A background paper submitted to the Global Commission on Adaptation by global risk transfer experts recommends numerous ways to maximise the benefits of risk transfer solutions for climate adaption.
Specifically, the paper calls for investment in open-source models that offer a long-term view of climate risk and link to insurance solutions, underlining that this, combined with increased collaboration between the insurance sector and state policy makers, could improve society’s ability to recover from disasters that are linked to climate change.
Today, discussions around climate change and its impacts on the planet are extremely commonplace, which, given the potential severity and complexity of the issue is a good thing. When thinking about climate change and the re/insurance industry, commentary often focuses on the potential for more severe and more frequent storms, more intense drought conditions and record-breaking wildfires and flood events, as a result of the changing climate.
The insurance, reinsurance and also insurance-linked securities (ILS) space is arguably better positioned than most to tackle the impacts of climate change. Risk models for numerous perils in different parts of the world are now far more advanced than they were in the past, and as the world adapts to climate change, insurance can play a very important role.
In the background paper, Cass Business School’s Professor Paula Jarzabkowski, Birkbeck, and Dr Kostantinos Chalkias of the University of London, alongside their co-authors, suggest a number of ways that insurance can be leveraged within a broader fiscal framework to ultimately strengthen socio-economic resilience under a changing climate.
The recommendations submitted via the paper are as follows:
- Investment in open-source models that provide a long-term view of climate risk and link to insurance solutions.
- Joined-up policy-making to put climate-risk models at the heart of national adaptation strategies.
- Develop consistent climate adaptation regulation and standards across countries.
- Foster insurance innovations that can respond to a changing climate risk landscape.
- Strengthen dialogue between insurers and policy-makers around Build Back Better.
- Convergence insurance, humanitarian and development agendas.
- Promote and invest in risk literacy throughout society.
The paper argues that improved risk data and the analysis of the impact of climate change should in turn enable modelling of both the frequency and severity of climate events, as well as the potential financial losses linked to them.
“The data should then be modelled according to differing projections of the rate of climate adaptation: in other words, by different estimates of how much the vulnerability of the natural and built environment may have been reduced, over various periods of time.
“This will ensure that climate risk data, covering both a near-term and long-term view of climate adaptation, can be linked to insurance and the risk-transfer process,” explains the paper.
An important part of this is that the models that are developed with this data are open and widely available, as explained by the paper’s lead author, Professor Jarzabkowski.
“This will ensure that they can be used to support public and private insurance mechanisms, including the piloting of insurance innovations, without the pressure to recoup costs from commercial transactions,” she said.
Discussing the second recommendation, Jarzabkowski added: “We need joined-up policy-making between treasury, environment and disaster-management divisions within government. These divisions must also work collaboratively with development agencies to put climate risk data at the heart of national adaptation strategies.”
Climate change and the associated risks is a far-reaching, extremely complex issue that will undoubtedly impact all industries in all parts of the world.
The risk transfer sector is very well placed to assist with greater understanding of the risks and the potential financial impacts on societies across the world, but as the paper highlights, it’s going to take more than just effective re/insurance solutions to increase the resilience of the world in light of the changing climate.