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Original Risk: A Society for Change Agents

ILS could help affordable solutions reach the world’s most vulnerable


The Munich Climate Insurance Initiative (MCII) recently expressed its support of the G7 InsuResilience target of providing 400 million of the world’s most vulnerable with access to insurance protection, underlining measure to be taken to achieve this goal. Bringing to mind the abundance of efficient and willing ILS capital that should play a greater role in expanding the reach of insurance.

Mind the Gap sign (Source: Autoprotect)The global protection gap (disparity between economic and insured losses post-event) continues to broaden and with the rise of natural catastrophe events across the globe, which some attribute to climate change, international organisations have begun implementing measures to broaden the reach of insurance.

The majority of the world’s poorest people are also among the most vulnerable to natural disaster events around the globe, and typically have some of the lowest insurance penetration rates in the world but, innovation from the public and private sector and the expansion of risk transfer solutions can help narrow the protection gap and do good for society.

And with climate change threatening to increase the severity and frequency of extreme weather events, insurance solutions are seen as a vital way of protecting people’s lives, and societies and economies as a whole, while facilitating improved disaster resilience measure around the world.

In order for insurance to reach those that need it most, reinsurance and insurance-linked securities (ILS) can and should play an increasing role, along with more traditional forms of primary insurance.

ILS capacity is often the cheapest cost-of-capital for peak catastrophe risks around the globe, and the increased willingness and maturity of the ILS investor base and ILS funds and managers, suggests the sector is more than capable at participating in closing the protection gap, and helping insurance reach the world’s poorest and most vulnerable.

For many of the regions discussed in the report the affordability of solutions is a key factor in insurance take-up rates, as low incomes leave little spare cash for insurance policies against natural disasters, or any other type of insurance protection for that matter.

The efficient and willing pot of ILS capital and the market’s features, such as parametric triggers and catastrophe bonds, for example, could enable more affordable and effective solutions to be developed at both a local and broader level.

The MCII report, titled ‘Making Climate Risk Insurance Work For The Most Vulnerable: Seven Guiding Principles,’ highlights measures that could be taken to broaden the accessibility and affordability of insurance solutions for the world’s poorest, and also explores existing schemes such as the African Risk Capacity (ARC), and the CCRIF SPC in the Caribbean.

The main message from the report is the seven key principles that the MCII says will benefit the poor and vulnerable with climate risk insurance, and these include comprehensive needs-based solutions, ensuring client value, ensuring affordability of solutions, facilitating the accessibility of solutions, promoting participation, transparency & accountability, ensuring sustainability, and the need for an enabling regulatory and broader economic environment in poorer regions.

Examples such as ARC, the CCRIF SPC, and other, more localised schemes are explored in the report, bringing to mind the important role that reinsurance and also ILS capital can play in helping insurance solutions reach the most vulnerable in the face of climate and weather-related events.

ARC and the CCRIF SPC both utilise parametric trigger structures to ensure rapid payout post-event, something that was highlighted by the MCII in its press briefing for the new report, and also by the fact that following hurricane Matthew CCRIF SPC member states that were due a payout from the scheme received their funding within 14 days.

Parametric triggers are a common feature of the ILS space, and along with catastrophe bonds, which have also been used by the Turkish Catastrophe Insurance Pool (TCIP), another regional catastrophe risk insurance scheme, certain catastrophe insurance schemes designed for the poor and vulnerable have utilised cat bonds to supplement their risk transfer needs.

We’ve discussed a number of times at Artemis that there is scope for the ILS world to play an increasing role in the aim at improving disaster resilience, and expanding insurance solutions to those that need it most, and that the MCII further emphasises the need for collaboration, innovation and dedication from much of the public and private sector supports this notion.

The global protection gap is so vast and set to expand as the threat of natural catastrophe events increase and global populations and assets rise also, driving risk concentration in areas highly susceptible to natural catastrophe and climate-related events.

“The relevance of insurance as a tool within comprehensive climate risk management has been recognized by policymakers around the world and is now anchored in major international policy agendas. Climate risk insurance can support poor and vulnerable people in a concrete way in finding climate-resilient development pathways. However, research shows a strong need for guidance and careful planning and implementation in order for this to be successful,” says the report.

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