New York’s climate change bill sets stage for risk transfer

New York state has seen new legislation on climate change adaptation making rapid progress through lawmaking channels and the Climate Leadership and Community Protection Act includes signs that risk transfer is on the agenda.

New York has been hailed as taking the lead on climate change related issues with its “green new deal” laws that are set to come into force.

For the insurance, reinsurance and insurance-linked securities (ILS) sectors, what is interesting here is how these laws will dovetail into other efforts around climate risk disclosure, which so often also includes disclosure of severe weather risk related exposure as well.

All of these initiatives hinge on legislating so that large corporations and other entities have to measure, report on and therefore plan to manage their climate risk exposures.

A natural step in that chain of process will be risk transfer, by traditional insurance and reinsurance means, or through capital market instruments including derivatives and securitisation such as the catastrophe bond.

Adaptation is of course the driving mantra, as by mandating disclosure of these risks for corporates and other entities, from investors to municipalities, the entity will need to plan to manage its risk and also reduce it as well.

But risk transfer will have a vital role to play in this, by enabling better management of climate exposure, as well as financial preparation through contingent capital means to provide the necessary capital buffers to protect companies, communities and people alike.

New York State’s latest bill, which is currently very close to being delivered to the Governor for signing into law following the completion of its passage through Senate and Assembly, features some interesting language, that while shying away from mentioning the importance of risk transfer, certainly sets the stage for it.

§ 9. Chapter 355 of the laws of 2014, constituting the community risk and resiliency act, is amended by adding two new sections 17-a and 17-b to read as follows:

§ 17-a. The department of environmental conservation shall take actions to promote adaptation and resilience, including:

(a) actions to help state agencies and other entities assess the reasonably foreseeable risks of climate change on any proposed projects, taking into account issues such as: sea level rise, tropical and extra-tropical cyclones, storm surges, flooding, wind, changes in average and peak temperatures, changes in average and peak precipitation, public health impacts, and impacts on species and other natural resources.

(b) identifying the most significant climate-related risks, taking into account the probability of occurrence, the magnitude of the potential harm, and the uncertainty of the risk.

(c) measures that could mitigate significant climate-related risks, as well as a cost-benefit analysis and implementation of such measures.

§ 17-b. Major permits for the regulatory programs of subdivision three of section 70-0107 of the environmental conservation law shall require applicants to demonstrate that future physical climate risk has been considered. In reviewing such information the department may require the applicant to mitigate significant risks to public infrastructure and/or services, private property not owned by the applicant, adverse impacts on disadvantaged communities, and/or natural resources in the vicinity of the project.

It is the inclusion of specific named climate and severe weather related perils, the discussion of physical climate risks and the laying out of the need for assessment, identification and then management of exposures, that all points to the need for risk transfer in this process.

Clearly this bill is focused on the state taking responsibility for its climate risk, but the language could be as easily applied and clearly relevant to corporations as well.

Taking actions to help state agencies and other entities assess their climate related weather risks suggests a need for advanced catastrophe and weather risk modelling tools, which can help to benchmark the exposures faced and set thresholds where risk transfer could be applied.

While the first step will be to identify ways that such physical climate risks can be mitigated, or avoided / negated entirely, the focus will likely also be on how to manage them and prepare for the response to their impacts, which is where risk transfer comes in.

Through the use of risk transfer tools and financial market structures, backed by insurance, reinsurance and ILS capital, such state agencies and entities can secure risk capital that can aid in recovery and also financially protect key infrastructure against the impacts of climate related severe weather events.

That’s all part of building resilience to the impacts of climate change and New York State is seemingly heading in a direction where that is only going to become increasingly important to it, setting the stage for risk transfer to take a key role in the states climate risk adaptation and resilience building.

Of course you can envisage instruments such as parametric triggers playing a key role in provision of risk financing and contingent funding to assist in climate adaptation and resilience building.

In order to provide the responsive risk transfer tools required though, there is going to need to be a focus on rethinking the insurance products on offer, else the industry may be at risk of creating another protection gap that it struggles to fill.