Risk transfer, reinsurance key to address reality of climate change: Guy Carpenter

The reality of climate change needs to be addressed and addressed fast by countries, governments and public sector entities, and the risk transfer, reinsurance and insurance-linked securities (ILS) sectors are well-placed to assist, according to Guy Carpenter.

The catastrophe bond is highlighted as a key risk transfer and resilience financing tool for governments and public sector entities in a new report from reinsurance broker Guy Carpenter, which details the threats from climate change and how private market risk financing can help to address them.

Climate change raises the spectre of higher severe weather related losses and also demographic shifts, all of which poses significant challenges to governments, regional public offices and entities that carry exposure to these changes.

Guy Carpenter calls for “a rethink of how catastrophic events are funded and a greater use of public-private partnerships to manage risk.”

As, “the risk landscape for public sector entities is changing at an unparalleled rate, with extreme weather, mass migration and unfunded social liabilities set to dominate government agendas for decades to come.”

Climate change is only going to “accentuate the challenges” faced by governments and public entities, the reinsurance broker says, with natural catastrophes seen to be becoming more frequent, while the intensity of certain perils may also increase, the company explains.

“Global warming has already caused multiple changes in the climate system, including increases in both land and ocean temperatures, as well as more frequent heatwaves. The frequency, intensity and/or amount of heavy precipitation events has also increased at a global level.,” Guy Carpenter’s report states.

From sea level rise, to warming temperatures, it all threatens greater financial impacts and as a result need for risk transfer, insurance and reinsurance capital, in all its forms and from all sources.

“The specter of climate change points to a future that will see more frequent and severe weather events, bringing obvious threats to properties and infrastructures in high-risk areas,” explained Rob Bentley, CEO, Global Strategic Advisory at Guy Carpenter.

Who continued to say, “The dynamics of climate change need to be understood and managed. The scale of change will vary significantly by location: some regions are likely to see minimal effects while others will experience disproportional impacts. Effective risk transfer and mitigation strategies will play a crucial role in offsetting wide-ranging financial and socio-economic impacts.”

The costs of climate change related risks are largely assumed by governments because the “insurance penetration for climate-related risks falls behind rising loss trends and the protection gap grows,” the report says.

At the same time, “climate change risks are intersecting with, and in some cases being amplified by, other equally challenging issues confronting societies, including shifting demographics and high levels of publicly held debt.”

Governments need to work closely with risk management and transfer experts, to help them better manage and mitigate catastrophe and weather related risks in a changing climate environment.

Importantly, “Governments therefore need to rethink how they fund catastrophic events that go largely unbudgeted and place a strain on public resources,” Guy Carpenter says.

“A growing number of governments are now stepping up to the plate,” explained Jonathan Clark, Head of Public Sector at Guy Carpenter, “and are taking proactive steps to manage risks by turning to the private sector for innovative risk mitigation solutions.

“As our report demonstrates, the financial resilience of our communities is already benefiting from the innovative risk mitigation solutions being offered by the reinsurance market. The sector remains well capitalized and the level of sophistication and expertise developed over decades of addressing previous market-changing events puts it in a strong position to help public entities confront the prospect of more frequent and severe weather events in the future.”

The report highlights the catastrophe bond and insurance-linked securities (ILS) role in global catastrophe and weather risk transfer, particularly its work with public sector entities and governments in sovereign cat bond deals.

Capital markets have the ability to absorb catastrophe and severe weather related risks and diversify them away, allowing reinsurers and insurers to leverage its depth and liquidity in their work to narrow protection gaps and help make public sector entities more secure and better able to manage the financial exposure of climate related risks.

“The argument is clear: countries need to move more quickly to address the reality of climate change and its financial challenges,” Clark concluded.

“Putting the capital and capabilities of the reinsurance sector to work to create new coverages and meet evolving demands from public sector entities is a crucial component for increasing community resilience and reducing disaster suffering.

“At a time when governments worldwide are being forced to bear a growing share of natural catastrophe losses, and face multiple challenges in funding increasing costs associated with aging populations and higher debt, the reinsurance market has established itself as a capable private partner for the public sector.”