United Nations (UN) Secretary General António Guterres has again said that the world needs more catastrophe-triggered financing and better instruments to support the delivery of climate financing, to enhance disaster resilience, fund adaptation measures and finance climate risk.
Speaking today at the Insurance Development Forum’s (IDF) Summit 2021, UN Secretary General Guterres explained the important roles of the insurance sector (within which we’d include reinsurance and insurance-linked securities (ILS) of course) in adapting to a rapidly changing climate and the race to transition to net zero emissions by 2050.
With more than $35 trillion dollars of assets under management in the global insurance and reinsurance industry, Guterres said, “I encourage the insurance industry to align its portfolios and investments with net zero by 2050.
“Your investments should not be contributing to climate pollution but should be directed towards climate solutions. Invest in renewables, low- and zero-carbon transport and climate resilient infrastructure.”
It’s not just on the investment side either, Guterres also urged faster action on the underwriting side of the insurance and reinsurance business, saying, “We need net zero commitments to cover your underwriting portfolios, and this should include the underwriting of coal — and all fossil fuels.”
Referring to upcoming important climate change meetings and the meeting of the G7, Guterres added, “COP 26 must signal the end of coal. I support the G7 commitment to end all public international support for coal by the end of this year.”
Adding for insurers and reinsurers, “Your industry needs to follow suit.”
Guterres went on to explain that more than just mitigating climate change and climate related risks, he wants to see adaptation as a key focus and that insurance risk transfer is core to this.
Referring to recent UN initiatives that have looked at disaster risk transfer and financing, for catastrophic perils as well as climate related risks, Guterres referred to what can only be parametric risk instruments.
“I have recently been calling for more and better catastrophe-triggered instruments, easier access to flexible finance and increased support for regional adaptation and financing,” he explained.
Referring to the InsuResilience Global Partnership’s Vision 2025 initiative, which aims to protect 500 million vulnerable people against climate and disaster risk by 2025, he said that more is needed.
“Now we need to do more, and faster,” Guterres said. “Climate and disaster risks keep rising.”
He laid out four areas of focus for the insurance and reinsurance industry, as well as related parties, to consider focusing on.
Starting with what the industry does so well and where the ILS market is absolutely central to helping to enhance resilience, Guterres said, “First, the insurance industry should continue to place risk capital and technical expertise behind disaster resilience.”
Going on to explain the other areas for focus as, “It can also invest more in developing countries, especially in low-carbon, climate-resilient infrastructure.
“Second, developing countries need better ability to understand and manage risk and develop their own insurance markets, including for small businesses and individuals.
“People in the least developed countries are, on average, six times more likely to be injured, lose their homes, be displaced, evacuated or require emergency assistance than those in high-income countries.
“Making insurance markets more inclusive in terms of countries, businesses and individuals is a core strategy for building safety nets.”
That second point is as important as mobilising capital, as the insurance, reinsurance and capital market infrastructure required needs to be there and ready to channel capital around the world, to the vulnerable people that need it most.
“Third, the development community must advocate for better integration of risk finance and insurance into country development planning and financing,” Guterres continued.
This is also important, as the integration of risk financing into development, planning and financing is something we’ve been calling for, for years now.
Sophisticated risk transfer arrangements need to be embedded within development objectives and financing, to ensure risk is accounted for and managed, or transferred where required.
That goes for planning as well, especially at the government and municipality level, where embedding risk transfer alongside financing can help to protect investor capital and ensure it is better used.
“Fourth, donor countries should support this work by recognizing the value of investments in governance, market transformation and premium support, especially for the most vulnerable countries,” Guterres stated.
It’s encouraging to see insurance and risk transfer being so readily cited as vital for the world’s continued efforts to mitigate and adapt to climate related risks, as well as to protect populations and support development.
It’s also encouraging to see risk financing being cited as something that should be integrated into these efforts, as without considering, managing and where necessary transferring risk, it will be challenging for the world to meet its climate goals.
Efficient and low-cost capital is, of course, going to be critical. As too are clever risk transfer structures such as securitization and solutions the ILS market is already expert at delivering, to ensure that institutional capital can be brought alongside the insurance and reinsurance industry’s own efforts, to maximise the effects and benefits for society.