Guy Carpenter proposes new climate resilience bond
The CRD bond would enable a municipality to obtain cover from an insurer on a multi-year basis, while also incorporating a project fund account for a project to reduce exposure to future losses from the insured climate-related event
Climate Resilient Development bond seeks to facilitate financial resilience and loss prevention in relation to climate-related weather risks
Guy Carpenter has proposed an new re/insurance structure to improve financial resilience and loss prevention for climate change-related weather risks.
The proposal for a climate resilient development (CRD) bond combines community-based insurance, stacked investment and advanced funding for loss-prevention measures. The bond uses an enhanced insurance-linked security structure with cover provided on a parametric trigger basis.
Presented in a briefing document, The Need for a Sea Change in Climate-Related Insurance, the structure of the bond aims to promote increased co-operation between the insurance sector, government, investors and other stakeholders.
The document was co-authored by Franziska Arnold-Dwyer, director of the Insurance, Shipping & Aviation Law Institute at the Centre for Commercial Law Studies of Queen Mary University of London, and Julian Enoizi, global head of Guy Carpenter’s public sector practice.
The proposed model would enable a municipality to obtain cover from an insurer on a multi-year basis, while also incorporating a project fund account for a pre-defined and approved project that is designed to reduce exposure to future losses from the insured climate-related event.
The programme is reinsured via an insurance special-purpose vehicle, which passes the risk to the capital markets through bonds or notes.
Investors will be of three types: commercial; environmental, social and governance; and philanthropic. Depending on the type of investor, the principal paid will either be purely risk-based or support the project fund component of the structure.
During the lifecycle of the structure, the implementation of the loss-prevention project – which may be new flood defences or wildfire-resistant housing, for example – will help improve the risk profile of the bond and reduce the potential for the structure to be triggered by a loss event, according to the briefing document.
At the end of the CRD bond term, remaining collateral will be returned to investors, with the order of repayment dependent on the type of investor and their risk/return profile.
“We need to see a paradigm shift in how the re/insurance industry addresses climate-related risks,” Enoizi said.
“The CRD bond provides a new type of structure that moves beyond the traditional post-disaster response cover to a truly integrated climate risk approach that combines financial protection against the impact of these perils and proactive support for loss-prevention measures.”
“The CRD bond provides a new type of structure that moves beyond the traditional post-disaster response cover to a truly integrated climate risk approach that combines financial protection against the impact of these perils and proactive support for loss-prevention measures”
Julian Enoizi
Guy Carpenter
Arnold-Dwyer added: “We believe the CRD bond has the potential to make an impactful contribution to the implementation of sustainable and just solutions to the climate crisis. It helps generate financial resilience and loss-prevention capabilities within a mechanism that promotes the principles of equity, sustainable development and co-operation.”
Failure to mitigate and adapt to climate-change, natural disasters and extreme weather events, are listed as the top three global risks over the next 10 years, according to the World Economic Forum.
“Yet, although climate change is a common concern of humanity,” the authors wrote, “climate action is held back by the ‘tragedy of the commons’ whereby individual or isolated acts can neither reverse climate change nor increase resilience.”
Insurance companies worldwide are already engaged in numerous climate initiatives such as public-private partnerships, the Net-Zero Insurance Alliance, the Global Shield against Climate Risk and the Insurance Development Forum.
But Guy Carpenter said a new operating model is required to address a crisis of this scale, one that promotes increased co-operation with governments, investors and other stakeholders, as well as within the industry, “to build knowledge, capacity and impact”.
