Recent environmental agreements open the door for innovative insurance solutions: Geneva Association

Recent international agreements to combat climate change clear the way for developing innovative insurance solutions that could help societies become more resilient, although pricing difficulties coupled with often-conflicting public policy measures continue to be challenges, suggests the Geneva Association.

Released Friday, the observation – detailed in COP 21 Paris Agreement: What Does It Mean for the (Re)insurance Sector? – follows a landmark international agreement reached Dec. 12 by governments of 195 nations during the 21st session of the Conference of Parties (COP21) to the UN Framework Convention on Climate Change. There are binding obligations for all nations, thereby “putting the world on a track for long-term co-operation,” notes a statement from the Geneva Association.

The outcomes of COP21 and the Sendai Framework for Disaster Risk Reduction 2015 “have opened the doors for innovative insurance solutions, especially in emerging or even new markets,” the highlights state. “The insurance industry has the potential to contribute significantly to making societies more resilient with respect to the adverse effects of climate change and, at the same time, creating new business,” the review suggests.

“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 synopsis states. “The text introduced in the COP decisions (risk-transfer clearinghouse) and the Paris Agreement (facilities, insurance solutions) explicitly recognize the role of insurance.”

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Public-private partnerships and closer co-operation among (re)insurance, policymakers, governments, regulators and other stakeholders is critical since every party has a role to play, the Geneva Association reports.

While the public sector must lay the institutional foundations, 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,” note the highlights.

With regard to emission reduction – the agreements cite a net-zero emission target by 2050 – it appears inevitable that by 2020 the (re)insurance sector will be providing more risk-transfer solutions, supporting emission reduction efforts and transitioning to a low-carbon economy through its investment strategies.

Among other things, 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.

Parties agreed to ratify the Paris Agreement – the three main objectives of which are mitigation of greenhouse gas (GHG) emissions; adaptation, including solutions for the management of loss and damage; and financing through new commitments (make finance flows consistent with the first two objectives) – during the period running from Apr. 22, 2016 to Apr. 21, 2017.

Looking specifically at decarbonization, the review notes “up to now, the UN has utilized a two-tiered system of reporting that imposes a much stricter requirement for developed nations than for those it classified as developing in 1992. However, the Agreement will establish a new, common reporting and monitoring system that would allow for simpler tracking of how much each country is emitting and what they are doing to reduce their contribution to climate change.”

Countries experience different patterns of risks – the product of hazards, exposures and vulnerabilities – and coping capacities, notes the synopsis. “Thus, they need specific strategies and measures for building climate resilience as part of their development agenda,” including through insurance and risk transfer.

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One article in the Paris Agreement, representing the first new global climate deal since the Kyoto Protocol 18 years ago, lists areas of action (by who is unclear), highlighting comprehensive risk assessment and management, risk insurance facilities, climate risk pooling and other insurance solutions among other measures. “In this context, explicit mentioning of insurance in the COP21 decisions and the Agreement is a signal that both developed and developing countries recognize the high potential for building financial resilience by expanding insurance,” states the review.

Developments of note that took place on the sidelines of COP21 include UN Secretary General Ban Ki Moon’s Anticipate, Absorb, Reshape Framework. With the goal being 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 early-warning systems, insurance and social protection, and resilience of infrastructure.

There is also the G7 InsuResilience Initiative, which involves the G7 nations pledging US$420 million to increase the availability of risk-transfer and insurance solutions to an additional 400 million people in the most vulnerable countries over the next five years.

The review notes that 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. It is anticipated that by 2020, most nations will have ratified the agreement.

But challenges remain. “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,” the review states.

“Pricing difficulties and often conflicting public-policy measures remain the key challenges for expanding the use of risk-transfer solutions in high-income markets,” it points out. “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,” the highlights add.

More details on the insurance implications of the recent Global Framework Agreement signed at COP21 are outlined by Dr. Maryam Golnaraghi, director of extreme events and climate risk for the Geneva Association, in a video.