It is clear from the explicit inclusion of insurance in the COP21 decisions and the Paris Agreement that governments recognise the importance of insurance as an integral part of national climate risk management strategies as well as building up financial resilience. Dr Maryam Golnaraghi of The Geneva Association elaborates on this in this extract from their post-COP21 paper.
On 12 December 2015, at the 21st session of the Conference of Parties (COP21) to the UN Framework Convention on Climate Change (UNFCCC), governments of 195 nations (Parties) reached a landmark international agreement, with binding obligations for all nations, putting the world on a track for long-term cooperation.
What is “historic” about this agreement is that, for the first time, a comprehensive approach to climate risk management was the underpinning theme. Also, all Parties acknowledged the anthropogenic causes of climate change, the need to limit the increase in global mean temperature to less than 2 degrees Celsius compared to pre-industrial temperatures, the need to develop and implement adaptation measures and to facilitate their financing.
The final COP21 document consists of two segments: the “COP Decisions” providing directions for the future work of the Parties, the UNFCCC and its associated bodies and the legally binding “Paris Agreement” (hereafter referred to as the “Agreement”).
The three main objectives of the Agreement are: (i) mitigation of greenhouse gas (GHG) emissions (ii) adaptation, including solutions for the management of loss and damage (iii) financing through new commitments.
Regarding decarbonisation, the net-zero emission target for after 2050 was agreed, providing a managed transition away from fossil fuels, with all countries officially on board. Its major achievement is that all nations, developed and developing, are obligated to undertake and maintain plans for their nationally-determined emission reductions (referred to as the Intended Nationally Determined Contributions – INDCs). They are also obligated to review and further raise their commitments every five years and report more transparently than before.
Direct mention of insurance
Insurance is considered as an essential tool to address loss and damage and is referenced directly in the Paris Agreement.
In this context, explicit mentioning of insurance in the COP21 decisions and the Agreement is a signal that both developed and developing countries recognise the high potential for building financial resilience by expanding insurance.
Other relevant developments on the side-lines of COP21
While many initiatives were launched at the side-lines of COP21, a few are particularly noteworthy:
United Nations Secretary General, Ban Ki Moon’s A2R (Anticipate, Absorb, Reshape) Framework: Launched at COP21 to help build resilience to disaster and climate risks in the world’s most vulnerable countries with 13 members within the UN system. The new initiative aims to raise funds and strengthen capacities in (i) early warning systems, (ii) insurance and social protection and (iii) resilience of infrastructure. The Secretary-General’s A2R Initiative is particularly focused on Small Island Developing States, Least Developed Countries and Africa.
Lloyd’s syndicates: Eight Lloyd’s syndicates are participating in the initiative and have a committed capacity of US$400 million towards solutions that address natural catastrophe risks in emerging and developing economies. These syndicates are managed by Amlin, Beazley, Hiscox, Mitsui Sumitomo Insurance Group, Nephila, Renaissance Re Syndicate Management, Tokio Marine Kiln and XL Catlin. However, membership is open to the entire Lloyd’s market and other managing agencies are welcome to participate.
FSB Climate Disclosure Task Force: Mr Mark Carney, Chairman of the Financial Stability Board, announced the establishment of an industry-led disclosure task force with a focus on climate-related risks. The premise is that effective climate-related disclosures by companies could promote more informed investment, credit and insurance underwriting decisions about those companies and ultimately, would enable stakeholders to understand better the concentrations of carbon-related assets in the financial sector and the financial system’s exposure to climate-related risks. The Task Force has already been staffed with experts from different industries, including the (re)insurance sector, and will be led by New York’s former mayor Bloomberg.
The G7 InsuResilience Initiative: The G7 nations pledged $420 million with the aim of increasing the availability of risk-transfer and insurance solutions to an additional 400 million people over the next five years in the most vulnerable countries.
The Climate Insurance Fund: Another initiative created by KfW, the German Development Bank, to contribute to the adaptation to climate change by improving access to and the use of insurance in developing countries.
Regional risk pools: Backed by private-sector reinsurance and capital markets solutions, regional risk pools such as the Caribbean Catastrophe Risk Insurance Facility (CCRIF), the African Risk Capacity (ARC) and the Pacific Catastrophe Risk Assessment and Financing Initiative (PCRAFI) have enabled smaller nations to secure a payment post-disaster to cover more urgent early recovery financial needs. A number of initiatives are providing additional funding for these risk polling mechanisms (eg, InsuResilience and the A2R).
Renewable investments and alliances such as the Breakthrough Energy Coalition led by Bill Gates.
The Lima to Paris Action Agenda (LPAA): an initiative led by France, Peru, the UN Secretary General and the Secretariat of UNFCCC, providing a platform for major initiatives, (Parties and Non-Parties) that could help with the implementation of the outcomes of the Paris Agreements.
The way forward: Leveraging opportunities and addressing challenges
The Paris agreement offers both opportunities and challenges for the insurance industry, especially in the areas of risk transfer for extreme events, sustainable energy and public-sector risk financing.
By 2020, it can be expected that most nations will have ratified the Paris Agreement, developing their national regulatory frameworks, continuing to reduce their emissions and adapting to a changing climate. The net-zero emission target for after 2050 provides a clear timeline. It seems inevitable that the (re)insurance sector will not only be providing a wider range of risk-transfer solutions, but also be supporting emission reduction efforts and the transition to a low-carbon economy through its investment strategies as well as actively managing its own carbon footprint.
Role of insurance explicitly recognised
The Paris outcome marks a milestone in climate policy, anchoring it within a comprehensive risk management paradigm providing many opportunities to the insurance sector.
The text introduced in the COP decisions (risk-transfer clearinghouse) and the Paris Agreement (facilities, insurance solutions) explicitly recognise the role of insurance. Similarly, the role of insurance is reflected strongly in another landmark international agreement, the Sendai Framework for Disaster Risk Reduction (2015-2030) in relation to the managing of risks associated with natural and man-made hazards.
Expansion of insurance is still a challenge
While the insurance industry has been best equipped for managing risks of extreme weather compared to any other sector, complexities and uncertainties associated with the adverse impacts of climate change combined with inter-connectivity within the global economy present a new range of challenges, where the risks may be unprecedented.
Pricing difficulties and often conflicting public-policy measures remain the key challenges for expanding the use of risk-transfer solutions in high-income markets. These, along with a range of other issues, hamper the introduction or scaling up of insurance in low- and middle-income countries, for example, weak (financial) infrastructure, access to reliable risk information, limited know-how and experience, lack of political stability, and distribution difficulties.
Public-private partnerships crucial
The public sector is required to lay the institutional foundations, whilst the insurance industry is challenged to think and act more creatively to understand the risks, actively participate in defining the role of the private sector and consider new markets, products and strategies.
However, active engagement in relevant public–private partnerships and closer cooperation with policymakers, governments, regulators and other stakeholders, will be critical to pave the way.
Innovative insurance solutions wanted!
The outcomes of COP21 (and the Sendai Framework for DRR) have opened the doors for innovative insurance solutions, especially in emerging or even new markets. The industry should take this unique chance!
Dr Maryam Golnaraghi is Director of Extreme Events and Climate Risks Programme at The Geneva Association.
The article is written with contributions from:-
Dr David Bresch is Head Business Development GP, Director, Global Partnerships at Swiss Re;
Professor Peter Höppe is Head of Geo Risk Research, Corporate Climate Centre Work at Munich Re;
Mr Karsten Löffler is Managing Director (Geschäftsführer), Allianz Climate Solutions GmbH at Allianz;
Mr Masaaki Nagamura is Division Head of Corporate Social Responsibility, Corporate Planning Department at both Tokio Marine Holdings, Inc and Tokio Marine & Nichido Fire Insurance Co, Ltd; and
Mr Ernst Rauch is Head of Corporate Climate Centre at Munich Re.