There is “no one better able to help the world manage its risks” than the insurance and reinsurance industry (and we would venture the ILS market), according to Christiana Figueres, Executive Secretary of the United Nations Framework Convention on Climate Change.
Speaking during an event held by the French Federation of Insurance Companies (FFSA) in Paris this morning and coinciding with the build up to the key COP21 climate talks next week, Figueres explained the important role that insurance and reinsurance plays in helping the world to manage, mitigate and adapt to the risks posed by climate, weather and natural disasters.
Figueres began by explaining a key issue related to the COP21 climate talks and insurance, the fact that many believe that, in terms of warming, “A world that goes above 2 degrees is uninsurable.”
She explained that scientists believe that we may already have passed the point where the 2 degree target is achievable, with some suggesting that warming of 2.7 to 3.5 degrees is more realistic. Which with the above statement about insurability of the risks of climate change in mind, means that there is “Obviously a lot of work to do.”
While nations are working on their climate change plans and making progress here, Figueres said, more important for the insurance and reinsurance industry is the “long-term view” of the structure and agreements that are hoped to be constructed in Paris next week.
Figueres assigns a great amount of importance to the involvement of insurers and reinsurers in the climate discussions, explaining to the audience that they are; “Not only a very important part of the global economy, you are actually builders of the evolution of the industrial economy.”
She explained that “insurance allows humanity to assess the risks of the era,” with the role of assessing, pricing and managing risks key in helping humanity to get to an equilibrium, resulting in a more prosperous economy for many.
However the “era of industrialisation based on fossil fuels is coming to an end” and that means that the equilibrium where insurers have been assisting by managing and pricing risk is also ending, as new levels of risk and new types of risk are now faced.
With the frequency, severity and scale of impacts thought to be increasing, not just due to climate factors but also due to the “way we are globally networked and the domino effect,” Figueres questioned whether the industry is actually ready to respond to this.
“Insurance and reinsurance is ready to face weather impacts. But is it ready to face climate change?” she asked.
Figueres said that she and the UN are not sure that insurance and reinsurance is fully prepared for the risks faced in the future, adding that the industry and the world as a whole is “still at the bottom of the curve in how we understand and deal with that.”
The future “risk and exposure is completely unprecedented,” she continued, “Can you actually insure against completely unbounded climate change risk? Scientists cannot explain the boundaries, the models are not yet capable of forecasting this.”
In order for the insurance and reinsurance industry to respond, Figueres said that new structures and types of instruments available for risk transfer will need to be developed, in order to ensure they can respond to the types of risks faced from climate and weather.
“Insurance products need to evolve, so they can actually begin to reduce the new type and level of risks we’re facing now,” she explained.
Responsive risk transfer is required to support the disaster and climate risk capital needs of both developing and mature economies, as well as the most efficient and liquid sources of capacity, making the insurance-linked securities (ILS) and reinsurance capital markets a key player in the outcome of the Paris discussions and the world’s mission to better manage climate related risks.
When the word insurance is used in the coming weeks, the industry should be agnostic as to form, solution, product, structure and capital source, as the amount of capacity required to address these issues is huge and the capital markets depth and liquidity will bring significant benefits if leveraged alongside the expertise of insurers, reinsurers and of course ILS managers.
“Under 1% of weather losses in developing countries are currently covered by insurance,” Figueres continued, explaining that this is “Morally irresponsible but a huge business opportunity” for the insurance industry and risk capital providers.
The re/insurance sector has a huge role to play in the developing economies of the world, to foster sustainability and resilience, Figueres explained.
The industry has a key role to play in setting standards, helping to develop building codes and leading on the building of resilient infrastructure, to help the world develop itself to withstand risks, she continued.
“In an era of unprecedented risk there is no-one better able to help the world manage its risks than insurance,” Figueres stressed.
The speech underlined the importance that insurance, reinsurance and ILS or capital markets players, engage with the United Nations process and keep informed as the talks progress.
Just earlier today an announcement from Lloyd’s of London that eight of its syndicates, including ILS manager Nephila, would form a $400 million catastrophe re/insurance capacity facility gave an example of how the industry can offer solutions to support the goals of building resilience and reducing under-insurance.
The involvement and engagement of re/insurance and risk transfer markets is key, without them the risks cannot be understood, financed, transferred or hedged effectively.
It’s an opportunity and an important one given the dynamics of the re/insurance market right now, of course, but also (we feel) a moral obligation, to work to provide the risk capital required to help develop and more importantly sustain life, livelihood and a better future for all.
Read our series of articles focused on the insurance protection gap – under-insurance in emerging and developing economies, the gap between economic and insurance losses, and transferring risk from public sector to private – the opportunity that is on every reinsurance CEO’s lips and which presents the largest opportunity to put excess risk transfer capital to use, requiring both traditional and capital markets support.