Here we have some thoughts from Rupert Pleasant, Chief Executive, Guernsey Finance, on how the industry can tackle the twin problems of climate change and extreme weather events;
In 2023, Hawaii was hit by the deadliest wildfire in the USA for more than 100 years, leading to more than 100 deaths and estimated economic losses of $5.6 billion. It’s no secret that natural catastrophes have become more frequent and intense in recent years, bringing increased threats to both people and economies worldwide.
The Chair of the EU’s insurance regulator, Petra Hielkema, declared that urgent action is needed to protect Europe from climate risk.
She urged firms, member states and broader society to address the steady rise in losses from natural disasters such as floods and wildfires.
This comes as extreme weather events caused by climate change cause an uptick in the price of premiums, feeding concerns that some areas will become uninsurable. In Aon’s Climate and Catastrophe Insight report for 2024, the firm reported that 398 notable disaster events in 2023 led to $380 billion in economic losses, only $118 billion of which were covered by insurance.
This represents a protection gap of $262 billion, 69% of total economic losses.
This protection gap lowers the ability of economies to recover from disasters and leads to supply chain issues for corporates.
With more and more climate-related disasters taking place, there has been increasing demand for the private sector to bridge this gap. Through ESG, sustainable finance and CSR, the corporate world continues to seek opportunities to engage in environmental and socially beneficial schemes; at the same time humanitarian organisations have rapidly increasing funding needs to be met as a result of increasing instances of climate-related disasters. There is a clear opportunity emerging for the private sector, as a source of knowledge, skills, tools and expertise, and government organisations to align to meet their respective objectives.
Building resilience through public-private collaborations and blended finance models, where governments and the insurance sector shoulder losses together, could protect and enrich lives around the world, as well as making insurance more affordable and accessible.
In 2023 the IFRC DREF (International Federation of Red Cross and Red Crescent Societies Disaster Response Emergency Fund) was insured on an indemnity-basis to ensure swift and agile support is available when a disaster occurs. The DREF is one of the oldest humanitarian pooled funds designed to respond to small and medium sized disasters that are often caused by climate related events.
The transaction was enabled through White Rock Insurance PCC Limited, a Guernsey protected cell company managed by Aon Insurance Managers and will increase the fund’s potential to reach by an additional 6 million vulnerable people each year.
The insurance tool, which is the first indemnity-based reinsurance model that has been developed within a humanitarian disaster risk finance context, provides the IFRC’s Disaster Response Emergency Fund (DREF) with contingency funding of up to £18 million.
Essentially, once DREF’s allocated funding for natural hazards hits £33 million, the reinsurance is triggered to replenish DREF’s reserves, acting as a safety net to ensure that extra funds are available to provide aid to vulnerable communities, even during periods of increased demand. It also allows the IFRC to more efficiently manage their resources knowing that the private sector will be providing additional funding from a certain point.
In the case of the DREF Insurance transaction an insurance regulated cell was necessary to allow them to access the reinsurance markets and obtain cover that was otherwise unobtainable. Guernsey’s insurance industry pioneered the Protected Cell Company (PCC) structure and now the use of these cellular insurance companies to access reinsurance markets is commonplace. Structures such as White Rock have been used by corporates in this manner for many years, this was the first time however it had been used in a humanitarian context.
Eric Andersen, President of Aon, said: “The impact of climate is giving rise to an increasing number of natural disasters that are disproportionately affecting undeserved communities. At Aon, we are honoured to play a role to help protect DREF from volatility and increase its capacity to effectively distribute funds to those in need through our innovative capabilities in matching capital to the risk and the innovation in our industry to address the humanitarian impact from climate-related disasters.”
Transferring climate risk using alternative risk solutions, as well as shifting the dialogue around humanitarian funding from philanthropy and donation to a business investment for the private sector could be the way to bridge the significant protection gap.
These insurance solutions are not there to replace donor funding. Their purpose is to manage volatility, and there are hopes that this could be the new way of financing humanitarian action.
More recently, Aon facilitated the issuance of a new $45.5 million Randolph Re (Series 2024-1) private catastrophe bond issued out of Guernsey using the firm’s protected cell company White Rock Insurance Company PCC Limited.
This new $45.5 million Randolph Re 2024-1 private cat bond is a renewal of previous deals that provides protection to a US property casualty insurer with significant exposure to wildfire risk in the State of California. Although not humanitarian in nature this is another example of how the private sector is supporting climate resilience and providing risk-capital into a sector which has been disproportionately impacted by climate-related events in recent years. Cat bonds are a way for reinsurers to mitigate their risks that may be linked to climate change and in doing so provide additional capital that ultimately goes to policyholders and enables communities to rebuild.
As well as insuring against losses from natural disasters, Aon’s report concludes that insurance for resilient infrastructure development, electrification, carbon capture and storage, and the decommissioning of carbon intensive assets combined could generate gross written premiums of between $8 billion and $25 billion. These transformative trends present immediate growth potential and can be addressed today.
Additionally, concerns for natural catastrophe exposures, prototype technologies and political risks have held back investment in some solar and offshore wind projects. Insurance can, however, address a range of political, technical, credit and operational challenges that would otherwise deter investment or increase the costs of financing renewable projects. Insurance in the renewable space has yet to fully meet its potential, in part due to uncertainties over catastrophe exposures and models.
The importance of insurance, whether that be reinsurance, parametric insurance, insurance-linked securities, or captives in providing creative risk management solutions for climate-related disasters is clear. There’s a huge gap to bridge, and despite concerns that the risks that fall within this gap are uninsurable, it paves the way for the insurance sector to think beyond the usual and carve out new routes for hedging against climate risk.
We’ll be discussing this in more detail at the Guernsey Champagne Reception in Monte Carlo on 10 September, where Eric Anderson will be delivering a keynote address. Register for the event here: https://www.guernseyfinance.com/events/2024/guernsey-champagne-reception/
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