As the link between the changing climate, more extreme weather events and higher insured and reinsured catastrophe losses strengthens, there’s an opportunity for the risk transfer industry to act as a force for social good, according to international insurance broker Howden.
Data and analysis in a new report by Howden, titled ‘Climate in Peril’, highlights and explores how the increased frequency and severity of events raise the importance of insurance.
However, for many of the world’s most vulnerable communities, access to much needed protection remains a challenge and presents an opportunity for the industry to be leveraged to create new markets and ultimately improve resilience in these types of communities.
“The power of insurance both in removing barriers to the transition to a lower-carbon future, and in picking up the pieces when disaster strikes is immense. However, we cannot continue with a model that only protects those who can afford it,” said David Howden, Group Chief Executive Officer (CEO).
“The need to deconstruct and rebuild insurance models in response to climate change is an opportunity to build back a more balanced approach, one which supports the long-term resilience of the world’s most vulnerable populations,” he continued.
Some of the key highlights of the report, which analyses topics expected to dominate agendas in the run up to COP26, includes an analysis of the past 50 years of insured losses, which shows an exponential increase in weather-related events against other non-climate perils.
For example, the report claims that global insured losses from wildfires – which has become an ever more costly secondary peril for the sector – increased by a staggering 500% between 2010 and 2019.
Additionally, Howden’s report explains that the humanitarian funding gap has moved from less than USD 1 billion two decades ago, to USD 4 billion one decade ago, to more than USD 20 billion today.
Furthermore, the broker’s data finds that as much as USD 1.5 trillion of total pension fund capital could be deployed in the insurance and reinsurance industry to help to narrow and close this gap.
Currently, governments and NGOs are assuming a greater burden of risk as insurance products and private capital remain severely underutilised for disaster relief funding.
Charlie Langdale, Head of Climate Risk and Resilience at Howden, said: “Traditional methods of disaster relief funding cannot keep pace with demand, and existing risk transfer products cannot close the protection gap. The magnitude of the issue requires something far more imaginative and innovative, something that resets how disaster relief is funded, with insurance at its core.
“The volcano catastrophe bond launched earlier this year for the Danish Red Cross has proven that insurance-based products can bring together charitable donations and private capital in a way that provides more funds, more quickly to those who need it. Scaling this model up unlocks significant potential to address the imbalance in accessibility, whilst creating an attractive market for investors.”
“I am convinced that what we have achieved with the Red Cross will prove to be a game changer. By focusing our collective expertise, data and ingenuity on creating new markets, we can unlock the huge sums of private capital looking for environmentally and socially conscious investments. This isn’t about tweaking existing models, it is about reinventing risk transfer and creating completely new markets. This is about changing insurance for good,” concluded Howden.