Garry Booth comment: no COP out for insurers - FREE

Garry Booth comment: no COP out for insurers - FREE

As the euphoria around the “success” of the COP21 climate talks subsides, and reality bites, the insurance industry can start to take stock of what it all means for them. There’s actually a good deal to chew on in the Paris Agreement, with developed and developing countries all recognising how important insurance is in developing national climate risk strategies and using it to build in resilience.

To recap, what was hailed as historic about the agreement was that all parties agreed that climate change is man-made and that the increase in global mean temperatures needs to be limited to below 2 degrees celsius, compared to pre-industrial levels. A comprehensive approach to climate risk management is necessary and adaptation measures need to be financed and implemented.

Crucially, the agreement will be binding under international law and will be ratified by April 2017. If it is ratified (by at least 55 states accounting for 55% of CO2 emissions) it will go into force by 2020, with reviews made at five yearly intervals from 2023.

As the Geneva Association points out in its recently published commentary, it’s inevitable that by 2020 the
(re)insurance sector will not only be providing a wider range of cat risk-transfer solutions, but it will be supporting a low-carbon economy through its investment strategies as well as underwriting infrastructure projects and performance guarantees, for example.

Speaking at an investor summit on climate change at UN headquarters earlier this year, Michael Morrissey, CEO of the International Insurance Society, said that with $35trn of invested assets “insurers are best positioned to make the kind of investments a clean energy world needs, because of their long term liability structure and lower liquidity needs than other kinds of asset pools”.

A lot is already happening to encourage industry engagement. The G7 InsuResilience Initiative has seen the club of countries pledge $420m with the aim of increasing the availability of risk-transfer and insurance to 400m people in the most vulnerable countries over the next five years.

At Lloyd’s, eight syndicates are participating in an initiative that has a committed capacity of $400m towards solutions that address natural catastrophe risks in emerging and developing economies.

Meanwhile there are several regional risk pools already up and running that are backed by reinsurance and capital markets instruments, such as the Caribbean Catastrophe Risk Insurance Facility (CCRIF), the African Risk Capacity (ARC) and the Pacific Catastrophe Risk Assessment and Financing Initiative (PCRAFI).

It’s a model that could be replicated - but insurers are not blind to the challenges ahead. In its response, the Geneva Association points to difficulties in emerging countries to do with weak (financial) infrastructure, access to reliable risk information, limited know-how and experience, lack of political stability, and distribution issues.

In mature markets, there are uncertainties around pricing, risk interdependencies and conflicting public-policy measures in high income markets. The biggest risk – and this was stressed at the World Economic Forum earlier this year – is that countries simply don’t follow through on their promises, however.

As Professor Peter Höppe, head of geo-risk research at Munich Re points out, there are no sanctions on countries - apart from reputational risk for government - and countries can step out later if there is a change in government.

Worryingly, just two months after the historic Paris agreement, cracks were already beginning to appear when US President Barack Obama’s plans to regulate emissions of CO2 from US power plants were stalled by the US Supreme Court.

The court ruled that the President’s Clean Power Plan could not go forward until all legal challenges were heard. Designed to cut US emissions by 32% by 2030, the scheme put huge emphasis on a shift to renewable energy. Many believe it is unlikely that all the legal questions over the future of the Clean Power Plan will be resolved before President Obama leaves office next January.

“The agreement would be weakened without the US, especially as the Chinese would be unwilling to continue without the US,” Höppe told me. “By contrast, it seems like European countries will work hard to fulfil their commitments. Germany has pledged ambitious 40% CO2 reductions by 2020. The five yearly review process hopefully will maintain a tight grip on progress.”

Maybe there is another role here for insurers and reinsurers: they have influence at a local and global level and could surely bring it to bear by lobbying politicians so that they don’t easily acquiesce to the carbon club.

Someone said that the future arrives before the past has completely gone. The insurance industry’s future lies in dealing with the risks associated with new clean technology and not supporting dirty industries that have such an uncertain future.

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