Vulnerable 20 nations to establish climate risk pooling facility

The Vulnerable 20 (V20), a group of the most vulnerable nations to weather extremes and a changing climate, is aiming to establish a risk pooling mechanism for climate related risks within the next five years, it was announced at a recent meeting.

The V20 held its inaugural meeting at the IMF and World Bank meetings in Lima, Peru at the end of last week. Members of the group represent 700 million people in nations vulnerable to climate and weather risk with the goal of putting in place action plans to build resilience and improve risk financing by 2020.

At the meeting the V20 group, with each nation represented by finance ministers and the meeting led by the Philippines Finance Secretary Cesar Purisima, announced a number of initiatives, the most relevant to Artemis’ audience being a goal to establish a climate risk pooling facility, to provide insurance and risk financing to enable members to recover more rapidly from climate risk related extreme weather and disasters.

The risk pool, named the V20 Climate Risk Pooling Mechanism, will act at the sovereign level to provide just-in-time capital when weather and climate related disasters occur. The aim is to enhance recovery financing, secure jobs, industry, livelihoods, businesses and investors in the V20 member nations.

The goal is to create a trans-regional risk pooling facility which will be modelled on other established catastrophe and weather insurance pooling facilities around the world, think the Caribbean CCRIF SPC or the African Risk Capacity (ARC).

A public-private partnership approach will be taken to establish the risk pool, suggesting that it will leverage private reinsurance markets as the other risk pools around the world tend to do.

The V20 Climate Risk Pooling Mechanism will feature index-based risk transfer, so parametric triggers, weather indices and other innovative forms of protection will provide the sovereign level coverage. The risks covered will be hydro-meteorological hazards, which the group says are most exposed to climate change, so drought, flood, extreme rainfall etc.

The pooling across regions will enable a diversified risk pool to be created, enhancing affordability and enabling the sovereign disaster insurance to be provided in a cost-effective manner. There is also a resilience goal and a suggestion that while pricing will be risk based there may also be adaptation related incentives.

There is also a mention of catastrophe bonds as something the V20 members have explored, alongside other risk sharing measures and tools.

A risk pooling facility across these nations will provide another opportunity for the capital markets to demonstrate their efficiency, in terms of cost-of-capital, when it comes to reinsurance protection for it.

With World Bank involvement there is also the prospect of a V20 risk pool using catastrophe bonds for risk transfer and reinsurance in future.

The V20 group features the following members: Afghanistan, Bangladesh, Barbados, Bhutan, Costa Rica, Ethiopia, Ghana, Kenya, Kiribati, Madagascar, Maldives, Nepal, Philippines, Rwanda, Saint Lucia, Tanzania, Timor-Leste, Tuvalu, Vanuatu and Vietnam.

Read our series of articles focused on the insurance protection gap – underinsurance in emerging and developing economies and the gap between economic and insurance losses – an 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.