Wildfires rage from California to Greece. Torrential floods devastate communities from Germany to Japan. Droughts threaten water supplies from the US to Turkey. Scientists confirm that 2021 has already witnessed the planet’s hottest month on record. According to Swiss Re, natcat losses in the first half of the year topped US$40 billion, the second highest ever.
Vulnerable, low-income populations in emerging economies have lived with the impacts of climate-related extreme weather events for decades, but now wealthier nations in the global north are increasingly in the firing line. The ‘code red’ warning issued by the Intergovernmental Panel on Climate Change (IPCC) earlier this month makes it clear that no country — rich or poor — will escape the impacts.
Faced with an increasingly insecure global outlook, what part can insurance play in helping to ‘build back better’ after extreme weather events, as well as investing in sustainable infrastructure? As UN Development Programme (UNDP) points out, insurers have around US$33 trillion in assets under management, ranking alongside pension funds as the world’s largest long-term investors. Historically, however, insurers have invested less than 2.5 percent of their assets under management in infrastructure.
“As underwriters, insurers are well-positioned to understand physical climate risks and the advantages of investing in infrastructure that is low carbon and resilient to climate change,” says the UNDP report Mobilizing Insurance Investment in Sustainable Infrastructure. “The virtuous cycle between investment and underwriting make insurers exceptionally well-positioned to lead the way on climate-smart investments.”
As Network Exchange reported in February, urban living is fast becoming the default human experience. According to the World Bank, around 55 percent of the global population, or 4.2 billion people, live in cities — a trend that is expected to rise to around 70 percent by 2050. The migration from rural to urban living is driven by climate change, water and food insecurity, conflict and a global economic downturn exacerbated by the Covid-19 pandemic. According to a recent survey by the International Organization for Migration (IOM), fleeing from natural disasters and climate change was one of the top five reasons given by Guatemalan migrants attempting to enter the US.
“With the deterioration of climatic and environmental conditions, the mechanisation of work in the field and the high rates of rural poverty, rural migration to cities will continue to be an important issue to address, because of its determining effects on the achievement of food security and rural and urban sustainability,” says the IOM’s Laura Manzani. “The Covid-19 pandemic, and the consequent isolation measures and mobility restrictions, have further heightened the urgency to address the issue of urban overpopulation and informal settlements.”
“Cities have a dual role to play,” says Kyra Appleby of the Carbon Disclosure Project (CPD). “As well as tackling climate change, cities must also strive to be resilient, healthy, and equitable places to live and work. It is city dwellers across the globe who find themselves on the frontlines of climate change, with some of the most vulnerable groups worst-affected.”
The global insurance giants, with billions of investment dollars at their disposal, could play a crucial role in seeking, post-pandemic, to create more sustainable cities with resilient transport, energy and social infrastructure. At the other end of the scale, inclusive finance and insurance is essential for low-income people — especially women — working in the informal economy, as well as small businesses which are highly vulnerable to climate and other shocks.
Financial inclusion plays a vital role in building resilience to the impacts of disasters and the ability to recover quickly. “In post disaster recovery, financial regulators are in a good position to steer rapid economic recovery and support building back better through its facilities,” says Jeanette Moling, a Policy Specialist at the Alliance for Financial Inclusion (AFI). “While financial regulators are not always involved in disaster risk reduction, they play a huge role in redirecting resources towards resilience building and sustainable recoveries.”
Faced with increasing environmental, social and economic challenges that together threaten the resilience of urban areas and those who live and work there, city authorities are increasingly turning to nature-based solutions (NbS) in their search to build back better. “Overall, a growing number of governments, businesses and civil society groups are coming to understand the important role nature-based solutions can play as scalable and cost-effective responses to the climate threat, which are actionable now,” says The Nature Conservancy’s James Lloyd. “Nature-based solutions are well placed to make a significant breakthrough…[but] we need to see much more action to align investment and increase finance.”
“Covid-19 recovery plans offer a great opportunity to scale up NbS in cities, with a view to building back better in ways that protect, conserve, and restore our ecosystems and their services, while addressing the social and economic challenges of urban areas and significantly reducing environmental impacts,” writes Roberto Cingolani, the Italian Minister of Ecological Transition, in his introduction to the G20 report Smart, Sustainable and Resilient cities: the Power of Nature-based Solutions. “As the world’s centres of innovation and economic dynamism, cities will be critical to defining the path toward a zero-emissions future with resilient and prosperous societies.”
Nature-based solutions are not just good for people, they make strong economic sense as well. For example, intact mangrove forests are estimated to prevent US$82 billion in flood damage every year - much of it to low-lying coastal cities. They are also often cheaper than hard infrastructure. “Sea walls may be successful in combatting coastal erosion in the short term, but they tend not to last very long and they may have adverse environmental impacts and disturb the natural ecosystems,” explains Herman Timmermans, Administrator at the Pacific Ecosystems-based Adaptation to Climate Change (PEBACC) Project, based in Samoa. “Nature-based solutions are a no-regrets, good value for money approach — that’s a major consideration in poorer countries.”
As much of Europe experienced unprecedented floods and heatwaves this year, the EU has called for “greater engagement of the insurance sector in NbS markets and NbS funding and collaboration with other actors across different countries, regions, and cities … [S]everal barriers remain insufficiently addressed to further engage the insurance sector in the particular case of NBS – from data management issues to overcoming the uncertainty of investments, or finding adequate regulatory incentives.”
Tomorrow’s smart cities will need to deploy a range of NbS and other sustainable infrastructure if they are to support ever-growing numbers of urban immigrants. These range from low-tech but effective water conservation through the use of roof-top gardens, to renewable energy systems such as Tokyo’s hydrogen economy. But in the short term, vulnerable populations in high-climate risk countries urgently need the safety net of low-cost, accessible disaster risk insurance — whether that is life, health, agriculture or business interruption cover.