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Original Risk: A Society for Change Agents

London Centre for Global Disaster Protection announced at G20 by PM May


UK Prime Minister Theresa May has announced a new London Centre for Global Disaster Protection, that will be established to harness expertise in the insurance and reinsurance market with the goal of helping to increase the use of rapid paying risk transfer protection and insurance against perils such as drought in Africa.

Tower Bridge, LondonThe announcement relates to what was named the Technical Assistance Facility (TAF), which was originally announced by the Insurance Development Forum (IDF) when it expressed support of the G7 InsuResilience target, to increase insurance penetration to cover 400 million vulnerable people by 2020.

Now renamed as the London Centre for Global Disaster Protection, it will provide a hub for leveraging UK risk, science, insurance and reinsurance expertise and innovation to help developing countries with disaster planning and the use of risk transfer insurance to provide what the government say will be “more cost-effective, rapid and reliable finance in emergencies.”

Prime Minister May, speaking at the G20 meetings in Hamburg, Germany where an insurance related announcement had been expected (as we reported last week), highlighted the severe drought in East Africa as one of the initial priorities, as well as expanding understanding and access to insurance more generally.

Reinsurance capacity will be key to such efforts and, as ever, it is to be hoped that an open-mind as to the source of such capacity is at the forefront of such initiatives so that the most efficient, liquid and available sources are put to work.

Being based in London it’s safe to assume Lloyd’s of London will play a role, along with other UK-based insurance and reinsurance companies. But it’s important not to forget the capital markets, insurance-linked securities (ILS) fund managers and the low-cost efficiency of third-party and institutional sources of capital to back risk transfer products as they are developed.

The UK government’s messaging is consistently framed around “cheaper, faster and more reliable” risk financing, something the ILS and catastrophe bond market has specialised in, along with risk transfer innovations such as parametric triggers or index-insurance.

The London Centre for Global Disaster Protection could provide an ideal opportunity to model disaster risk transfer and financing resilience products, using the lessons learned across risk transfer and reinsurance markets over the last decade or more, as well as bringing technology to bear and leveraging the InsurTech community that has been created in London as well.

The UK will provide up to £30 million of support for the London Centre, the majority of which will be spent on “providing expert advice, developing cutting edge science and robust plans for managing risks.”

“This will help developing countries better understand and access the right insurance for them when disaster strikes,” the UK’s Department for International Development (DFID) explained.

The London Centre will develop a pilot program, which is expected to use up to £8 million of the government funding, involving the provision of grants to some of the poorest developing countries as a way to fund insurance premiums for them and as a first step to help them become more sustainable in managing their own risks.

This pilot phase aims to link insurance and risk transfer to vital public services, such as health, nutrition, water, education, sanitation and hygiene, to support continuity or enhanced services to those requiring urgent support or assistance after natural disasters strike, to help rebuild lives.

So the insurance or risk transfer products will be designed to support faster and better responses to natural disasters or severe weather. Hence parametric triggers and risk transfer business models such as those used by the African Risk Capacity (ARC) encouraging disaster resilience alongside the use of financial cover, are likely to feature heavily in the work of the new London Centre for Global Disaster Protection.

The UK government believes this initiative and the projects that are spun out of the Centre could help to provide as much as £2 billion of protection to vulnerable people over the next 10 years, to help them avoid the cycle of poverty that can occur when repeated natural disasters and weather catastrophes hit them.

Another goal will be to foster the development of insurance markets in developing countries, which is vital as these regions do need to generate their own insurance systems, supported by global reinsurance and risk capital.

DFID notes that while the Centre will offer opportunities to UK players, it is also aiming to link developing countries to insurance solutions that can work for them.

Hopefully this means a global outlook, an agnosticism as to source of risk capital, form of risk transfer structure and domicile of the provider. This is key, as the London re/insurance market is no longer the sole source of risk transfer innovation and is certainly not always the source of the most appropriate capacity anymore.

DFID also stresses that the Centre and funding is not designed to pay for risk transfer for developing countries forever, and the initiative will look to help countries become self-sustaining in their use of insurance protection.

If insurance, reinsurance and capital markets risk transfer are put to work for the good of developing nations the end-result could be that less humanitarian aid is required, rather than more, while fostering local insurance markets with the backing of the most appropriate reinsurance capital can help to provide the financial buffer’s that regions at risk of recurring disaster need.

This can also help countries to protect their developing infrastructure, critical services, growing financial markets and ultimately their economic development, with risk transfer providing the responsive, efficient, and rapid paying support required to help them prosper more securely.

Encouragingly we are told that risk transfer structural features, such as parametric triggers, and also the efficiency of the insurance-linked securities (ILS) markets, are expected to play key roles in the work of the new London Centre for Global Disaster Protection.

The focus on providing risk transfer tools that protect lives and livelihoods, while also making aid provision and humanitarian relief more responsive and rapid, in terms of action and payout, is not only encouraging it is also exciting and initiatives like this have the opportunity to create and demonstrate the re/insurance paradigm of the future.

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