Reinsurance and its ability to transfer risk into a diversified pool of capital can play a vital role in helping the world to mitigate the negative effects of a changing climate and smooth volatility for carbon-free ventures, the CEO of Swiss Re has explained.
Writing for the World Economic Forum (WEF) and timed to coincide with the WEF annual meeting held in Davos, Switzerland this week, Christian Mumenthaler the Group Chief Executive Officer of global reinsurance firm Swiss Re, highlighted the role of his industry in helping the global response and adaptation to climate change.
Mumenthaler urges a methodical approach to the challenge of climate change, with understanding of the risks being a key component to inform where time, effort and finances are best spent.
“We must move methodically – examining every sector and every carbon-emitting source, making an inventory of available technologies to reduce emissions, identifying what’s missing and figuring out how to channel investments accordingly. Indeed, investors are now recognising the profit potential in the transition to a zero-carbon world and the unprecedented opportunities that await post-transition,” Mumenthaler explained.
Finance is seen as one of the key levers for achieving this, with insurance, reinsurance and risk transfer important components within that.
“A key example is found in reinsurance, which is poised to accelerate the transition to a more sustainable world,” the Swiss Re CEO said.
“Reinsurance – with its ability to transfer risk and with its diversified portfolio – mitigates the negative effects of a changing climate and has the potential to remove financial volatility from carbon-free ventures such as renewable energy and emissions reduction,” he continued.
Insurance-linked securities (ILS) can be included within this, as an efficient source of risk bearing capacity that can transfer risk away from those requiring protection against climate related risks and exposures, while the capital markets are the largest, most diverse and liquid pool of capital able to diversify away the risks.
Mumenthaler further explained, “By transferring risk to reinsurers, enterprises can raise capital, secure loans, begin hiring and start innovating. If an event occurs that could potentially threaten or disrupt operations, the “insured” receives a payout so it can continue operating seamlessly. With the assurance of uninterrupted cash flows, investors and lenders have greater confidence.”
The ILS market supports these endeavours, through its activity in global reinsurance markets, its provision of retrocession to major global reinsurers and the contribution it makes to global climate and weather risk transfer.
In fact, ILS structures and capital market investors support the ability of reinsurers, such as Swiss Re, to continue absorbing climate and catastrophe related risks.
Swiss Re itself is one of the largest underwriters of property catastrophe related risk in the world, but as it grows that segment of its book its own use of ILS, catastrophe bonds and the capital markets is increasing, as a volatility buffer to support Swiss Re’s own ability to take on more risk.
But data and understanding of the risks is increasingly important and as our climate becomes increasingly volatile the importance of risk data and knowledge will only grow.
“Risk knowledge is a key asset in this endeavour. It gives us the insights to fully understand the risks – and opportunities – associated with novel technologies and enables the kind of risk-taking essential to drive innovation and investment,” Mumenthaler said.
While corporations are being urged to respond to the threats posed by a climate crisis, they cannot do so without risk bearing capital and capacity, from whatever source it comes.
According to Mumenthaler, “Corporates are turning to reinsurers for help. They are seeking financial mitigation of their sustainability risks such as extreme weather, excessive greenhouse gas emissions, chemical spills, drinking water pollution, the impact of negative environmental, social and corporate governance (ESG) activity by suppliers and competitors, and regulatory restrictions.”
Again, there is an opportunity for the ILS market to demonstrate the value it can bring to this conversation as well, in helping the world’s largest corporations to adapt to our changing climate, mitigate their climate risk and transfer it away from their balance-sheet, shareholders and employees.
“Swiss Re believes in the transition to a carbon net-zero world and is working with its partners to help the world arrive at this destination. We continually look for opportunities in both the public and private sectors and are developing partnerships that support scalable solutions to mitigate and adapt to climate change and close protection gaps,” Mumenthaler closed.
Of course, it’s important to note that no amount of reinsurance or ILS capital can stop climate change and that the industry itself needs to adapt to and respond to the threats it poses to the business model of risk.
But risk transfer itself is a key financial tool for mitigating the impacts of climate exposures in general, providing capital liquidity when the worst happens and here the reinsurance and ILS market’s have a vital role to play in supporting adaptation and response, in the transition to a low-to-zero carbon economy.