Nefarious Nets: Private Insurance in the Public Sector?

At the end of the day, the insurance industry is a business. But they are also a risk pool. So while they may be companies with stockholders and CEOs with a bottom line, they are still risk shares that are meant  to minimize damage impacts amongst their insured customers. But as the insurance industry becomes savvier with personalized data about who to insure and how much to charge them – customers should ask themselves whether they can really trust their insurance company to be less of a capitalizing business and more of a safety net against damage.

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As climate change damages rise, big insurance companies have begun to calculate risk costs with extreme weather events in mind. This calculation development has put insurers like Munich Re and Willis Re on the forefront of early action planning and early risk warning conversations at COP23. These two insurance companies are currently in partnership with InsuResilience. InsuResilience is a recently launched UN initiative that operates as a financial mechanism to buoy those who are vulnerable to climate change.

As a financial mechanism, InsuResilience will operate as a climate risk insurance provider to vulnerable people groups. This could occur directly with smallholder farmers or governments themselves. They have multiple programs and insurance plans that can provide service for small countries or service for small farmers. InsuResilience says that their plans will have the means to provide for “rapid emergency assistance and reconstruction, as it can very quickly disburse cash to the insured party.” The website claims that they will provide an effective and proactive approach to extreme weather events compared to the reactive measures taken by humanitarian charity efforts. Their unique position to act quickly could “save lives, protect[] livelihoods and assets, and safeguard[] development gains.”

As it affects developing countries and their campaign to receive compensation for climate change loss and damages, InsuResilience is a boon. InsuResilience allows developing and vulnerable countries to minimize the detrimental effects of climate change. In that way, InsuResilience follows a basic risk pooling example as countries pool their resources to protect and rebuild after an extreme event. For example, Cook Islands, Marshall Islands, Tonga, Samoa, and Vanuatu have pooled their resources into the Pacific Catastrophe Risk Assessment and Financing Initiative (PCRAFI) Insurance. PCRAFI proved itself to be a successful program when Tropical Cyclone Pam hit Vanuatu in 2015. Because of PCRAFI, Vanuatu was able to receive a US$1.9 million cash pay out. Vanuatu received its funds within one week of Tropical Cyclone Pam and Vanuatu was able to use those funds to support their recovery process by mobilizing nurses into the affected provinces. 150316073014-01-cyclone-pam-0316-super-169PCRAFI is just one of the regional programs that InsuResilience supports. InsuResilience works with African Risk Capacity (ARC), Global Index Insurance Facility (GIIF), India, Caribbean Catastrophe Risk Insurance Facility (CCRIF), and more. 2cb97666-2c50-4fb7-a0c4-d0dfade57163But PCRAFI is also being “complemented by reinsurance provided by Sompo Japan Nipponkoa Insurance, Mitsui Sumitomo Insurance, Tokio Marine & Nichido Fire Insurance, Swiss Re, and Munich Re.” PCRAFI is not unique in that its funds are being complemented by private insurers. Granted, this position is not unique – but private insurers are taking a larger role in Climate Change than just reinsurance.

So while PCRAFI, its counterparts, and InsuResilience are providing vulnerable people groups safety nets against the financial costs of climate change damages – it is still being funding by private insurers. While private insurers are not inherently “nefarious”, the capitalist goals behind their operation provide a shadow of whether developing countries can trust these insurance companies to be less of a capitalizing business and more of a safety net against climate change damage.

 

 


Financial instruments ignite SCF Forum on L&D risk

Screen Shot 2016-09-14 at 12.19.31 PM Some sparks flew and some eyes got opened at the 2016 Forum of the UNFCCC Standing Committee on Finance (SCF), held in Manila last week. The Forum’s exploration of financial instruments for addressing the risks of loss and damage was at the request of the Executive Committee of the Warsaw International Mechanism (WIM) on Loss and Damage (L&D) in service of Action Area 7 of its 2-year workplan. (For some past posts on the WIM, including on this significant SCF-WIM linking, see here.)

The Forum drew nearly 150 representatives of governments, financial institutions, civil society and the private sector. The webcast (which covered much of the meeting) along with informative tweeting (#scfmanila) from a number of participating institutions and individuals offered remote observers some interesting insight. But first a little context/framing:


Addressing L&D – Basically, addressing L&D involves: 1) avoiding it, and 2) meeting it when it is unavoidable. L&D can be avoided primarily through mitigation and adaptation. In addition, reducing the risks of L&D (e.g., through early warning systems and disaster GITEWSconcept14001preparedness plans) can help prevent it. Unavoidable L&D can be minimized through certain types of risk management (sharing, savings/credit, insurance instruments, catastrophe bonds). Because L&D still occurs, even if it is minimized, responses to it rely on disaster response and management and climate services.

WIM workplan Action Area 7 – A close reading of Action Area 7 reveals one goal, one objective (how the goal is to be accomplished) and one strategy/action (how the objective is to be met):

  • Goal = facilitate finance in L&D situations;
  • Objective = “encourage comprehensive risk management;” and
  • Strategy = “diffus[e] information related to financial instruments and tools that address the risks of [climate-induced] loss and damage…”

Action Area 7, through encouraging risk management, tends to both avoiding L&D and minimizing unavoidable L&D. As for the SCF Forum, it fit within Action Area 7’s strategy of diffusing information, by covering risk pooling and transfer, catastrophe risk insurance and bonds, contingency finance, social protection schemes, and other instruments.

Cat bond transaction structure (rms.com, 2012)

Cat bond transaction structure (rms.com, 2012)

Throughout the event, however, it was clear that some participants were focused on the goal, while others (predominantly the insurance experts) were focused on the objective and/or strategy. The resulting friction illustrated the philosophical and political tensions that continue to fester in the climate regime in the absence of financial support to directly address loss and damage. The workplan, after all, is devoted essentially to compiling, diffusing and leveraging information. (We wrote about the Paris Agreement/Decision role in this evolving issue in our COP21 Documentation Project.)

The Forum did enhance understanding both of the gaps and opportunities with existing financial instruments, as well as the barriers that must be addressed to reach the most vulnerable with any versions of current and emerging risk instruments. (See the Forum page for presentations and the WIM Financial Instruments page for a well-organized host of relevant resources.)

Among the conclusions was that both cross-sectoral collaborations and integration of approaches are vital to deal with the risks of L&D. Importantly, two significant areas of concern remained unaddressed:

  1. The absence of actionable approaches for addressing slow-onset processes nclimate2016-i1from the insurance industry and related market players. Not surprising, given that there are generally no dramatic moments of humanitarian focus and no money to be made.
  2. The absence of financial instruments and tools to address non-economic losses. Without a means to monetize, the financial sector has yet to be effectively engaged toward this cost.

We will be tuning into the WIM Executive Committee’s 4th meeting later this month to learn its response to the Forum and more.