Next month is COP27, bringing together global leaders to discuss limiting and curbing the impacts of climate change. And such action couldn’t come soon enough, as recent events only serving to further highlight the urgent need for creating resilience against the impacts of climate change.
In August, Pakistan was subject to severe flooding, which wiped out lives and livelihoods, destroyed crops, homes, access routes and hospitals. Stagnant water in these areas quickly became a breeding ground for diseases such as malaria, leading the UN to declare a public health emergency in the region. Then in September, Typhoon Noru struck the Philippines, intensifying into a super typhoon within six hours of being forecast. This fatal weather event brought heavy rains and chest-high contaminated waters, causing an estimated USD 51m of agricultural damage.
A similar story was seen with Hurricane Ian – a Category 1 turned Category 4 hurricane – which brought severe winds and flooding in Florida, taking lives, and wiping out homes and livelihoods. Karen Clark & Co currently puts the economic loss estimate at more than USD 100 billion, while the industry insured loss estimate stands at USD 63 billion.
Weather events of this ferocity and devastation are becoming more common in recent years, and although advancements in technology can provide early-warning systems, sudden developments in storm strength are hard to forecast. These shock, catastrophic events have the power to turn people’s lives upside-down in a matter of minutes – and the financial impacts can last a lifetime.
With our world edging closer to the 1.5 degree warming mark, such events will continue to happen, and at greater ferocity. We can therefore no longer ignore the urgent need to create resilience, and most crucially, to mitigate climate risks.
The fight for net-zero
As mitigators and handlers of risk, the insurance industry can be the catalyst for bringing about such change – and not just from a recovery point of view, but in the form of prevention. To implement disaster risk reduction, however, requires collaboration.
The scale and complexity of these challenges, however, means strategic, cross-cutting partnerships are key.
The Vulnerable 20 Group (V20)-led Sustainable Insurance Facility (SIF) is a collaborative effort aiming to enhance risk management. The initiative aims to build financial and climate resilience for MSMEs in Asia-Pacific, Africa, the Middle East, Latin America and the Caribbean, with an aim to de-risk the implementation of renewable energy and enable the transition to net-zero.
The reason for this focus on net-zero is clear; if temperatures continue to rise, our world will eventually become uninhabitable. The transition to net-zero therefore is all about protecting the environment, nature and biodiversity; it is “the life insurance policy of our planet” – as Butch Bacani, Programme Leader UNEP FI Principles for Sustainable Insurance (PSI) said during the MiN, IDF and GIZ Philippines Country Workshop last month on ‘Nature Positive Insurance: the upside for people, planet and business’.
Nature-positive insurance plays an instrumental part in this transition; from only investing in and underwriting cover for green technology projects, to engaging with corporate clients to reduce emissions, insurers have the power to bring a stop to what has been described as the “rampant destruction of nature”. As Lorenzo Chan, the MiN’s Board Chair and President and CEO Pioneer Life Inc, said during the workshop, “We need to think about insurance differently – and do insurance differently.”
In today’s world, however, risk is becoming more complex to underwrite, and in developing countries only 10% of climate risks are covered. Sustainable energy solutions, such as wind, also bring their own set of unknown and new risks to the table. To help insurers better understand the wider impacts of climate change and the changing risks as economies transition to a net-zero economy, UNEP-PSI are working to provide insurers with insights into how different climate scenarios could impact insurance portfolios and assets.
Efforts are also underway by the UNDP-IAIS Climate Steering Group, which is raising climate awareness and the importance of adaptation to supervisors. The group is also encouraging supervisors to question regulators on how they are driving and incentivising insurers to invest in nature-positive solutions.
The power of nature
Part of the focus on de-risking renewable energy and pushing for more uptake in natural infrastructure is money. As Bacani said during the Philippines Workshop, money makes the world go round, and by realising the financial value of nature, insurers can help reduce claim costs and reduce the financial impacts on global economies, all while saving nature and the environment in the process. It’s a win-win for all.
This is where the Nature-Positive Insurance Alliance comes into play; with a focus on building resilience and mitigation, the alliance is focused on encouraging insurers to invest in and protect natural habitats that can reduce, and even prevent, damage caused by weather events. It is all about investing in nature to prevent loss.
As Lubomir Varbanov of Swiss Re commented, natural defences have both financial and environmental weight. Natural sea defences, such as sands and marram grasses, for example, are more resilient to the impacts of storms and improve water quality, increase fish numbers, and can even boost local economies as tourist attractions. Coral reefs are another example; they provide natural storm protection – reducing damages by USD 272 billion – provide habitats, and generate USD 36 billion from tourism-related activities. The restoration and protection of these natural defences is therefore vital.
Mangroves are another natural defence system that insurers need to start investing in. Acting as a carbon sponge and as a buffer that can reduce wave height by up to 100%, mangroves offer estimated savings of USD 65 billion per year in avoided losses from floods and storms. So why then - Michael Rellosa of the Philippine Insurers and Reinsurers Association (PIRA), questioned – aren’t insurers investing in mangroves as an asset?
To help raise awareness and educate the industry on the benefits and economic value of mangroves, Earth Security and PIRA have collaborated to launch the Mangrove Initiative 40, a programme that aims to increase mangrove protection and restoration in the Philippines through risk modelling and innovative finance mechanisms.
Make or break
The value of natural defences is clear; and so too is the role of the insurance industry. As Andrea Teran at GIZ Philippines, said, it is all about preserving ecosystems and increasing biodiversity, and insurance can help deliver that, by increasing climate change adaptive capacities; paying for ecosystem restoration, and biodiversity and ecosystem conservation; and by paying for loss and damage after an event to help economies recover faster.
The window of opportunity to reverse nature loss, and slow down global warming is, however, closing fast. As Bacani concluded, we are in a make-or-break decade, and for the world to deliver on these goals everyone needs to work together.
“If we don’t work together, the catastrophic impact that science is telling us will happen will manifest itself,” Bacani said. “The economy of the last century was one of ‘extract, consume and waste’; but our resources are not infinite. We need to live within the boundaries of what our planet can do. Our lifestyles have to change; corporations have to change.
“A healthy environment will allow us to lead healthy and productive lives with dignity,” Bacani concluded. “This is at the heart of what microinsurance wants to do; but we can't do that with an environment that has been destroyed.”