COP27, Climate Change and Insurance Industry

The climate change conference of the United Nations (COP27) concluded in Sharm el-Sheikh in Egypt on 20^th November 2022, and they are planning to meet in Dubai for the next one (COP 28) in 2023. According to the UN¹, COP27 brought together more than 45,000 participants to share ideas and solutions and build partnerships and coalitions.

The highlight of COP27 was the breakthrough agreement to provide “loss and damage” funding for vulnerable countries hit hard by climate disasters. It is also agreed to establish a ‘transitional committee to make recommendations on operationalising the new funding arrangements and the fund at COP28 next year. The transitional committee's first meeting is expected to occur before the end of March 2023. There will be a significant scoping process to identify current instruments and gaps.

In addition, The Vulnerable 20 Group of Finance Ministers (V20) of 58 climate-vulnerable economies and the Group of Seven (G7) officially launched the Global Shield against Climate Risks, an initiative for pre-arranged financial support designed to be quickly deployed in times of climate disasters. Initial contributions include around EUR 170 million from Germany and more than EUR 40 million from other countries. A broad coalition of countries, multilateral institutions, and non-state and private sector partners has underlined their full institutional commitment to Global Shield. The first recipients of Global Shield packages include Bangladesh, Costa Rica, Fiji, Ghana, Pakistan, the Philippines, and Senegal.

COP27 also emphasises the urgent need for immediate, deep, rapid, and sustained reductions in global greenhouse gas emissions by Parties across all applicable sectors, including through an increase in low-emission and renewable energy, energy transition partnerships and other cooperative actions. And recognises that limiting global warming to 1.5 °C requires rapid, deep and sustained reductions in global greenhouse gas emissions of 43 per cent by 2030 relative to the 2019 level.

According to Swiss Re sigma research², “even though the COP27 climate change conference saw breakthroughs in climate finance but failed to adopt more ambitious emissions reduction pledges and agree on the further phase-out of all fossil fuels. The talks showed that multilateral climate cooperation is still possible despite a more multipolar world but moving from targets to action is challenging.”

Insurance Industry

The banking sector was the Glasgow (COP26) highlight through its commitments as part of the Glasgow Financial Alliance for Net Zero (GFANZ) and Race to Zero coalitions. Insurers were trying to drive meaningful action at COP27.

Climate change is an important topic for the Insurance industry as they are more directly exposed to the impacts of climate change than other financial institutions through the claims they must pay out after extreme weather events. Insurers have been offering financial protection against natural catastrophe risks and sharing risk management expertise with governments and customers to help reduce and prevent risks.

Many insurers are already part of the Net Zero Insurance Alliance of the UN and are already implementing steps to reduce carbon footprints. Major re/insurance companies such as Munich Re, Swiss Re, Allianz and Hannover Re have announced that they will stop insuring oil and gas projects unless oil and gas companies provide credible commitments to net-Zero greenhouse gas emission by 2050. There has been a steady growth in the number of insurers that refuse to cover coal projects, particularly in the reinsurance sector, where 62% of companies have coal exclusion policies.⁶

The insurance industry has been offering parametric insurance for a while. Parametric insurance does not require an assessment of loss; A predefined amount can be paid based on the occurrence of a specific event and the magnitude of that event. This makes it a valuable tool for communities and businesses to build resilience against climate risks. Parametric pay-outs can fund the restoration of critical infrastructure, pay for households’ emergency expenses or support cash flow for small businesses.

Hosting this year’s COP27 by an African country is placing the climate needs of African countries high on the agenda.⁴

• Agriculture’s presence in Africa and its direct exposure to physical climate risks. 23% of sub-Saharan Africa’s GDP is from agriculture, and more than 60% of the Sub-Saharan population are smallholder farmers.
• Within Sub-Saharan Africa, 95% of arable farming relies on rainfall as opposed to irrigation, combined with African countries facing some of the highest water risks in the world.

To help the African communities, A group of over 85 insurers in Africa has pledged to create a financing tool, African Climate Risk Facility (ACRF)⁵, to provide $14 billion of coverage to help the continent's most vulnerable communities deal with climate disaster risks. The ACRF will protect 1.4 billion people against floods, droughts, and tropical cyclones by providing $14 billion of climate risk insurance by 2030 to African sovereigns, cities, humanitarian organisations and NGOs,

Our parent company Marsh McLennan in Partnership with ‘Race to Resilience’, an UN-backed global campaign established in 2021 to build the resilience of communities vulnerable to climate risks, published a report³ at COP27 which focuses on how the insurance sector can ‘advance community-level climate risk reduction and adaptation’ and highlights eleven ‘pioneer projects in operation or development to build the climate resilience of vulnerable communities.

This report also calls for action for three Adaptation outcomes for financial services companies:

1. Public finance actors increase the provision of climate finance and allocate 50% of climate funds to Adaptation &Resilience (A&R)
2. Private sector integrates physical climate risks in investment decisions. It continues to innovate mechanisms for financing A&R to enable the mobilisation of the $140 to $300B by 2030 that will be needed across both public and private sources.
3. Global property and casualty insurance sector has an industry capabilities framework, actively supports project implementation, and institutionalises a longer-term industry approach to climate adaptation

Marsh McLennan’s report also presents an early-stage insurance sector capabilities framework as the basis for defining how the mechanics of insurance can de-risk, accelerate or otherwise facilitate climate risk reduction efforts, thereby setting the foundation for sectoral tracking, measurement, and target-setting initiatives.

Source: Marsh Mclennan³

In summary

It is known that the carbon footprint in the atmosphere is the primary driver of climate change. Bringing down the carbon footprint should be the priority for all businesses. Given the deep expertise of risk management, the insurance sector should find new ways to deploy its unique capabilities- risk finance, risk analytics, impact investing, strategic philanthropy, and stakeholder engagement— to help advance community-level climate adaptation.

The Insurance Industry could play a significant role if there is a regulatory landscape that facilitates insurers’ contribution to green transition and a strong focus by the public authorities on prevention and adaptation.

References

_{1. https://unfccc.int/news/cop27-reaches-breakthrough-agreement-on-new-loss-and-damage-fund-for-vulnerable-countries}

_{2. https://www.swissre.com/institute/research/sigma-research/Economic-Insights/COP27-climate-change-summit.html}

_{3. https://www.marshmclennan.com/insights/publications/2022/november/fulfilling-a-legacy-of-societal-risk-management.html}

_{4. https://www.schroders.com/en/insights/economics/whats-the-point-of-cop27/}

_{5. https://www.reuters.com/business/cop/african-insurers-take-up-climate-change-fight-with-14-bln-pledge-2022-11-09/}

_{6. https://www.reuters.com/business/sustainable-business/esg-watch-insurers-flex-muscles-ahead-cop27-by-refusing-finance-oil-gas-2022-10-27/}

_{7 Cover Photo by Matthew TenBruggencate on Unsplash}