What re/insurers can do for climate adaptation and resilience

With its expertise in risk management and financial capacity, the re/insurance sector can contribute to climate adaptation and resilience efforts in six main ways, according to one of the UN’s resident co-ordinators.

“Re/insurers can share valuable insights on risk assessment and management, facilitating a deeper understanding of climate risks across financial institutions. By integrating climate risk considerations into investment strategies and lending practices, the financial community can align with climate goals and contribute to building a more sustainable and resilient economy,” Dirk Wagener says in an interview with Insurance Day.

The six capacities re/insurers have in this context are:

Risk assessment and pricing: insurance and reinsurance companies, along with brokers, are crucial players in tackling climate change risks. They can support climate risk insurance through premium assistance programmes. Leveraging their expertise, they can develop risk analysis tools, enhance assessment models and create sustainable insurance products. Collaborating with policymakers, they can promote market-driven risk adjustments and advocate for climate resilience.

Innovative insurance products: they can develop innovative insurance products tailored to climate-related risks, such as parametric insurance that pays out based on pre-defined triggers like wind speed or rainfall levels. These products provide rapid payouts after a disaster, enabling quicker recovery.

Prevention and risk mitigation services: re/insurers can offer risk mitigation services to their clients, such as providing guidance on building resilient infrastructure, implementing disaster preparedness plans and investing in renewable energy projects to mitigate climate risks. Through tools such as communication campaigns, tailored customer advice and underwriting and pricing policies, they can motivate individuals to adopt preventive measures. Re/insurers can also work with administrative agencies to develop preventive and adaptive public policies supporting a climate-resilient future.

Data and research: they can contribute to climate research by collecting and analysing data on climate-related risks and sharing insights with policymakers, businesses and other stakeholders to inform adaptation strategies. Insurance industry initiatives like the Global Resilience Index Initiative aim to provide open climate risk data to support resilience-building efforts.

Partnerships and collaboration: re/insurers can collaborate with governments, non-governmental organisations and other stakeholders to develop comprehensive adaptation and resilience strategies, leveraging their expertise and financial resources to maximise impact. They work with policyholders, policymakers and administrative agencies to develop climate-resilient public policies and recovery coalitions post-disaster. Promoting public-private partnerships and pooling mechanisms can offer affordable coverage, helping real economy actors absorb climate-related shocks, reduce default rates and maintain creditworthiness.

Advocacy and awareness: re/insurers can advocate for policies that promote climate resilience, such as building codes that incorporate climate risk considerations or incentives for adopting resilient practices and communicate longer-term climate risk information as well as potential adaptation options along with associated possible benefits to their clients, such as premium reductions and discounts. They can also raise awareness among their clients and the public about the importance of adaptation and resilience efforts. With their expertise in understanding and quantifying risks, re/insurers can also support national and global conversations on the best practices in addressing and managing risks associated with climate change.

Wagener, who is the UN’s resident co-ordinator to Fiji, Solomon Islands, Tonga, Tuvalu and Vanuatu, says collaborative efforts between the re/insurance sector and the wider risk financing community can also drive innovation in financial products, such as green bonds and climate risk insurance, mobilising capital towards climate-resilient projects. As experts in risk assessments, re/insurance actors can also act as a bridge between governments, development partners and the wider financial community, he adds.

“Additionally, sharing data and research on climate risk can enhance the collective understanding of financial risks associated with climate change,” he continues. “The re/insurance sector can partner with training and educational institutions to design learning programmes that would support wider financial community in understanding climate risk. Moreover, by advocating for policies that incentivise climate resilience and engaging in policy dialogue, the re/insurance sector and the wider financial community can create an enabling environment for sustainable finance initiatives,” he adds.

Through these concerted actions, they can harness their collective resources and influence to address climate risk effectively and transition towards a more sustainable and resilient future, Wagener says. Furthermore, the re/insurance sector can partner with governments and development institutions to extend protection to those who might not be able to afford it while allowing insurance companies to continue operating in markets that “may seem unprofitable”, he says, owing to factors such as the increased frequency of extreme weather events and premium pricing regulation. “By engaging their clients, wider financial community and other development partners, as well as advocating for change, the re/insurance sector can use its influence to catalyse action to address climate risk,” he adds.

Lloyd’s and the Sustainable Markets Initiative

Wagener illustrated the role re/insurers can play in adaptation and resilience projects, pointing out that on behalf of the Sustainable Markets Initiative’s (SMI) insurance taskforce, Lloyd’s signed a memorandum of understanding (MoU) with the UN Capital Development Fund (UNCDF) in September 2023 during Climate Week NYC to scale insurance access for climate-vulnerable countries.

The SMI was launched by King Charles III during the 2020 annual meeting of the World Economic Forum in Davos. SMI’s mandate, called the Terra Carta, has a mission to build a co-ordinated global effort to enable the private sector to accelerate the achievement of global climate, biodiversity and Sustainable Development Goal (SDG) targets.

SMI has 17 industry and financial taskforces under it, comprising chief executives across the private sector whose purpose is to drive collective action towards a sustainable future within and across industries in line with the Terra Carta, and one of the taskforces is for insurance.

“By advocating for policies that incentivise climate resilience and engaging in policy dialogue, the re/insurance sector and the wider financial community can create an enabling environment for sustainable finance initiatives”
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Wagener says: “The MoU with UNCDF focuses on developing and increasing access to parametric insurance particularly in the Pacific, Caribbean and Africa regions, for the last-mile communities vulnerable to the consequences of natural hazards.”

He adds: “The agreement outlines the co-operation is expected to contribute to progress on closing the protection gap, building financial resilience in climate vulnerable countries, expand opportunities for flow of adaptation finance and catalyse investments from public and private sectors to accelerate the achievement of the SDGs.”

While the MoU was signed between UNCDF and Lloyd’s, the activities fall under the purview of the SMI and UNCDF only. Parametric insurance training workshops are organised by UNCDF, the UN University Institute for Environment and Human Security and SMI, either at national or regional level.

The most recent workshop was held in Suva, Fiji in March and saw the participation of insurance stakeholders from seven Pacific Small Island Developing States.

Wagener says the main objectives of these workshops are to: establish a common knowledge base in parametric insurance; train insurance stakeholders in parametric insurance products; explain the nuances and requirements of the same through a participatory approach; and build stakeholder capacity to facilitate the introduction of new and innovative products in the market.

“The workshops help foster networking, collaboration, knowledge exchange and can also bolster potential partnerships for future projects and initiatives,” he says.