The third day of the International Insurance Society’s Annual Seminar was an all-day session devoted entirely to the threat posed by climate change, the studies of its risks and the solutions available to face them.
While the re/insurance industry is justifiably concerned about excess and alternative capital, the digital revolution, cyber liability, reputational risks, increasing regulations and a host of others, the elephant in the room remains climate change. As global temperatures warm, well known risks – floods, droughts, fires, windstorms, political disruption – are increasing and becoming more violent.
Virtually no one in the re/insurance industry now questions the perils the changing climate poses; however, the threats are so varied, and assessing them properly is so difficult, that only a truly global effort will result in positive actions being taken.
The seminar featured a number of speakers from UN agencies and non-governmental organizations (NGO’s) that are addressing the problem. It was sponsored by Willis, and organized under the direction of Willis executive Rowan Douglas, Chairman of the Willis Research Network (WRN), who also serves as the Chairman of the UN working group the Hyogo Framework for Action Renewal Consultation (HFA-2).
A WRN “working paper” described the goals as supporting research to enable society to “achieve resilience at local and global scales, via public, private and mutual mechanisms as a platform for sustainable growth.”
Its principle aim is to integrate “disaster risk and resilience into the financial system,” thereby providing “structural and proportionate means of saving millions of lives and livelihoods in the coming decades and protecting billions of dollars in homes, assets and property in a cost effective and rational way, when weighted against competing priorities.”
That’s a tall order, and it won’t happen overnight, but it is after all what the re/insurance industry has always done, and it’s only natural that it takes a leading role in facing such an existential threat, not only to the industry, but also to the entire planet.
The WRN paper described the growing convergence of the re/insurance sector with the financial sector as a continuing process; noting that this type of cooperation has deep historical roots. From the 19th century onwards the re/insurance industry played a leading role in providing standards – fire departments, building codes, zoning laws, etc. – to prevent the disastrous fires that destroyed large portions of major cities, notably Chicago and London. “We need to employ the same techniques to meet our own challenges,” the report said.
In his opening remarks Douglas called on business and the private financial system to “share best practices” with re/insurers to create a “convergence of communities” to explore the best way to meet the threats from climate change.
Thomas Christensen from the UN Secretary General’s office listed the upcoming conferences which will provide opportunity to turn the various proposals into action. He noted that the Hyogo Framework [named after the city in Japan where it was first established] would be the subject of negotiation for its renewal in March 2015. In September 2015 negotiations begin for the UN’s “sustainable development goals (SDG), followed by an UN Conference in Paris in December and the “World Humanitarian Summit in 2016. The re/insurance industry should play an important role in all of these events.
“Stakeholders, both public and private should explore forming partnerships,” Christensen said. These would examine critical areas; notably “energy, land use, transportation and major exposure areas.” They would “align science, politics and economics” to try and see into the future. “But,” he added, “we need incentives to convince governments to do this.”
As an example of “interactive disaster relief” he cited the sixteen member governments of the Caribbean Catastrophe Risk Insurance Facility (CCRIF) that have banded together to obtain coverage for the damages from the hurricanes, floods and landslides that frequently hit the region.
World Bank Treasurer Madelyn Antoncic described a “shift in the view of governments” in their recognition that natural catastrophes have a financial impact on entire countries above and beyond the immediate impact on local areas where they occur. The Thai floods and the Japanese earthquake/tsunami in 2011 are prime examples. As a result, she said: “Disaster risk management (DRM) has become a higher priority.”
Scientists have forecast that natural disasters will increase in strength, if perhaps not so much in frequency, due to climate change; thereby causing more damage and higher losses, which will impact the economies of the countries where they occur. “Natural disasters will expose governments to a loss of productivity, human losses, and will have political consequences,” Antoncic said.
The World Bank’s role in mitigating catastrophes includes “working to get governments to integrate disaster risk reduction (DRR).” This includes increasing the use of risk modeling to reduce a country’s vulnerability to disasters, as well as providing lines of credit after an occurrence to provide relief.
Willis CEO Dominic Casserley reminded the audience that it’s the job of reinsurance intermediaries to “find solutions to align the problems,” which is helped by the participation of UN agencies.
“Now I have a simple purpose today,” he said, and that “is to call for a major change in what businesses tell their stakeholders about their performance and health.” He urged that “companies should report publicly on what resilience they have against natural disasters.” By doing so companies “would be incentivized to build natural resilience, making themselves stronger and in a better position for growth.” They thereby protect themselves against “downside risk,” and are better able to promote growth and create jobs.
Casserley noted the rising costs of natural disaster, which now average $200 billion a year – “ten times the level of thirty years ago.” He ascribed the situation to the fact that “humanity is now more populous and richer,” as well as the fact that a majority now lives in cities and more and more people will do so, which concentrates the risks from natural disasters.
Climate change is the second cause of the increased impact from natural disasters. He cited the recent UK floods as being considered as “hundred year” events, but which occurred for two years in a row, and the statement from UN Secretary General Ban-Ki Moon that “economic losses are out of control.”
There are solutions Casserley continued, and many of these should come from the re/insurance community, as it has “the experience” to identify potential risks, which is the first step in taking measures to “help the business community better evaluate the risks it will face.” That’s the driving force that has led him to call for businesses to publicly report their disaster exposures, as it would enable “investors to make informed judgments about the business – its opportunities and its risks.” This in turn would lead to “better allocation of capital.”
Lady Lynn de Rothschild followed up on Casserley’s remarks; noting that “insurance can reduce risk,” by forcing companies to do the right thing,” and look beyond “financial measures” to human capital, compensation and the formation of supply chains. As examples of initiatives that have been taken with the environment in mind she note Unilever’s commitment to obtain raw materials from “sustainable sources,” and the Norwegian wealth fund’s commitment to make “environmentally sound investments.”
The “main event” followed these presentations, with a keynote address by HRH Charles the Prince of Wales, which he began by describing the IIS conference as “a vitally important meeting on climate change, disaster risk reduction, resilience and the role of the private sector.”