Thoughts after COP21 and the role of risk assessment and insurance

I recently published a blog for my employer's blog site summarising some of the outcomes of the COP21 meeting in Paris. I focused on some of the developments in the financial world that may be able to help with adapting to the impacts of global warming in the coming decades. You can find the blog here if you’re interested.

Although the various schemes and forums that have been set up will no doubt broaden the reach of the insurance industry through government risk pools, or through micro insurance, many are quite new and innovative for the industry. Some of the new successful options are built as bespoke parametric insurance products that can be very quick to pay out since they are based solely on a defined parameter. The main thing required for such a product is a reliable dataset upon which to build a relationship to losses or costs.

Some financial support for African farmers

A very relevant example, due to this year’s strong El Nino (see another of my company blogs here) and droughts in some parts of Africa (Figure 1), is the African Risk Capacity (ARC).

Figure 1:  Pumping well-water from a borehole in the village of Bilinyang, near Juba, South Sudan. Source: World Bank/Arne Hoel

Their approach uses a drought index and an agreed threshold of precipitation which triggers payouts to help small farmers via their governments. The number of countries signed up to this in Africa is growing year on year, and is a great example of the insurance sector providing financial stability in an efficient manner for farmers that would otherwise be at risk of losing their livelihoods in extremes of drought. According to the ARC website, an analysis by Boston Consulting Group for ARC showed that the potential benefit of running the scheme is 4.4 times the costs of emergency response in times of drought.

Basically, every one dollar spent through ARC, saves four dollars and 40 cents in emergency response costs, and the money through ARC will be where it needs to be in a matter of days rather than the weeks and months that it can take for governments to reassign funds or wait for international aid. This is a great example of the financial sector providing a cushion to potential climatic impacts which may well get worse in the future.

Global initiatives from COP21

As I explain in my company blog, the UN’s Secretary-General Ban-Ki Moon announced his climate resilience initiative named A2R, which stands for Anticipate, Absorb, Reshape. Much of the scientific endeavour for projecting climate change, while understanding and providing early warnings for current climate extremes, broadly fits within “anticipate” section of the initiative. “Absorb” seems to fit naturally with financial mechanisms, as well as building resilient infrastructure (see here for link to fellow MSc blogger) and mitigating actions to reduce CO2. And “Reshape” is again about resilience but with more focus for the future, in building partnerships between the public and private sectors to foster sustainable growth and better decision making for future infrastructure.

There are many complementary initiatives getting started in this push for resilience. A special Task Force on Climate-Related Financial Disclosures, chaired by Michael Bloomberg, who has been ardent in support of building climate resilience, galvanized no doubt by having seen first-hand the impacts of severe weather on New York while presiding as mayor during Hurricane Sandy. This aligns well with a UN endorsed initiative called the ‘1-in-100 initiative’ which aims to encourage companies to better assess and disclose their ‘tail’ risk (risk of a 1% probability loss), giving them a financial incentive to be more resilient if they want to attract investment through being resilient.

Public/private sector partnerships

There seems to be a groundswell of activity in the private sector. While COP21 was underway I was invited, through my employer, to attend a meeting in Paris regarding climate resilience hosted by one of the clients of my company. The hosts are a large international management, engineering and development consultancy firm, and are therefore interested in finding out how different industries and sectors are planning to approach the challenge that will befall us due to global warming. It was a Chatham House Rule session so I won’t go into any details, but the meeting involved delegates from the World Bank, the European Investment Bank, the Rockerfeller Foundation, the Global Sustainability Institute and Anglia Ruskin University, a senior professor from our very own UCL Geography Department to highlight but a few - an interesting line up indeed.

Discussions covered a number of topics from city resilience to financial stability with respect to climate change, but my general feel from the event was that there was a tangible motivation to deal with the future impacts of global warming sooner rather than later. There was a recognition that there is good business opportunity through building sustainable cities, and offering risk assessment products and services in areas that will see increasing climate risk.

I feel the key to helping climate resilience is certainly to engage all parties and ideally within mutually beneficial partnerships. Initiatives such as the UN’s AR2 or the Insurance Development Forum (IDF, also announced at COP21) can help. My own job is part of this too: I may have mentioned it before but my MSc studies are part time, beside my day job which is in the risk and (re)insurance sector. I work with business users and academics to try to match up both of their needs and capabilities, and work towards tangible outputs through research and internal client related projects. An applied science coordinator/leader of sorts, by coordinating a network of academic institutions working with my company on a wide range of risk related subjects, including climate extremes.

There are also academic led partnerships such as the Engineering for Climate Extremes Partnership (ECEP) hosted by the National Centre for Atmospheric Research (NCAR) which aims to “strengthen society’s resilience to weather and climate extremes” (ECEP website: About). I also have a separate blog on this on my company website here. This vision can only truly be achieved through partnerships between the public and private sectors.

The power of partnerships is examined in the Stern Report which also highlights the potential economic downsides of not adapting to climate change. And furthermore a recent paper by Estrada et. al (2015) shows the economic costs of climate change in terms of damage from hurricane. They estimate that 2 to 12% of the normalized losses from the busy hurricane season of 2005 in the U.S. are attributable to climate change. It seems an interesting finding, but since they have also found an increase in both frequency and intensity of storms from the geophysical data, where other papers have only found a increase in intensity, it does seem to be a finding worth more exploration in a future blog.

In summary, it seems clear that the financial world certainly has a key part to play, and when fully committed to investing in new technology and research, it can act as a powerful driver for change in terms of building resilience and financial stability in the face of changing climate extremes.

Afterthought

I know this blog is supposed to be about storms, but I’m starting to realise just how much climate change is a multidisciplinary challenge and so to focus on one subject, one problem, or one solution can reduce our ability to bring together different expertise and opportunity.

I think it’s healthy to take a step back and look at the wider interaction of various adaptation and mitigation initiatives, and then perhaps work out how they can fit into your own area of expertise and capability to do something useful for society.