Industry Expertise, Data, Capital Can Help Reduce Global Disaster Risks: Interview

By | March 17, 2015

Margareta Wahlström, the UN Secretary General’s special representative for disaster risk reduction, and Rowan Douglas, Willis CEO for capital, science and policy practice, have been hard at work preparing for a series of conferences and meetings dedicated to integrating the re/insurance industry’s expertise, data and capital into reducing global disaster risks.

Following their presentation at the Economist’s Insurance 2015 Conference in London on March 3, they explained the program they are seeking to have adopted in the accompanying interview. The initiative dates from the earthquake and tsunami that struck Indonesia and the Indian Ocean in December 2004. The main ideas were first presented at the IIS Conference in London last June, and have continued to be fleshed out into a working program.

The ongoing conference in Sendai, Japan, the epicenter of the 2011 earthquake and tsunami, is the forum for a discussion of the possibilities of brining insurance expertise from the private sector together with governments.

Up to 8000 delegates from around the world are meeting to map out future plans for disaster prevention and relief. “A very significant portion of that will be, in fact, the business community, private sector, civil society, science, local governments and parliamentarians,” Wahlström said.

The re/insurance industry is "a driver of investment resilience, climate smart investment - not because it's green, not because it's sustainable with a cuddly polar bear, but because it's generally about risk.” Rowan Douglas, Willis CEO, capital, science and policy practice

“In Sendai, we have a very significant number of some of the top insurers in the world,” she said; “and they are there because that’s where they know it’s going to start playing out. They share the vision that 2015 could very well be the year of absolute change about the section of how resilience can be built.”

Improving the global response to disasters is an ongoing task, made more complicated, yet more necessary, by the effects of climate change and the increasing percentage of the world’s population that lives in coastal zones, flood plains and other high risk areas.

“Some of the big issues that have come to bear over this decade show that we need to put a lot more effort into understanding risk in all its perspectives,” Wahlström said. This requires expanding “the need for data, for free and open access to data, for use of data, for collaboration with science,” she continued. It means using “a very inclusive, modern way of managing risk together. There is a big emphasis also on how to govern risk, what motivations we bring to the fold.”

She also explained: “We need much more understanding of the challenges of reconstruction. Not necessarily only to do reconstruction better, but to understand how you anticipate the challenges, how you can avoid them and mitigate them.

“There is a motivation for risk mitigation in capital. Can we convince major growth areas and major growth economies to look at risk in an anticipatory manner? Most of the economic growth in the world today is not in our part of the world, in absolute numbers, but in Africa and Asia. That’s also the right spot for insurance. If you look at the map of our insurance, it’s covering the world today.”

There are significant areas, however, where insurance coverage is minimal or non-existent. “Arica is almost white; it’s white and gray shade intensity,” she said. While insurance isn’t the only industry involved in facing disaster risks, it can help. “In terms of innovation, it can broaden its outlook, engage in the really big, I would say the changing, issues. They are not only changing, they are changing very rapidly. There’s a huge expectation, not only from the disaster risk community, but from the climate community, that insurance is part of the solution.

“That’s what everyone is looking to both in foresight, the risk expertise, and in risk transfer, innovation. For many years, I’ve heard the call for innovation; I’m looking for innovation everywhere.” She cited the insurance industry’s “long tradition;” adding that “I think they have a huge opportunity now to really be part of this solution for the coming decades, but it is an opportunity that plays out now. Not in 10 years, not in 20 years, it’s now.”

So what exactly can the re/insurance industry do? Douglas identified “three or four key areas.” He explained that over the “last 25 years, the insurance sector, because of the challenges it’s faced, has developed the most sophisticated scientific and engineering gearbox, which allows us to understand and evaluate natural disaster risk around the world, and make it tractable into current financial operations and valuations.

“Now, we’re reaching the opportunity where those tools and techniques can become much more widespread in enabling many others to understand that risk,” he continued. “Once risk is understood, it can be managed.” That will provide opportunities for insurers, beginning with the application of the industry’s scientific expertise.

Addressing the strictures of multiple regulatory regimes is a second opportunity to harness the re/insurance industry’s expertise. Douglas said: “The industry has integrated that risk into our financial system through the stress tests of 100 and 200 year resilience, through the ways that the credit rating agencies take this, the way that it’s accounted in our books.

“We’re the only sector that actually accounts for this risk in their operations,” he added, “and we’re the only sector where insurance capital is recognized on balance sheets as a contingent source of capital against contingent risk. People are waking up to the fact that as soon as you make this risk tangible in the financial system, people start looking to manage it.”

As an example of the science involved he cited the fact that “we can invest in vulnerable coastal locations, and not be punished, and yet, it’s risky. But if we annualize that risk, it becomes economical and that works in our favor.”

The industry’s role in investments is tied into the other sectors. “Investment is our third area,” Douglas said. “Insurers represent one third of assets under management. We have tremendous influence to become a driver of investment resilience, climate smart investment – not because it’s green, not because it’s sustainable with a cuddly polar bear, but because it’s generally about risk.”

Given these factors, “making insurance far more ubiquitous” is a real goal. “We have 25 percent coverage in the world, but much less in many places,” Douglas said. “Meanwhile, even North America, Europe and Australia, and even Japan are facing crises in our developed world systems of insurance.

“We have to actually make insurance far more inclusive. Once people are included in the system, not only are they protected, but actually, a whole set of broader, sustainable behaviors emerge. That’s how we cure it over an open fire.

“I think that the politicians and the policymakers, through this yo-yo process have woken up to this – have woken up to the institutional nature of insurance to deal with this risk, as it dealt with urban fire 150 years ago. Ironically, the last community to understand and recognize this is the insurance industry itself. Insurance has got a huge future; we should be a growth stock.”

Another major meeting will take place at the IAS conference is in New York. “The third day will be at the UN headquarters, to report back on the commitments which were made last year here in London,” Douglas said. It will “literally bring the world’s insurance industry to the UN in the middle of this year, and explain many processes.”

The New York session will be preceded by the third International Conference on Financing for Development to be held in Addis Ababa, Ethiopia, from July 13 to 16. 2015. “That one includes a lot of risk financing and insurance, as well as peer investment,” Wahlström said. “It sets the stage for the sustainable development goals which are, if you like, the global goals or economic and social development.” Which, as “millennium development goals are being renewed for the first time after 15 years.”

The goals encompass “all nations, not just the developing world,” she added. “They’re like the business priorities. We’ve mapped the role of insurance against those 17 goals and sub-goals. Insurance is absolutely pivotal to about one third, it’s relevant to another third, and to one third perhaps it’s less relevant.”

The goals include climate resilience, as well as health and investment. They are in part a “build up, in the public’s mind, towards Paris [in December] and the key climate negotiations for what’s called ‘COP21,’ where,” she said, “insurance will have a massive role to play in obviously the adaptation and resilience areas, but also, in helping use our modeling techniques to convey the risk of these challenges to our economy.”

Wahlström and Douglas see these international conferences as ways to “incentivize action” for addressing climate change and increasing the insurance industry’s presence and participation in doing so in both the climate and the investment sectors.

So far they seem to be doing their job. “We had a very exciting session at Davos on insurance this year,” Wahlström said, and “I think we’ll be having some very exciting ones next year, and we think that the role and potential for insurance is extremely exciting in the decades ahead.”

The key to achieving the goals that have been set lies in getting the public and private sectors to cooperate. “Hopefully, during this year, we will come to some realistic understanding,” Wahlström said. She added, however, that this was perhaps “slightly over-optimistic, at this stage at least.” As the “expectation from the public sector of how much the private sector will contribute to financing the development agenda” remains uncertain. However, she added, “It may not be over-optimistic in the longer term, if the conversation that develops between the public and the private changes tack a bit.”

Looking to the future, she said: “In 2016, in the years coming, we could have a very different perspective on sustainability, stability, global growth. We have high aspirations through these processes, but I think it’s only honest to say that there are also some deep divides among countries when it comes to what the solutions should look like; it’s a hard year, in many ways, but with many opportunities.”

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