Insurance and Climate Change column

How Will Paris Agreement Change The Insurance Industry?

By | March 17, 2016

The sweeping agreement to reduce carbon emissions and battle climate change hammered out by world leaders last year could be greatly transformative for the insurance and reinsurance industry, according to industry experts who have read and thoroughly analyzed the document.

To use a cliché, the COP 21 Paris agreement, the fate of which is darkened by politics here in the U.S., is a potential game-changer for the industry.

That’s the definite impression I came away with after interviewing Mayram Golnaraghi with the Geneva Association, an international think tank for insurance and risk management issues.

Golnaraghi, who has been an advisor on disaster and climate risk management in the public and private sectors for the past 20 years, has constructed a detailed interpretation of the agreement for the industry. She detailed her findings in a recent report, and has been speaking with top industry officials about what the agreement means for their industry.

When I asked Golnaraghi to quantify how profound the changes to the industry will be, she steered the conversation toward addressing the opportunities that the agreement presents for the industry.

Pressed for a comparison, analogy, or at the very least a sentence to describe how the industry will look in 2050 if the world’s nations make good on the agreement, Golnaraghi stuck to her positive outlook, preferring not to get into the business of forecasting on behalf of the trillion-dollar insurance industry.

Still, it’s hard not to read between the lines when talking with Golnaraghi, who is intimately familiar with the agreement down to the minutiae.

In her report she states that it’s inevitable that by 2020 the reinsurance sector will not only be providing a wider range of risk-transfer solutions, but also will be supporting emission reduction efforts and transitioning to a low-carbon economy through its investment strategies as well as actively managing its carbon footprint.

The COP21 agreement will go into force following ratification by the governments by 2020. Every participating government is required to offer a new upgraded plan for managing of risks, and reduction of carbon emissions every five years up to 2020 toward the 2050 goal of having a no-carbon economy.

The three main objectives of the agreement are to reduce carbon emissions, adapt to a changing climate, which includes creating solutions for the management of loss and damage, and financing through new commitments.

The word “insurance” is mentioned a few places in the agreement, but it is implicit throughout the document.

The agreement spells out the need for more insurance in not only developed countries but also developing countries, where penetration is estimated at less than 1 percent in some countries – the potential market for insurance in developing economies is estimated to be between 1.5 and 3 billion policies, according to Lloyd’s of London.

The agreement calls for the government and the industry to work together to significantly beef up penetration, so it’s not difficult to interpret that as providing many times the amount of insurance to those nations during the next 30 years over what is being provided currently.

“This opens up an unprecedented opportunity for the industry to start a very positive, open dialogue with the government towards development of sound, scalable and sustainable insurance programs, as part of which significant amount of innovation can happen,” Golnaraghi said.

Governments for the most part aren’t in the risk management game, and they are far less knowledgeable about how to quantify risk; nor are governments as skilled at risk modeling.

“For governments to be able to develop sound programs that prevent risk and transfers the risk, they need to base it on understanding and quantifying what that risk,” Golnaraghi said. “If you work with many governments, you realize that they don’t have the skill sets and the tools and methodology to develop that.”

Beside direct mentions of insurance, Golnaraghi in her report highlights several other moves made in conjunction with the agreement that have implications for the insurance sector.

One of those moves came from United Nations Secretary General Ban Ki Moon and his ‘s A2R (Anticipate, Absorb, Reshape) Framework.

The framework was launched at COP21 with the aim of helping build resilience to disaster and climate risks in the world’s most vulnerable countries. The initiative seeks to raise funds and strengthen capacities in early warning systems, insurance and social protection and resilience of infrastructure, Golnaraghi notes.

Eight Lloyd’s of London syndicates are participating in the initiative and have a committed capacity of USD $400 million towards solutions that address natural catastrophe risks in emerging and developing economies.

“These syndicates are managed by Amlin, Beazley, Hiscox, Mitsui Sumitomo Insurance Group, Nephila, Renaissance Re Syndicate Management, Tokio Marine Kiln and XL Catlin,” Golnaraghi said.

Insurance is also considered as an essential tool to address loss and damage through the requirement in the agreement that the UN and the International Warsaw Mechanism on Loss and Damage – created COP19 in 2013 in Warsaw, Poland, this mechanism is geared to address loss and damage associated with impacts of climate change in particularly vulnerable developing countries – to create a clearinghouse for risk transfer that serves as a repository for information on insurance and risk transfer, which could facilitate the efforts of countries to develop and implement comprehensive risk management strategies.

This concept of clearing house for risk transfer is one of the things in the broadly worded agreement that needs to be clarified.

“Exactly how you’re doing it. What are you monitoring?” Golnaraghi said.

She added: “This is where, again, in all interactions with UN, we very much promote that UN and the International Warsaw Mechanism should very closely consult with the insurance sector. Not from just the insurance perspective, but as an expert in this field of risk analysis, structural prevention and so on, to see how such a clearing house can be designed effectively.”

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Latest Comments

  • April 16, 2016 at 10:51 am
    Valentino Piana says:
    Contrary to what you state by saying "The COP21 agreement will go into force following ratification by the governments by 2020", COP21 Decisions are already operational and th... read more
  • March 21, 2016 at 10:01 am
    Agent says:
    Dave, there is money to be made in the Global Warming, Rising Seas market and that is what they are shooting for.
  • March 18, 2016 at 2:06 pm
    Dave says:
    Al Gore probably has one of the largest carbon footprints on the planet, probably second only to Obama's. What a pair of hypocrites.
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