Climate risk is reshaping the insurance sector in emerging markets

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  • New global initiative seeks to support countries vulnerable to climate risk.
  • Modelling climate risk offers a path towards more holistic insurance policies.
  • Insurance industry has an opportunity to rethink how businesses mitigate risk.
  • Merging net-zero targets with insurance strategies is a promising approach.

With the launch of a new joint initiative to support the countries that are most vulnerable to climate change, the global insurance industry is evolving in ways that could carry important implications for business in emerging markets.

The Global Shield against Climate Risks (GSCR) was announced by the ministers of finance of the so-called Vulnerable Twenty Group (V20) and the G7 after the COP27 UN Conference on Climate Change in Sharm El-Sheikh Egypt in November last year. It seeks to address weaknesses in the financial protection structure in climate-vulnerable economies through pre-arranged finance disbursed before or just after disasters happen.

The urgency of the climate crisis has been especially apparent this summer, when the warmest June on record was followed by 10 of the hottest days on record in early July. Scientists forecast that 2023 has an 81% chance of being the warmest year to date.

Initial contributions for the GSCR included around €170m from Germany and more than €40m from other countries, with the first recipients of Global Shield packages – referred to as Pathfinder countries – comprising Bangladesh, Costa Rica, Fiji, Ghana, Pakistan, the Philippines and Senegal.

The World Bank, for its part, has created a Global Shield Financing Facility to help developing countries access financing for recovery from natural disasters and climate shocks.

Legacy issues

The failure of developed countries to deliver on the annual $100bn in climate finance promised at the COP15 UN Conference on Climate Change in Copenhagen in 2009 has had dire effects on the implementation of mitigation and adaptation measures. According to the V20, the group has collectively incurred more than $525bn in climate impacts since 2000.

The problem for V20 countries may be deeper than previously understood. Recent research found that roughly 98% of the nearly 1.5bn people in V20 countries do not have financial protection. As the damage induced by climate change continues to grow, the cost of capital and debt is rising to unsustainable levels, especially across climate-vulnerable economies, whose workforces are mainly employed by small and medium-sized enterprises.

Reimagining risk

The GSCR offers the insurance industry a major opportunity to expand its offering to V20 countries, which could lead to strategies for related bodies such as the Climate Vulnerability Forum – a grouping of 58 emerging markets disproportionately affected by climate change – and help to shape a more effective global response to climate change.

The industry is starting to leverage collaborative platforms, including the Insurance Development Forum (IDF) and the InsuResilience Global Partnership (IGP), to develop mechanisms to enact the GSCR.

At the IGP’s annual forum in June 2023 in Bonn, Germany, the V20 and the G7 launched the Global Shield Solutions Platform, a multi-donor grant facility to support Global Shield countries.

Meanwhile, the task force for nature-related financial disclosures, also launched at COP27, will play a key role by developing a set of recommendations, expected to be published in September, for assessing and reporting the financial risk associated with nature-related risks and opportunities.

Insurers have already evolved in recent years from a model of concentrating on a specific industry and its operational risks to a more holistic approach, which best applies for modelling climate risk and embracing clean energy technologies. By modelling the risks and potential impact of climate-induced catastrophic events, insurers can develop appropriate policies for clients as well as investors.

The Global Risk Modelling Alliance (GRMA), established after COP26 in 2021 in partnership with the IDF, will be a key resource for the GSCR. The GRMA aims to use open-source technology and standards optimised for public sector use cases; a public good fund to help countries fill model and data gaps; and a technical assistance team of public and private sector practitioners to work with V20 countries on applied projects.

In July Ghana held its first consultation with government officials, as well as local and international stakeholders, about how to identify strategies and priorities on climate and disaster risk finance and insurance, and to leverage support from both the GSCR and the GRMA. Ghana is the chair of the V20 through to 2024, having taken over the position from Bangladesh in 2022.

Insuring green energy and finance

With COP28 to be hosted in November by the UAE, which is also the headquarters of the International Renewable Energy Agency, there is the potential to build on the progress the insurance industry has made thus far, not least because of the UAE’s commitment to compliance with environmental, social and governance principles, having declared 2023 the Year of Sustainability.

The UAE has put forward innovative solutions that address climate risk for the financial services sector, and has made a concerted push to implement the recommendations of the Task Force on Climate-related Financial Disclosures, a private-sector framework launched in 2017 with the objective of developing common global standards for corporate climate-related disclosures.

In March Abu Dhabi Global Market’s Financial Services Regulatory Authority and other members of the UAE’s Sustainable Finance Working Group launched a public consultation on a new set of draft principles for UAE-based financial sector firms.

Insurance companies can capitalise on the emergence of ambitious national-level policies to enable the energy transition and include new public-private partnerships as well as the commercialisation of new clean energy technologies in their efforts to develop innovative risk management and financing solutions.

With the use of renewables – most notably solar power – accelerating in the Middle East, insurance companies can also provide insight into risk reduction. For instance, by analysing issues with certain solar panels or the construction of solar fields or power stations, companies can apply their industry knowledge to build out vital projects as quickly as possible.

Linking net zero to insurance

Another major opportunity for insurance companies to help businesses mitigate climate risk is to harness the momentum across the world for setting net-zero targets with a robust energy transition plan, with many insurance and reinsurance companies already setting goals.

In January, at the World Economic Forum, the UN-convened Net-Zero Insurance Alliance (NZIA) launched its first target-setting protocol, which enables NZIA members to independently set science-based, intermediate targets for their respective insurance and reinsurance underwriting portfolios in line with a net-zero transition pathway.

However, in July the alliance dropped the requirement that all members set such targets due to political pressure in the US, which is expected to slow momentum on the initiative.

Nonetheless, insurers looking to expand their client base have plenty of opportunities to underwrite and invest in green energy infrastructure systems, carbon markets and nature-based systems in Africa, where several new net-zero-target-based schemes have been deployed.

The voluntary Africa Carbon Market Initiative aims to produce 300m carbon credits annually by 2030 and 1.5bn credits annually by 2050 through the commercialisation of natural assets, while the Alliance for Green Infrastructure in Africa, an initiative launched by the African Union, the African Development Bank Group and Africa50, aims to raise $500m for early-stage project development. The voluntary carbon market – spanning carbon credits as well as nature-based carbon offset projects such as planting new forests – could lead to an estimated $1.3bn in demand for new specialist insurance policies and services, according to a 2021 report by carbon market consultancy BeZero Carbon and insurance brokers Howden Broking and Blackford, with this rising to $2bn-4bn under more optimistic scenarios.

Author: Oxford Business Group

This article was first published by the Oxford Business Group and is republished with permission

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