How risk managers can support climate finance: Ferma
Federation of European Risk Management Associations recommends setting up an expert group, led by the European Commission, to discuss an EU public-private reinsurance scheme to address climate insurance gaps
Closer co-operation between public authorities, financial markets and the private sector, as well as between governments across the globe, is needed to foster sustainable prosperity, Ferma’s Hedemark Hancke and Beaupérin argue
There has been a paradigm shift in the EU regarding the fight against climate change, according to the leadership of the Federation of European Risk Management Associations (Ferma).
In an interview with Insurance Day, Ferma’s president, Charlotte Hedemark Hancke, and chief executive and secretary-general, Typhaine Beaupérin, outline the two main elements of that shift.
On the one hand, reducing carbon emissions and climate adaptation remain high on the list of EU priorities. Indeed, the president of the European Commission, Ursula von der Leyen, renewed her commitment to the Paris Agreement in her recent address at the World Economic Forum.
On the other hand, however, they point out the green agenda has become integrated into EU economic and industrial policies in light of the report Mario Draghi, former European Central Bank (ECB) president, issued last September on the future of European competitiveness. “The net-zero transition is now seen as a parameter of EU competitiveness,” Beaupérin says, “rather than a distinct objective motivated by a fear of public backlash.”
As a consequence of these developments, Beaupérin says the issue of funding the transition to net zero “has become front and centre”. She says Maria Luís Albuquerque, EU commissioner for financial services, has been “explicitly tasked with scaling up sustainable finance to ensure the EU remains a global leader in this domain”.
Beaupérin continues: “From Ferma’s perspective, particular attention should be given to financing climate resilience. Indeed, climate risks are becoming ever more frequent and destructive under the influence of climate change.”
Pointing to reinsurer Munich Re’s estimate the 2024 floods in Valencia alone have caused at least €10bn ($10.42bn) in damages, Beaupérin says the cost of rebuilding for public authorities and civil society will “almost certainly be even higher, without mentioning the economic losses caused by the slowdown of economic activity following such a disaster”.
Now is the time to “join the dots”, Beaupérin stresses, to go from the idea of promoting sustainable finance, to implementing concrete actions to mobilise the tremendous resources needed for climate adaptation. Closer co-operation between public authorities, financial markets and the private sector, as well as between governments across the globe, is needed, she says, to develop innovative solutions to foster sustainable prosperity and safety against climate risks.
Ferma hopes Cop30 – the UN’s next round of climate talks, which will be held in Belém, Brazil this November – will bring about solutions to these issues. The EU Directorate-General for Climate Action’s planned international symposium on managing global climate risks is “also on Ferma’s radar”, Beaupérin says. This conference will aim to gather global government representatives, financiers and civil society experts on the topic of managing climate risks.
Most crucial risk
Risk managers play a key role in the overall climate resilience process of their organisation, since they are keenly aware of the threat climate change represents, Hedemark Hancke says. Indeed, risk managers perceive climate risks as “the most crucial in the long term”, she says, citing Ferma’s Global Risk Manager Survey Report 2024.
Moreover, climate risk assessment is becoming a “central part of a risk manager’s mission”. She says: “Currently 60% of risk managers identify climate change risk with their risk maps, 38% define different climate-related scenarios and 35% quantify the financial impact of physical climate change risks on their organisation. Furthermore, the risk assessments risk managers conduct inform the climate adaptation measures that need to be financed.”
Charlotte Hedemark Hancke, Ferma
Risk data collected through risk assessments is central to improving insurability by measuring and addressing climate protection gaps, Hedemark Hancke continues, while accurate climate risk assessment and effective climate adaptation measures contribute to reducing insurance premiums, thus improving climate resilience and freeing up resources to invest in the net-zero transition.
In particular, she says captives can play an instrumental role in consolidating data about climate risks, as they centralise the data from their parent organisation’s various subsidiaries. “Captives can incentivise climate adaptation and foster resilience, since their quantification of the financial impact of climate risks helps in building a business case for investing in risk prevention and mitigation,” Hedemark Hancke says.
“Insurance is a critical financial mechanism underpinning the net-zero transition. It allows enterprises to reduce the risks of investing in new green technologies or changing their business activities”
Charlotte Hedemark Hancke
Ferma
“In light of the challenging conditions in the insurance market – such as hard-to-insure risks, lack of coverage or high premiums – captives may serve as a stable and strategic mechanism to support the climate resilience and sustainability goals of the companies,” she adds. Ferma’s captives committee will look specifically into that topic this year.
According to Ferma, private insurance coverage for transition-related risks is insufficient to meet demand, forcing companies to choose between maintaining their competitiveness and meeting their climate goals.
“Insurance is a critical financial mechanism underpinning the net-zero transition. It allows enterprises to reduce the risks of investing in new green technologies or changing their business activities,” Hedemark Hancke says. “Without the safety net of insurance protection, the necessary risk-taking and innovation are discouraged and climate ambitions may well become unattainable for many organisations,” she adds.
Climate protection gaps are a “very concrete issue” for risk managers struggling to insure green assets or activities, Hedemark Hancke stresses, pointing to Ferma’s 2022 white paper Insuring the Transition.
This report shows insurers are reticent about providing cover for some companies because of past activities – if they were involved in fossil fuels or mining, for example – even as they are attempting to diversify and transition to greener business models. Moreover, Hedemark Hancke observes there is a lack of insurance capacity for specific technologies and material that are underpinning the energy transition, such as offshore solar panels or wind farms, hydrogen fuel or storage or new construction techniques.
A third point she makes is specific risks – such as property damage or bodily injury – may be excluded when there is a direct or indirect link with mining activities or when battery packs are stored or used in sprinkler pumps, for instance. “Even worse, climate protection gaps are widening, as specific risks are increasingly excluded from insurance policies,” Hedemark Hancke says. “This leads to a concerning figure: 53% of risk managers fear part of their business locations or activities may become uninsurable in the future, according to the Global Risk Manager Survey Report 2024, with climate risks perceived at the most probable area where coverage will withdraw.”
The insurance industry needs to adopt a “more proactive stance”, she says, and to collaborate with risk managers and public authorities to increase the affordability and availability of climate and transition-related coverage. Building on the results of the European Commission’s Climate Resilience Dialogue, which Ferma co-chaired, innovative approaches can be explored, she continues, such as parametric insurance, multi-year policies or bundling multiple hazards into a single standardised insurance policy.
Supporting policies
Beaupérin highlights how the EU policy framework supporting sustainable finance is “layered” and involves several interconnected regulations and initiatives. Of particular interest to risk managers is the sustainability reporting “triad”: EU taxonomy regulation, the corporate sustainability reporting directive (CSRD) and the corporate due diligence directive (CS3D).
The taxonomy regulation defines a common classification of economic activities that are aligned with the net-zero transition, with the aim to direct investments towards them.
The CSRD requires companies, including financial entities falling under its scope, to conduct a double-materiality assessment, analysing on one hand the impact of business activities on its environment (impact materiality assessment) and on the other the impact of the environment on the company’s economic value (financial materiality assessment) in the short, medium and long term. This year is the first year of reporting under the CSRD.
The CS3D will only be applicable starting in 2027 but will, among other obligations, require companies to adopt and put into effect a transition for climate change mitigation. The aim of this plan is to ensure the business model of the company is compatible with the Paris Agreement and the objective of reaching climate neutrality by 2050. The transition plan will notably include an explanation and quantification of the investments and funding necessary to implement it.
Beaupérin says all three acts are due to be revised through an “omnibus simplification package”, which is due to be announced by the European Commission on February 26. “Ferma will closely monitor this initiative, and we will see how we can contribute to its objective of reducing the administrative burden for companies while maintaining a high level of ambition regarding sustainability goals,” she says.
Potential solutions
Hedemark Hancke observes that at present most climate resilience investments are coming from public authorities at the EU, national or local levels. Not only does this limit the resources available for climate adaptation when it should be a priority, she says, but it also strains public finances at a difficult time for many European countries. “There needs to be a more effective way of sharing the cost of building climate resilience across a wider range of public and private stakeholders,” she stresses.
In particular, she says the EU presidency should take action to increase the share of insured natural catastrophe losses. Citing data from the European Insurance and Occupational Pensions Authority (Eiopa), she says on average only one-quarter of the losses incurred from extreme weather and climate-related events in the EU were insured, and this share is declining. “In some EU countries this gap is even wider, which has motivated governments to implement national natural catastrophe schemes – for instance Italy has recently decided to introduce mandatory insurance requirements against natural disasters and catastrophic events,” she adds.
Typhaine Beaupérin, Ferma
If nothing is done, Hedemark Hancke continues, the increasing cost of climate adaptation and rebuilding after natural disasters will “fall on the shoulders” of public authorities and therefore ultimately on the taxpayer. “Innovative approaches need to be explored to ensure that the private insurance markets contribute more to climate resilience, including in the form of public-private partnerships at EU level,” she says. In this regard, Ferma considers the proposed EU public-private reinsurance scheme put forward by the ECB and Eiopa constitutes a “solid starting point for this discussion”, she adds.
“[Climate risks] need to be addressed by sharing them across multiple actors in a way that is both effective and fair. This is what the proposal by Eiopa and the ECB for an EU public-private reinsurance scheme aims to do”
Typhaine Beaupérin
Ferma
Another way the EU presidency could facilitate the green transition of the private sector would be to develop “robust and clearly signposted” strategies for companies to follow on the path towards net zero. “Many businesses – and SMEs in particular – would like to do more for their transition but need guidance on best practices in the realm of climate adaptation,” Hedemark Hancke says. “These guidelines would have to rely on holistic, forward-looking climate risk assessments and consider the impact of climate change in the short, medium and long term,” she adds.
The EU presidency could also explore the possibility of giving financial support for climate risk management training targeted at small and medium-sized enterprises, Hedemark Hancke says, and Ferma could contribute to such an initiative, given its expertise in professional training through the risk management certification Rimap.
Expert group
Ferma recommends setting up an expert group led by the European Commission to discuss the proposal for an EU public-private reinsurance scheme to address climate insurance gaps, as put forward by Eiopa and the ECB.
Outlining the practical steps such a group could take, Beaupérin stresses climate risks are systemic risks. “They need to be addressed by sharing them across multiple actors in a way that is both effective and fair. This is what the proposal by Eiopa and the ECB for an EU public-private reinsurance scheme aims to do. In a nutshell, it would allow national natural catastrophe schemes and private re/insurers to transfer some of their climate risks on a voluntary basis. This would in turn increase climate insurance capacity and lower the premiums for the consumer,” she says.
Ferma considers this proposal is a “good starting point” to address climate protection gaps, she continues, but some of its more practical aspects “need to be clarified” before it can become an official policy initiative, notably regarding its risk pricing methodology, risk modelling capabilities, initial capitalisation and conditionality requirements.
That is why Ferma is advocating for the European Commission to set up an expert group on the topic, to unite all stakeholders concerned by the proposed scheme. These stakeholders include re/insurers, business representative organisations, EU member states and, where appropriate, their national natural catastrophe schemes.
They also include the European Commission in the form of the Directorate‑General for Financial Stability, Financial Services and Capital Markets Union and/or the Directorate-General for Climate Action. “Ferma would also have its place in this expert group,” Beaupérin says, “as we carry the voice of corporate insurance buyers and captive managers.”
Although it is “beyond the role” of risk and insurance managers to facilitate the creation of a global architecture for climate finance, they can anticipate, identify, prevent and mitigate climate and transition-related risks, Beaupérin says. “And eventually they can encourage their partners in the insurance industry to be more ambitious and proactive to achieve their sustainability goals.”
