Risk sharing has to expand to tackle climate emergency: Report

A new report calls for an expanding use of risk sharing to help the world tackle the climate emergency and highlights the role of the capital markets, as well as instruments such as ILS and catastrophe bonds, in helping to protect lives and livelihoods against loss and damage during a resilient transition to net zero.

The report from the University of Cambridge Institute for Sustainability Leadership (CISL) (which you can download here) has been launched at the COP26 climate conference in Glasgow today and calls for policymakers, financial regulators and industry to expand risk sharing systems at scale in order to tackle the Climate Emergency.

If the recommendations are applied, the CISL report states that “it will enable a radical global transformation to protect lives and livelihoods, now and in the decades ahead.”

In order to manage risks, they need to be shared, the report asserts, and it details twenty steps that can be taken to “urgently govern, manage, and reduce climate risks for a just, resilient transition to net zero in developing and developed countries.”

Bronwyn Claire, Sr Programme Manager for the insurance and reinsurance industry leaders group ClimateWise commented on the launch of the report today, “Traditionally expertise in risk sharing has sat with the insurance industry. Through our collaborative insights and desire to accelerate the transition to net zero, ClimateWise has seen how the expansion of these skills and understanding into a much wider group of economic and policy decisionmakers is vital in the race to tackle climate change.

“COP26 leaders gathered in Glasgow have the opportunity to recognise the importance of risk sharing to support the transition to a resilient, net zero economic and finance system. Robust disaster risk recovery and net zero aligned economy and society depends on the framework of the financial system reflecting the impact and future implications of climate risk.”

Dominic Christian, Global Chairman Reinsurance Solutions Aon and Chair of ClimateWise added, “As we each face the challenge of managing climate risk in our personal and professional roles, there is a great opportunity to step forward as leaders. We welcome and appreciate the calls to action set out in the report that give a clear direction and aspiration for insurance, finance, regulators and government. Stepping forward together gives us the best chance to deliver impact at a scale commensurate with the accelerating climate crisis.”

Risk “sharing” appears to be the term of choice around the COP26 climate conference, but of course what it really refers to are the long-used practices of risk pooling and risk transfer, while making use of the advanced risk management, insurance and reinsurance tools that are now available, as well as the most efficient and effective forms of capital.

Given the scale of the climate emergency, it requires a response at scale, hence risk sharing needs to be massively scaled up and best practice from the insurance, reinsurance and insurance-linked securities (ILS) industry applied.

As a result it’s encouraging to see that the capital markets, insurance-linked securities (ILS), instruments such as catastrophe bonds, parametric triggers and other risk transfer tools all get well-represented in the report.

It’s also important that the report goes into some detail on measuring risks, as without measurement and putting a price on climate risks, they are harder to manage and more challenging to transfer.

“To share climate risks at scale, they must be measured consistently,” the report explains. “Within risk-sharing systems, the insurance sector (premium-based risk-sharing) has unique risk quantification and management skills, overseen by regulation.”

The report calls for similar approaches to be adopted more widely across financial regulation, from microfinance to global financial institutions, in order to achieve “a climate-smart financial system.”

Modern risk-sharing systems include social protection, informal community networks, as well as the insurance and reinsurance industry, plus of course the global capital markets. Each has crucial roles that can be applied to the climate crisis, the report explains.

It’s how you structure risk sharing, pooling and transfer systems that matters though, making them both effective at helping to shift risk away to those better able to bear it, while also keeping the economics appealing enough to attract the necessary capital to support these initiatives.

But importantly, these initiatives and ideas are now gaining prime time acceptance, with significant global leaders backing the need for risk measurement, management and resilience building, including through risk transfer, insurance and reinsurance.

Mark Carney, UN Special Envoy on Climate Action and Finance wrote in the reports foreward, “In the face of the unfolding climate emergency, this report provides a timely and valuable overview of the lessons we can already draw from the global insurance system – across public, private and mutual sectors – and the opportunities for that system to help increase our systemic resilience to the worst effects of climate change. […]

“The global financial system is leading the way in the run up to COP26. This collaboration between senior regulators, policymakers and industry extends that leadership by informing a pathway beyond Glasgow that aims to secure a smoother and more equitable transition to a resilient, zero-carbon future.”

Youssef Nassef, Director, Adaptation Division, UNFCCC also wrote, “At a time when rapid transformative action is essential to address the climate emergency, this inspiring report highlights the centrality of risk management in climate change mitigation and adaptation, and points to the unique contribution of the insurance industry and regulators to a better understanding of climate risks, and to building a resilient future.”

The report was co-authored with global law firm Clyde & Co, and Geoff Summerhayes, Executive Board Member, APRA (2016–20) and Chair Sustainable Insurance Forum (2018–20).

Nigel Brook, Partner at Clyde & Co commented, “The transition to a net zero economy will require an unparalleled level of investment in new technology and infrastructure that will require complex financial and risk transfer solutions developed and delivered at unprecedented speed. Beyond the products they provide, insurers have the knowledge, expertise and skills to play an invaluable role in building resilience and addressing the risks associated with the climate emergency. In dealing with this issue, policymakers’ focus to date has mainly been on the banking and investment side of the financial services industry; they now need to broaden that focus to include insurance.”

Public and private market collaboration on risk sharing, pooling, transfer and insurance will ultimately put governance around climate resilience and support economies while they transition towards the net zero goals most are adopting.

This requires an adaptation in the insurance and reinsurance industry as well, because it is going to be critical that the correct players are brought in at the right time, in the right structures and in the right manner.

That needs traditional re/insurance players to work with the capital markets, as well as public institutions and a holistic approach needs to be taken to bring parties together, if the goals are going to be reached.

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