Climate and disaster risk: building resilience, bridging the protection gap

Extreme weather events are more frequent and severe than ever before. According to Swiss Re, total economic losses from natural catastrophes and man-made disasters in 2018 was $US165 billion, while 3,500 people lost their lives in all catastrophes that year. The insurance protection gap in developing countries is between 90 and 100 percent. How can policymakers, regulators and supervisors reduce the protection gap in the face of increasing climate and natural catastrophe risk?

This year three Consultative Forums - organised by the MiN, the International Association of Insurance Supervisors (IAIS), the Access to Insurance Initiative (A2ii) and the InsuResilience Global Partnership - aim at answering some of these big questions. The 15th Consultative Forum, hosted by Superintendencia de Seguros y Reaseguros de Panamá in May, saw more than 70 participants from 24 countries gather in Panama City.

Denis Garand of Denis Garand and Associates pointed out that insured losses in Latin America make up just 11 percent of total losses on the continent compared to 55 percent in Australia and 35 percent in Europe. South America suffered US$4.3billion of damages due to natural disasters in 2017, but only US$400 million was insured. Climate and disaster risk insurance is only one piece of the puzzle to help people to better deal with risk related to climate change and disasters, but it is an important one.

California Insurance Commissioner Dave Jones highlighted the devastating wildfires and mudslides which have hit the state and the growing problem of the protection gap for homes in the ‘wildland-urban interface’. The non-profit consortium of home insurers Fair Access to Insurance Requirements (FAIR) plan, established by Californian law, helps provide fire cover for homes that cannot otherwise obtain insurance. Jones concluded that supervisors, insurance companies and governments all have a role in addressing the protection gap - a theme echoed throughout the Forum.

Dario Luna of the Caribbean Catastrophe Risk Insurance Facility (CCRIF SPC), Lourdes del Carpio of La Positiva Seguros y Reaseguros in Peru and Edwin Vargas from Fundacion PROFIN in Bolivia all shared examples of innovative approaches to disaster and climate risk insurance. CCRIF, for example, makes payments within 14 days of a nat cat event based on the intensity and the amount of loss calculated in a pre-agreed model. Peru represents a significant market opportunity - 86 percent of total agricultural land in the country has no insurance cover, 13 percent is covered by government-subsidised catastrophic crop insurance, and only one percent by commercial crop insurance. In Bolivia, risk transfer funds (RTF) are being used in pilot projects including compensation for damage caused by extreme weather, loss of income from damaged harvests and insurance for dairy cattle.

Summing up the day, Regina Simões, A2ii’s Regional Coordinator for Latin America, highlighted the long-term approach - the impacts of uninsured climate and nat cat losses can persist for decades. Success comes from adequate regulation, raising awareness among those most affected, involving the private sector, training staff to understand regulations and laws, and public and private investment at macro, meso and micro levels.

In June the action shifted to Johannesburg, South Africa, for the 16th Consultative Forum hosted by the African Insurance Organisation (AIO). Once again, trust, collaboration and knowledge sharing between regulators, supervisors, insurance companies and governments was key. Dunja Latinovic of A2ii noted that climate and disaster risk is extraordinarily complex and will not be solved if governments, industry and regulators work alone.

This theme was picked by MiN Chair Doubell Chamberlain who said we work in a complex environment in which there are many uncertainties and variables over which we don’t have control. The old style of planning for the future doesn’t work. The problem with complex issues such as climate change is that individually we cannot control it, often resulting in paralysis or sporadic action. Collaboration can help avoid this.

AIO President Delphine Traoré threw out a direct challenge: “We attend many conferences and discussions like this, but what are you personally doing on a day-to-day basis to support financial inclusion, especially when it comes to climate change?”

Teresa Pelanda, Advisor at A2ii, was one of several speakers to emphasise that insurance is one piece of the puzzle in building resilience. But a recent survey showed 77 percent of insurance industry representatives said they had faced regulatory barriers when designing products to promote resilience. Disaster risk management (DRM) requires collective action, and bridging the protection gap means integrating insurance into broader DRM policy frameworks.

The Johannesburg event included two important set-piece panel discussions. The role of insurance supervisors and policymakers in closing the gap brought together Abdeljalil El Hafre of Morocco’s Ministry of the Economy and Finance; Kerwin Martin from the Prudential Authority at the South African Reserve Bank; Israel Muchena of Hollard Mozambique and Viviene Pearson, CEO of the South African Insurance Association, all under the watchful moderation of Cenfri’s Mia Thom. Pearson summed up the challenges of getting everyone on the same page: “Sometimes things take too long, sometimes you take three steps forwards and seven steps backwards - but that doesn’t mean you shouldn’t try. We need to accept that we are in an era where increasingly things will be abnormal and the insurance industry is at the coalface of these changes.”

During the second panel, the role of the insurance industry in closing the gap and enhancing the resilience to natural catastrophes related to climate change, Victor Wang of Pula showed how insurance can help break the cycle of impoverishment due to adverse weather and build long-term capacity and resilience. Moderated by A2ii’s Janice Angove, panellists Shola Ajibade of Continental Re, Kipkorir Koskei of African Risk Capacity (ARC) and Eric Kouaghu Tchuisseu from the Insurance Regulatory Authority of Cameroon concluded that in addition to a good regulatory framework, success depends on accurately estimating nat cat losses; adequate systems for DRM; good communications and robust disaster risk financing.

The event rounded off with an interactive role-play workshop run by Bert Opdebeeck, Founder of Microinsurance Master, focused on raising awareness around the struggles experienced by all stakeholders in climate risk insurance - and finding solutions.

Summing up was no easy task, but Teresa Pelanda drew together a number of common threads. Insurers, reinsurers and their intermediaries can help close the protection gap by sharing knowledge, being creative and innovative; by building multi-country initiatives; and by developing products which are affordable, accessible and easily understandable for smallholder farmers. At the same time, supervisors, regulators and governments can make sure regulations ensure the growth of the climate risk insurance market and do not create unnecessary barriers.

For the next Consultative Forum, the focus shifts to Asia, so please join us for the 17th edition set for Dhaka, Bangladesh in November - look out for more details soon!