Re/insurance needs to do more on climate catastrophes: UN’s Ban Ki-Moon

The global insurance and reinsurance industry, so including the ILS and catastrophe bond market along with providers of capital, needs to do more to help counter the threat of climate catastrophes, according to UN Secretary-General Ban Ki-Moon.

“It is not enough to simply create new products to respond to climate catastrophes,” Ban Ki-Moon stressed during a high-level meeting on resilience with re/insurance industry leaders and other stakeholders at United Nations Headquarters in New York yesterday.

“The world needs your leadership to meet the climate challenge,” he explained, going on to highlight that the issue affects the entire world, thus needing a joined-up response from key actors in the insurance and reinsurance sector, as the “impacts of climate change will affect every aspect of our lives.”

The UN Secretary-General said that he sees the insurance & reinsurance industry as a “key actor in forging new instruments to anticipate and manage climate risks”, saying that he hoped the industry could continue to work ever more closely with the UN in order to improve the world’s ability to manage and reduce such risks, resulting in a more sustainable world.

Climate change “profoundly affects” the core business of insurance and reinsurance, Ban Ki-Moon said, with the industry set to face “mounting claims of a magnitude not yet seen” in the future, as climate change results in the potential for more intense, frequent and damaging weather or climate-linked catastrophe events.

But there is more to do than simply providing the risk transfer the world needs, to provide a more secure future from the threat of climate change, Ban Ki-Moon explained. The traditional insurance and reinsurance industry also needs to take the lead on climate proofing its assets.

“We need to better anticipate and act on climate hazards through early earning and early action. We need the capacity to absorb shocks by increasing insurance and social protection coverage. And we need to reshape development to reduce risks at the national and international level,” the Secretary-General explained.

He said that re/insurance industry support has been critical in provision of risk transfer to-date, citing initiatives such as CCRIF and the African Risk Capacity as examples of initiatives assisting with the climate problem.

“I urge you to build on the foundation laid by sovereign risk pools, including the Caribbean Catastrophe Risk Insurance Facility and the African Risk Capacity. We should aim to establish similar risk pools across the globe by 2020.”

The UN, World Bank and others are all actively working towards this goal and as new risk pools come on-line the traditional re/insurance industry and the capital markets (ILS) will be required to provide the risk transfer capacity, from private markets, in order to make them sustainable in the longer-term.

“If you invest wisely, you could reap new rewards – for both your own businesses and society at large,” he commented.

“At some $25 trillion dollars, you own some of the world’s largest investment portfolios. Your investment decisions are crucial for reducing the growth of carbon emissions and protecting again the financial disruption caused by stranded assets.”

The investment side is key for insurance and reinsurance, which really should be leading the way by seeking to become as climate neutral as possible in its approach to doing business. But, perhaps in the short-term, increasing the availability and penetration of climate related risk transfer and insurance remains the most valuable, immediate action that can be taken.

“The world’s most vulnerable people should be provided with greater access to risk transfer mechanisms,” Ban Ki-Moon stated.

“The poorest and most vulnerable people – those who have done least to cause climate change – need support to reduce their exposure to climate impacts.”

The provision of sufficient risk capital to enable climate, weather and catastrophe related insurance and risk transfer can get to the people who need it most is perhaps one of the biggest challenges and opportunities facing re/insurance markets today.

Here, the capital markets and ILS players can assist, by mobilising large amounts of low-cost and efficient capacity in structures which respond rapidly to climate related events. A number of initiatives are pushing this mantra in the market right now, but there remains, at times, a need for more focus and innovation in order to embrace technology and type of risk transfer that truly provides what people need, cash in order to recover more quickly when bad things happen.

Ban Ki-Moon continues to push for greater engagement from the wider insurance and reinsurance industry, and the ILS market needs to come with them. In order to even begin to create solutions to the climate problem, there can be no traditional vs alternative, it has to be holistic and it has to be backed by deep, liquid and efficient capital markets, using responsive risk transfer structures.

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.