Parametric risk transfer critical to address climate change: WTW’s Hess at Davos

To reach the required levels of adaptation and increase the world’s resilience to climate change, parametric insurance is critical in order to manage the long-term impacts and the transition, according to Carl Hess, Head of Investment, Risk and Reinsurance at broker Willis Towers Watson (WTW).

Hess was speaking as part of a panel session at the 2020 edition of the annual World Economic Forum (WEF) meetings in Davos, Switzerland.

He explored what needs to happen in order to get people to invest more in the preparation that is required to reach the adaptation needed, and ultimately increase the resilience of the world to the impacts of climate change.

“Invest more, yes, but invest correctly,” started Hess, adding that in his mind, there are three components that are critical for this process of adaptation to move forward in a positive way.

“I think effective risk transfer vehicles are a must,” he continued. As an example, Hess alluded to the parametric insurance policy developed by reinsurance firm Swiss Re and The Nature Conservancy, designed to both insure and enhance the resilience of coral reefs and the communities that rely on them.

Resilience-linked parametric solutions enable traditional insurance and reinsurance protection while at the same time bringing benefits to local communities. Furthermore, structures such as this can be replicated and leveraged for a range of nature-based solutions and can also tap diverse sources of capital such as insurance-linked securities (ILS).

“These sorts of vehicles, and parametric insurance in general, where we can setup model-based and quickly transferable vehicles that enable countries, companies, and individuals to manage their risk effectively and cheaply, are critical for us to be able to manage the long-term effects as well as the transition,” said Hess.

While the development of innovative risk transfer, insurance and reinsurance solutions is key, including capital markets solutions, Hess underlined the importance of having a supportive regulatory regime that helps capital inflows both find and manage risks.

Undoubtedly, a sound regulatory framework can support the development of bridging mechanisms that are likely needed for the world’s most vulnerable and poorest, which are unable to address the challenges themselves.

And, at the same time, “to enable pooling so that individual enterprises, which may not have the ability to fund climate change effectively by themselves, can bring it together and actually self-insure on a collaborative basis,” explained Hess.

Ultimately, “to get the finances right you have to get the physics right,” said Hess. “So, building proper analytical models, available to all players in the ecosystem, be they governors, governments, infrastructure owners, or investors, is critical for us to be able to begin to make a common parlance, to be able to price this in correctly.”

From an investment perspective, Hess said that “truly integrated ESG is a must.”

“And, that really has two dimensions to it, risk – which we have looked at for years, but the return potential – the amount that is going to be spent here is tremendous, and with that will come tremendous opportunity and not just tremendous risk.

“It is going to take long-term thinking of both asset owners and the companies they invest in, and that will take change. But, at the end, to the extent we can find good product design in the investment market that will help address the gaps we have societally, for income and for liquidity, I think there is actually tremendous potential here,” said Hess.