News eDaily10 Jul 2018

Climate risk insurance:PPP the strategy for the future, says German official

10 Jul 2018

Climate risk insurance plays an important role in protecting populations, and public-private partnership is the way forward in this strategy, said German Federal Ministry for Economic Cooperation and Development state secretary Martin Jaeger, with a focus on the climate risk issue in his special address yesterday morning at this year's Global Insurance Forum in Berlin.

Mr Jaeger provided the host government’s perspective of the climate risk issue. Together with the G7 and partner countries, Germany aims to help insure 400 million more poor people against the risks of climate change by 2020.

Citing Chancellor Angela Merkel’s comments that climate risk insurance turns people from supplicants to claim holders, and noting insurance’s role in swift emergency relief and recovery, he said, “from a development policy point of view, this is a responsible approach”. He also lauded insurance industry members which have divested from fossil fuels and acknowledged the role of the industry’s risk assessment data in helping governments in targeted development measures for climate change adaptation and disaster preparedness.

However, Mr Jaeger noted that there are challenges. Often there are no solutions tailored to the needs of poor and vulnerable people and necessary legislation is not in place to facilitate these.

 “We aim to change that, working with you in the insurance industry. Many of you are already on board…we want to encourage even more of you to join. You have the expertise to develop insurance products that match client needs,” he said. “Not unimportantly, you have capital. And climate risk insurance is an attractive alternative to the traditional capital market product.”

Mr Jaeger noted that climate risk insurance is however, not a panacea. Insurance solutions have to be embedded in broader financial risk management strategies and a comprehensive system of disaster risk management.

And partnerships between public and private sectors have a key role to play, such as providing solutions tailored to the needs of the poor and vulnerable and helping developing countries to collect data, analyse risks and foster smart investments in financing and insurance. In Asia, the German government is already engaged in successful cooperation with the insurance industry to generate harvest yield data and facilitate swift reimbursement if an insured event occurs.

“Public-private cooperation is the strategy for the future,” said Mr Jaeger. “The insurance industry is looking for new markets and new products. Official development players are looking for new investors. People in our partner countries want to insure themselves against climate risks. This is where our interests coincide and we should seize this opportunity,” said Mr Jaeger.

Adding to the discussion on the the role of insurance in building resilience, World Bank Group director and CFO Joaquim Levy said the insurance sector plays a critical role in supporting resilient societies and sustainable growth using both the liability and asset sides of its balance sheet.

The World Bank is committed to helping emerging market and developing countries (EMDEs) which are most affected by the impact of natural disasters and climate change. Rating agencies have the tendency to not look at risks beyond four or five years, even for bonds of medium or long-term maturities, said Mr Levy. “This is a risk whose adverse impact remains under-priced. However, as insurers develop products against climate-related losses and strategically invest their reserves, they will be sending price signals that will affect investor behaviour,” said Mr Levy.

“We don’t have to think about risks in 30 years,” said Mr Levy, “since natural disasters can create a downward spiral of economic degradation right now, especially in fragile economies. As a development institution, we believe that viable risk-sharing mechanisms have a unique role in protecting poor and vulnerable people.”

The World Bank, through its Disaster Financing and Insurance Program (DRFIP), has developed a diverse array of financial protection instruments. In February this year, the organisation issued a $1.4bn CAT bond – the largest ever – covering earthquake risk in Chile, Colombia, Mexico and Peru. It is also working with the industry to create an infrastructure to support the offer of risk transfer mechanisms across the developing world, with a view to protect at least 400m people against natural disasters. This is at the heart of the Insurance Development Forum, a public private partnership involving the World Bank, the United Nations and the insurance industry. 

The Global Insurance Forum is a signature annual event of the International Insurance Society. This year’s edition takes place in Berlin and will conclude tomorrow.

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