Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Re/insurance and ILS have important role in climate change battle


The latest independent review from ClimateWise, which was prepared by PwC, highlights the important role that insurance, reinsurance and insurance-linked securities (ILS) can play in the financial fight against the perils of climate change.

Following the United Nations Framework Convention on Climate Change (UNFCCC) meeting in Lima, Peru of December this year, ClimateWise has released their 2014 report revealing what the organisation believes the insurance and reinsurance market could, and should be doing to help.

ClimateWise launched in 2006 with 16 core insurers at its base, and has since grown to include some of the world’s leading re/insurance companies, including Swiss Re, Allianz, Marsh, Lloyd’s, Catlin, RenaissanceRe and many more.
The organisation’s report provides a comprehensive look at what the collaborative work undertaken by its vast member base seeks to outline prior to the next UN climate change meeting in Pars, 2015.

A section of the study looks at how innovative product offerings, risk transfer and risk modelling knowledge can aid the UNFCCC’s process, bringing to mind an opportunity for the reinsurance linked investment, insurance-linked securities (ILS) and catastrophe bond market.

A key issue facing cities’ economic battles against climate change is that many of the most natural-disaster prone regions are undereducated in terms of personal finance and underserved in terms of insurance and risk transfer products. The knowledge insurers, reinsurers, ILS and risk-modelling firms have on historic and future events are invaluable to the ClimateWise and UNFCCC cause.

Part of the organisation’s report states; “The insurance industry has much to contribute in an advisory capacity to supporting the UNFCCC process, by producing and interpreting data, through its specialist technical knowledge of modelling and pricing risk, and risk transfer and sharing.”

The study continues to praise the work of innovative products including the 1-in-100 initiatives, and the same praise is surely due to other ventures like the Indian national crop insurance scheme, the Caribbean Catastrophe Risk Insurance Facility (CCRIF) and the African Risk Capacity (ARC).

But, as ClimateWise acknowledges, perhaps more products like this are needed throughout the world; “There are further opportunities to innovate and develop new risk insurance products in emerging and developing markets for low carbon industries. One example is the development of a new geothermal drilling risk insurance product for the Kenyan and Ethiopian markets.”

The traditional reinsurance, ILS alternative reinsurance capital markets offer an unrivaled insight and understanding of the ins and outs of pricing catastrophe, climate and weather related risk transfers and insurance products alike, while providing sound understanding of better underwriting practices.

While the innovation of newer, more expansive and globally diversifying products aids the insurer, reinsurer or ILS manager concerned in growing their global footprint, the security offered to agricultural workers which benefit from such risk transfer mechanisms is extremely necessary and apparent.

Risk pooling funds, catastrophe bonds, weather derivatives, parametric or index-linked covers and other forms of risk transfer, can act as a vast security blanket for the economy of countries and cities, or even the balance-sheet of corporations, which are vulnerable to the increasing severity and frequency of climate and weather related perils.

ClimateWise amplifies this point; “Global insurers and reinsurers have made progress in providing new insurance products to grow their markets in new territories, new risks and new technologies e.g. micro insurance products for low-income communities such as those increasingly offered by Allianz, and CAT bonds and weather index products such as those offered by Swiss Re and Tokio Marine.”

So it’s clear that insurers and reinsurer really can help mitigate the impacts of a changing climate and seemingly increasing weather extremes, boosting resilience for both the more resilient and the more vulnerable regions of the globe. As ClimateWise concludes, “it is their expertise in managing and transferring risk that will be invaluable to the international climate deal and any subsequent implementation at national level.”

Other reading:

Loss & damage wording survives climate talks, remains on UN agenda.

Push for natural disaster stress-tests and disclosure of risks gains pace.

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