Insurers have a historic opportunity to reimagine risk: Iyahen

Insurers must seize their place in history by adopting a proactive approach to climate resilience and adaptation, according to Insurance Development Forum (IDF) secretary-general, Ekhosuehi Iyahen.

Introducing a webinar hosted by the Better Insurance Network, Iyahen highlighted how public, private and mutual insurance systems had played a major role in the social and industrial transformations of the early 20th century by protecting communities and institutions from excess risk and dislocation.

“Insurance is much more than a set of financial products, it is a framework for orderly progress and transition,” Iyahen said. Insurers must now rediscover the potential “scope, scale and standing” of the core insurance business, she added.

First, insurers have invaluable expertise and resources to resolve complex risk management challenges. That is why, Iyahen said, the IDF launched the Global Risk Modelling Alliance (GRMA) as a public-private partnership on risk analytics with the Vulnerable Twenty (V20) group of finance ministers, which now comprises 68 countries from Africa, Asia, the Caribbean, Latin America, the Middle East and the Pacific.

The GRMA is currently supported by 10 IDF member companies, which provide multi-year funding that leverages finance from the German government. They are AIG, Aon, Axa, Axis, Convex, Guy Carpenter, Howden Group, RenaissanceRe, Scor and WTW.

Data-driven investment

The IDF has also supported the Global Resilience Index Initiative (GRII) to provide “open and globally consistent” climate risk data for governments and financial institutions to scale up climate adaptation, resilience and loss and damage finance to protect climate-exposed communities and economies, Iyahen said.

“As climate change accelerates, the stakes are getting higher for people, businesses and governments around the world,” Iyahen said. “Putting globally consistent numbers behind who and what is most at risk, and how people, prosperity and the planet will be impacted, is essential to guide capital investments in adaptation.”

The GRMA and GRII are just two examples, she continued, of programmes that allow the public and private sector to collaborate and address “deep structural and pragmatic operational issues” that influence access to – and the quality of – information that can be used to influence policy.

Insurers also need to expand urgently the availability of sustainable risk pools to protect populations and assets. “All the actors of the risk-sharing domain – tax-based and premium-based, from community programmes to multinational level – need to be integrated in a public-private mutual risk-sharing continuum,” Iyahen said.

She pointed out how national insurance programmes of the late 19th and early 20th centuries in Germany and the UK had been expanded from 1945, when the welfare state and social security system were introduced in response to the impacts of economies and populations in transition.

“In today’s societies that face industrial and environmental shocks, it may be necessary to consider the updated landscape of public, private and mutual social protection systems to support populations against a wide range of extreme social, environmental and economic risks,” Iyahen said.

“It should be of general benefit to research, design and prepare potential insurance systems before major dislocations occur, rather than in response to an unprepared, emergency context,” she added.

Dawn of a new era

The world has entered an era ripe for public-private partnerships, she said, such as the V20 Global Shield against Climate Risks and the IDF’s Tripartite Agreement with the German government and the UN Development Programme (UNDP).

The IDF is actively engaged in projects in 23 countries, with programmes ranging from insuring public assets to supporting smallholder farmers. Its private sector members have committed $5bn in offered capacity and they have co-invested about $30m with the German government on the implementation of these projects, which are expected to benefit about 64 million people.

The IDF is also actively supporting calls for strengthened commitment to pre-arranged financing for crises, with the expectation some donor governments will commit a specific percentage of their humanitarian spend to ex-ante financing arrangements.

Funding requirements for extreme weather events are eight times higher today than they were 20 years ago, Iyahen stressed. Between 2017 and 2022, humanitarian appeals linked to extreme weather were only 54% funded, resulting in an estimated shortfall of $28bn to $33bn, she added, and only 1.3% of this funding is pre-arranged.

“This is a tremendous opportunity to deepen the use of ex-ante financing instruments in the humanitarian sector to address a global development challenge. It allows for much more efficient leveraging of public resources and the impacts are material and real for people and communities,” Iyahen said.

A third area she highlighted was communicating the value of the insurance sector to the wider community, to define its role in tackling major socio-economic challenges, including the protection gap.

“This is beyond pushing products,” she said. “It will require doubling down on our effort to build trust and demonstrate value.”

The development and humanitarian community are becoming increasingly aware of the importance and relevance of insurance, Iyahen said. Recent reports that show this growing appreciation include the UNDP Human Development Index report and the World Bank Crisis Toolkit.

“This increasing openness for engagement is a window of opportunity to deepen trust, shape policy and cultivate partnerships focused on solutions,” she said, adding: “We can no longer be comfortable speaking only to ourselves.”

It is precisely because the topics of resilience and adaptation are complex and difficult issues that re/insurers must be engaged, “even if out of enlightened self-interest”.

Deep weaknesses

The past few years have “aptly demonstrated” deep weaknesses in the resilience of global social and economic systems, she said.

Significant structural and geopolitical shifts include the “rupture in the rules-based system that governed global stability”, “heightened and likely prolonged” geopolitical insecurity, slower economic growth and a climate crisis affecting developing and developed countries alike, Iyahen said.

She continued: “This is all occurring against a backdrop of enhanced fragility coming out of divergences in growth and wellbeing, both within societies and across the world. Investing for the future has therefore become a much more complex game as governments, communities and businesses seek to navigate these choppy and unprecedented waters.”

These issues demand insurers become better risk managers by being more proactive.

“It is no longer going to be tenable to think the resilience and adaptation agenda is one we will get to later on, precisely because many of the assumption regarding levels of resilience and our adaptive capacity do not hold,” Iyahen said.

“Addressing the mitigation challenge is just as important and as urgent as the resilience and adaptation challenge. Likewise, the protection gap is no longer going to be a problem for the others – the public sector or private sector alone to solve or developed or developing countries – as systems are increasingly connected,” she added.

Addressing these challenges goes “right to the heart” of the relevance of the insurance industry and its values, which are ultimately centred on offering protection that allows people to take better risks and build stronger societies.

“The insurance industry has the heritage to take a leadership role in helping to tackle elements of these major global challenges at a time when the world and populations are looking for solutions and not simply identification of the problems,” Iyahen said.

She concluded: “This not a problem of the other, but of the collective. It is not of developed or developing countries, or public versus private. It is a problem for all. It is also not a problem of the future as impacts are being felt today and solutions are needed now. This work is not charity. It is about creating new markets for an unprecedented era. Simply put, it represents a tremendous opportunity for the industry and those with the vision and capabilities to match the challenge.”