Swiss Re Insurance-Linked Fund Management

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Lloyd’s calls for re/insurance, investor & Gov work on disaster risk financing


The Lloyd’s insurance and reinsurance market has put out a call for a coordinated effort to enhance the disaster resilience of developing and developed economies, by bringing together the re/insurance sector with investors and governments to create new financial solutions.

lloyds-london-reinsurance-ilsLloyd’s launched a new report today called Insuring a sustainable, greener future, which it says “sets out how the insurance industry will partner with critical industries to support and accelerate the transition to a low carbon economy.”

The report highlights ambitions to put the global insurance and reinsurance industry’s roughly $30 trillion of capital to work in green, climate-positive and resilience focused investment, risk transfer and innovation.

Lloyd’s has also set out a climate action roadmap, including steps is says will help accelerate the transition of multiple industries to net zero carbon.

Lloyd’s has come under increasing fire over its own roadmap to net-zero in recent weeks, so this new plan will be welcomed in some quarters.

The new report also lays out certain product ideas Lloyd’s has to support a greener energy transition, with risk transfer solutions for offshore wind and new insurance products for electric vehicles seen as key.

It’s important to note here that some of the product ideas here have been done before, both in risk transfer to support offshore wind, or sustainable energy financing, an area where ILS fund manager Nephila Capital and its often partner Allianz have both excelled.

But Lloyd’s wants to make these kinds of risk transfer solutions that support the ability to invest in climate and greening solutions far more prevalent a part of its market, which can only be a good thing.

Of greatest relevance to our world, of insurance-linked securities (ILS) and third-party reinsurance capital, are the ambitions to further close protection gaps around the world, as well as to create new financial solutions to hedge disaster risk and support disaster resilience.

One of the actions to be worked on is a public-private disaster resilience, response and recovery framework, which Lloyd’s says will help protect developing nations from the evolving economic and societal impacts of climate change.

Lloyd’s says that the global insurance industry should work with investors and governments to ” provide financing structures to support disaster resilience, response and recovery in developing countries.”

Here, it would perhaps have been worth pointing out that while the global re/insurance industry might be $30 trillion in size, the global capital markets and institutional capital is far larger.

In fact, global bond market capital was seen as $123.5 trillion in 2020, while pension fund capital is on aggregate estimated over $30 trillion in some quarters.

Which is a significant amount of firepower that the insurance and reinsurance industry could call on to achieve broader disaster risk and resilience financing goals, if insurance-linked securities (ILS) structures were deemed the best mechanism to channel funding.

The re/insurance market and entities like Lloyd’s needs to lead on risk transfer and insurance product design, while letting the capital markets structure supportive mechanisms for channelling huge sums of capital to the risk, with government support and oversight at the same time.

But it is encouraging to see yet more narrative on bringing together the risk, capital and governance sides to create new solutions to disaster risk and resilience, something the world is going to need a lot more of if it fails on its climate goals.

The report could have gone much deeper, perhaps with a focus on the need for longer-term hedging solutions for climate related exposures, something that are sorely lacking right now and challenging certain industries where traditional insurance and risk transfer fails to contemplate their exposure to slow-onset climate change effects.

Hopefully the industry will continue to evolve its positioning here, as currently it is still failing to deliver meaningfully on some of the most pressing climate related challenges society faces.

Chair of Lloyd’s, Bruce Carnegie Brown, commented, “There is an ever-more pressing need for a coordinated global effort across industries to effect the monumental transformation needed to address the climate challenge. Lloyd’s is proud to play a role, together with the global insurance industry, in partnering with sectors to provide the risk management solutions and investment that will help enable and accelerate the necessary changes and drive action towards a more sustainable world.”

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