technical assistance and risk solutions to 20 climate vulnerable countries.

It will involve provision of technical assistance and up to USD 5 billion in total insurance risk capacity for these 20 developing countries, which will be prioritised by their vulnerability to climate risks and their readiness to accelerate the integration of risk analysis and management into their development plans in order to increase their resilience.

The UNDP will provide country level assistance, support and management of development planning, in order to mainstream risk management and deliver the necessary regulatory and legal frameworks to drive resilience.

The BMZ will deliver financing, including through vehicles such as the InsuResilience Solutions Fund (ISF), including co-financing with the private sector.

The Insurance Development Forum (IDF) will deliver a range of technical support, risk modelling, risk management tools and also the all-important reinsurance risk capacity to underpin new climate insurance schemes.

This will including delivery of climate and natural hazard risk modelling, development of risk transfer solutions, providing the necessary financing in line with resources mobilised by the BMZ, and a commitment to offer up to $5 billion of risk capacity for climate risk insurance for the selected countries by 2025.

The IDF has invited all of its members to get actively involved in this initiative and its has already been endorsed by Allianz, Aon, Axa, Munich Re, Renaissance Re, Scor, Swiss Re, Willis Towers Watson.

Meanwhile, the The UK Government has also announced a new contribution to the Global Risk Financing Facility (GRIF) of up to £90 million (around $110m).

The GRIF has been designed to scale up rapid and reliable post-disaster financing and also to assist countries in better planning for disasters, in a program delivered by the World Bank and co-funded by Germany.

The various announcements made under the InsuResilience banner are designed to further the roll-out of climate risk insurance and reinsurance support to vulnerable nations, while also creating the risk models, tools, technical support and resilience or development plans to ensure risk financing is used in the most effective and appropriate manner.

As ever, it’s important to highlight the challenges involved.

Rolling out climate risk solutions with funding and industry support is one thing, but making them stick and be renewed year after year is an entirely different challenge.

Demonstrating the value of climate risk insurance solutions is key, in order to encourage countries and people to see the necessity of protecting themselves, their assets, their communities and businesses, in order to instil a habit of life and livelihood protection.

Product design of the climate risk insurance solutions themselves will be vital, to create risk financing and transfer paradigms that can dovetail neatly into developmental goals and provide the necessary support in an effective, fast and cost-efficient manner.

Capital efficiency and structural innovation are key, as a result we would suggest that the insurance-linked securities (ILS) market can play a key role in delivering the necessary financing to underpin such efforts.

Insurance-linked securities (ILS), catastrophe bonds and parametric triggers have demonstrated their ability to play an important role in enabling the sustainable roll-out of insurance coverage to vulnerable people.

Reinsurance capital will underpin these efforts. For now that seems to be the remit of the IDF, but the ILS market and its investors should embrace any opportunity to support this work.

Bringing the most efficient capacity to bear to support the world’s most vulnerable people and nations as they seek to become more resilient to climate and weather related disaster risks is an important goal and the capital markets has the depth of capacity and appetite to be involved in such initiatives as they take shape.

As we’ve explained before, an evolution of the risk transfer model seems required to really deliver the products that can narrow the protection gap, including a focus on the lowest cost-of-capital, efficient risk transfer and product design.

While the protection gaps keep expanding there is significant work to do. But announcements such as these made yesterday give hope that between public and private actors some progress can soon be made.