Tag Archives: insurance development forum

How Insurers Can Step Up on Climate Change

Insurance sector communities have invaluable expertise and resources to address society’s climate challenges, but that experience is not fully understood or harnessed into the mainstream climate, sustainable development and finance agenda. The United Nations’ 26th conference on climate change, known as COP26, is a strategic opportunity to finally and comprehensively bridge this gap.

With COP26 drawing ever nearer, the insurance industry has a gilt-edged opportunity to recapture its historic role as a key commercial shepherd of social transition and gain a seat at the main table in Glasgow.

Not since the age of industrialization has global society faced a challenge on the scale of climate change, and the insurance sector is uniquely placed to play a leading role in forging a workable solution; in fact, it is a challenge we are duty-bound to accept. 

When the Paris accord was adopted by 196 nations in 2015, the annual COP meetings instantly became the focal point of global efforts to tackle climate change. While some of the signatory nations have since made progress in building economic resilience against the physical and financial impacts of climate change, the urgency to do more is escalating; the demand for risk mitigation and adaptation strategies is accelerating in parallel.

Like few others, the actuarial sciences have a track record of providing support for strategic social transition at scale; the role as an architect of the social insurance systems that have underpinned many national reconstructions is well-documented.

More modern insurance tools, such as national catastrophe modeling, also have obvious applications to the climate challenge and reinforce our industry’s unique ability to accurately price risk over the longer term.

It shouldn’t be surprising that an industry built on the mathematical and philosophical foundations of the Scottish and wider 18th century Enlightenment is now well-placed to provide assistance in the quantification of climate-related risks and the evaluation of the related choices and trade-offs.

Since the early 1990s, the insurance industry has revolutionized its mainstream assessment of climate-related risks and integrated this into its core pricing, risk controls, regulatory disclosure and capital management. A decade ago, led by Munich Re and in concert with public and academic partners, the industry created a global facility to assess the seismic risks to properties, infrastructure and wider assets.

In creating the Global Earthquake Model Foundation, the aim was to support better planning, building codes, investment, insurance and disaster response to help save the millions of lives, livelihoods and assets that were at risk. We now have the opportunity to emulate that ambition and provide a program for building a global resilience model to support physical climate risk scenarios, stress testing and analysis for the communities, markets and assets that are exposed.

Because building climate resilience is the product of many factors, insurance is not a silver-bullet solution. But it is a necessary component because, when disaster strikes, the ability to rebuild lost homes, businesses, jobs and lives is central to any economic recovery.

Through insurance, communal risks can be shared across public, private and mutual systems, via premiums, taxation and hybrid systems. With sound scientific principles, economic sustainability and transparency as the foundations, costs, payouts and incentives can be designed to support affordability, risk signaling, resilience and wider solidarity.

By November, we should have set an objective to make access to basic climate-related insurance protection systems an essential component of a climate-resilient lifestyle. In conjunction with wider financial reforms and processes, we also need to ensure that companies and local and national governments have enough support to evaluate and formally manage their contingent climate risks and liabilities. 

Society’s history with physical, industrial and social transition has shown that changes need to occur at speed and across all economies. They will require the provision of public, private and mutual insurance (including hybrid approaches) to enable a financially, socially and politically viable process. This is not just about commercial insurance products and public services; it is about the adoption of “insurance thinking” with regard to risk assessment and the creation of economically sustainable risk pricing and risk-sharing mechanisms.

See also: Increasing Regulation on Climate Change

It is a mammoth task, but we don’t have to start from ground zero for insurance to play a role in achieving Net Zero. There are organizational vehicles already in place to help speed us along this journey.

For example, the Insurance Development Forum (IDF), launched at COP21 in Paris, was created in recognition of the critical role that risk management plays in the response to climate change. The Forum is a unique international institution that brings together private and public sectors to help countries to build the resilience they need to limit the physical, social and financial impacts of climate change.

The global challenge of closing the risk protection gap brought by climate change is at the heart of the IDF’s mandate, and the forum has already found success using its Tripartite Agreement project to support major sovereign and sub-sovereign programs.

This model of shared success, augmented by inclusive insurance and mainstream market expansion across many territories, provides the ideas and facilities to support the countries looking to protect their people and assets from the dangers of climate change.

If we seize the opportunity, society may look back on COP 26 in Glasgow as the pivotal moment in climate-financial history in the same way we now refer to COP 21 in Paris for its influence on climate politics. November also may be remembered as the month the insurance sector, a sleeping giant, awakened to fulfill its potential to help quell today’s climate emergency.

As the providers of risk transfer solutions, we have always been “in the room” for discussions on climate change, but we have yet to fully take a seat at the main table where the historic solutions will be forged. 

Insurance sector communities have invaluable expertise and resources to address society’s climate challenges, but that experience is not fully understood or harnessed into the mainstream climate, sustainable development and finance agenda. COP26 is a strategic opportunity to finally and comprehensively bridge this gap.

An Opportunity in Resilience Analytics?

In my post last month, I discussed why the insurtech revolution should be focusing more on addressing the protection gap, thereby growing the pool of insurable risks, rather than figuring out how best to eat the insurance incumbents’ lunch.

At a conference in February, Tom Bolt of Lloyd’s noted that an increase of 1% in insurance penetration can lead to a 13% drop in uninsured losses and a 22% drop in taxpayers’ share of the loss. The key to increasing penetration is lowering distribution costs to make products more affordable. That is where insurtech can come in. Many recent startups have business models looking to tackle the excessive intermediation costs that exist in the current insurance value chain.

Sadly, when a catastrophe strikes areas of low insurance penetration, those communities not only suffer from the difficulties of having to seek aid—which can take three-plus months to reach affected zones—but also face the prospect of a significant drag to economic growth. It is unsurprising, therefore, that governments in vulnerable countries are keen to improve their “resilience” and seek solutions to better prepare themselves for catastrophes by working with the likes of the World Bank, the UN and the recently established Insurance Development Forum (IDF). Interestingly, AIR Worldwide announced recently the Global Resilience Practice, which will be led by former U.S. presidential adviser Dr. Daniel Kaniewski.

See also: InsurTech Need Not Be a Zero-Sum Game  

As well as providing low-cost distribution models in new markets, a related opportunity I see for insurtech is working together with the insurance industry in the growing field of resilience analytics. As Robert Muir-Wood recently pointed out on RMS’ blog, the claims data gathered by insurers — which historically has been used for the pricing and managing of risk — have the potential to also be used to reduce the potential for damage before the event. Insurtech companies could work with government authorities to pool this claims data, leveraging it with other key data from external sources and then using the results to influence urban resilience strategies. There are inevitable doubts over the willingness of insurers to share their data, but agile and thoughtful startups are likely better placed to be able to find insights in a world of abundant unstructured data than the more technologically challenged incumbents.

The current size of the protection gap is a failure of the insurance industry, and any companies that can help address it will not only be first movers in new markets but will also be adding social value and much-needed resilience to vulnerable communities all over the world.

InsurTech Need Not Be a Zero-Sum Game

This summer, I have attended a number of disruption/innovation insurance industry conferences in London that often, to varying degrees, come down to a debate regarding the extent to which InsurTech startups will be able to come and eat the lunch of industry incumbents. There is little argument that, should the insurance industry fail to better engage with its customers and continue to poorly communicate its social value in protecting people, communities and assets somewhere else will transform what today for many is a “grudge transaction” into a delightful relationship.

However, I believe InsurTech does not have to be a zero sum game. I am a proud member of the International Insurance Society (www.internationalinsurance.org) led by Michael Morrissey. In Singapore at the IIS annual conference, a keynote presentation was delivered on the recently formed Insurance Development Forum (IDF). The IDF was formally launched in April and is a collaboration between the insurance industry, the World Bank, the UN and various other institutions. The IDF is chaired by Stephen Catlin, with Rowan Douglas leading the Implementation Committee that includes industry heavyweights such as Dan Glaser, Nikolaus von Bomhard, Greg Case and Inga Beale. Its mission is to incorporate the insurance industry’s risk management expertise into governmental disaster risk reduction and to give insurance a larger role in providing resilience to communities all over the world.

In a speech at the conference, IDF Chairman Stephen Catlin noted, “We talk about innovation and new products. The reality is we are not even selling well the product we know and love dearly.” I believe the less insular InsurTech community — with its diverse skills sets (often from outside of the insurance industry) — can help insurers start to address the obvious misunderstanding consumers, governments and regulators share of the social value of the insurance product. Sam Maimbo of the World Bank, who sits between deep technical insurance teams and the public sector, noted he spends 70% of his time explaining what the industry has to offer. Addressing this communication gap has parallels to what many InsurTech companies are trying to do in providing better engagement with consumers than is currently provided.

There is real opportunity for InsurTech to work with the insurance industry in addressing blockages in the system that, if unlocked, would drive increased demand and grow the overall insurance pie. We are seeing a bit of this in microinsurance with companies like MicroEnsure and Bima providing low-cost insurance solutions to customers that, before recent technological advances, were just not possible. For instance, we need to see more examples of smart contracts founded on blockchain technology. In Africa, it is now possible to buy crop insurance through a mobile device that pays out based on a parametric weather-related trigger through a blockchain-validated third party source that almost eliminates the cost of handling a claim.

I am confident we are at the start of this kind of innovation and look forward to seeing more InsurTech companies look to grow the overall industry pie for the benefit of themselves and society as a whole.