A continued and advanced use of science to enhance risk modelling, innovation to drive efficiency, and the experience and skills of the global risk transfer landscape are required to support and improve global disaster resilience efforts, according to speakers at a recent Start Talks event.
Improving global disaster resilience efforts, coupled with the growing need for economies throughout the world to be better financed in the wake of natural catastrophe events has been at the forefront of international debates on climate change and global resilience.
Regardless of how true or untrue one feels the notion that climate change is driving more intense and frequent catastrophe activity around the globe, the current high volume of economic and insured losses from natural disasters is enough to promote action.
Speaking to an audience at Start Talks 2016, Start for Change, Jerry Skees, President of GlobalAgRisk and Simon Young, Chief Executive Officer (CEO) of the African Risk Capacity (ARC), underlined the importance of science, risk transfer, innovation, and resilience, in improving the world’s preparedness and response to catastrophe events.
Skees discussed the benefits and a need for ex-Ante financing, so ensuring adequate financing is available post-event. To achieve this Skees noted the importance of utilising science to understand potential periods of drought or heavy rainfall, for example, which in return enables insurers, reinsurers, and insurance-linked securities (ILS) markets to better understand and therefore price the risk.
“I think in some ways the science will motivate action for the ex-Ante financing,” said Skees.
Science enables the development and enhancements of catastrophe risk modelling platforms that are widely used by the re/insurance and ILS space to quantify global risks. In more developed regions and markets around the world, such as the U.S. and part of Europe, catastrophe modelling for high exposures such as flooding, are far more advanced that other peril regions.
Unfortunately, some of the costliest and most devastating catastrophe events around the globe occur in underdeveloped, and underinsured parts of the world, places like Asia and Africa where a lack of awareness and a low average income limits the influence re/insurance protection has.
Furthermore, risk modelling in these parts of the world are often limited when compared to the more mature markets, meaning that risks are simply viewed as uninsurable or the premiums citizens are faced with are just too high for any greater level of insurance penetration.
However, innovative approaches that combine science-backed risk modelling and risk transfer mechanisms can enable affordable financing for catastrophe risks in some of the world’s poorest and most vulnerable places, an example of which can be seen with the African Risk Capacity (ARC).
The success of ARC, Africa’s first sovereign catastrophe insurance pool, was praised by world leaders at the COP21 meeting in Paris last year, and noted as an example of how risk transfer and innovation can combine to enable rapid post-event financing for vulnerable, poorer parts of the planet.
“We’re understanding the risk, we’re driving the preparation, and then we’re enabling the finance to flow when it’s needed,” said Young, underlining how ARC helps to mitigate the impacts of certain catastrophe events in member states.
ARC operates with the use of a parametric trigger, a feature of the ILS space that is also seen in catastrophe bond transactions, which ultimately ensures rapid payout post-event by utilising the modelling data to trigger a payout as opposed to the actual loss itself, which can take many months to be understood.
In some cases, explained Young, the funds can actually be deployed before a drought event actually takes place, supporting to development and use of ex-Ante financing as discussed by Skees.
Another part of improving global resilience lies with contingency planning, something that is part of the ARC programme, with member states not being allowed to participate in the scheme without some form of contingency plan in place.
This further supports the improvement of resilience as over time the member states should be able to support themselves against the impacts of natural catastrophe events by working towards the establishment of risk reduction measures, and building a steady financial back-bone.
ARC is just one example of catastrophe insurance schemes and how they can help to build global resilience efforts and build stronger financial foundations for regions pre and post-event.
As seen with ARC and highlighted by Young, public and private partnerships also help to get schemes like this off the ground, enabling a diversification of funding and also to promote education and awareness, which should translate into greater demand for solutions to protect against the world’s perils.
The insurance, reinsurance, and ILS landscape is faced with both a huge challenge and opportunity to innovate and develop mechanisms, like ARC and beyond, which enable and support disaster resilience across the world.
The use of science, innovative solutions and features such as parametric trigger structures, and the capacity of the entire risk transfer landscape, coupled with the help and expertise of governments, could help to establish platforms that mitigate the impacts of global risk post-event, and provide adequate funding post-event.
Which, where the understanding of the risk is great enough, could enable funds to be deployed before an event happens, ultimately providing regions with the tools to better react in the face of a natural disaster.