COP26: The Role of the Insurance Industry in Mitigating and Adapting to Climate Change

By Laura M. Cheng, Adjunct Professor

Introduction

The insurance industry has an instrumental role to play in transitioning to a net-zero economy and adapting to the impacts of climate change.  As investors with over $26 trillion in global assets under management,[1] insurance companies can invest in sustainable businesses and renewable energy, and either divest from carbon-intensive businesses or pressure them to operate more sustainably.  Insurance companies can support sustainable business practices by choosing which businesses to insure, at what price, under what conditions, and with what type of insurance product.  Finally, as experts in identifying, analyzing, and managing risk, insurers can help individuals, businesses, and governments to predict and mitigate damages from natural disasters, while also making a data-driven case for the protective value of natural ecosystems.  At COP26, the role of the insurance industry was highlighted throughout the conference.

AXA XL and the Coastal Risk Index: Calculating the Resilience Value of Ecosystems

Coastal communities around the world are dealing with climate impacts, including rising sea levels and increased frequency and intensity of hurricanes, typhoons, and other natural disasters.  In 2017, insurer AXA XL launched the AXA Ocean Risk Initiative with the goal of developing insurance-led solutions to risks caused by a changing ocean, with a focus on using nature to build resilience.[2]  At COP26, AXA XL launched its Coastal Risk Index (CRI), an innovative and interactive tool that allows users, in a variety of future climate scenarios, to compare coastal flooding with and without coastal ecosystems such as coral reefs and mangroves, in order to calculate the potential risk reduction benefits of marine ecosystems.[3]  By enabling quantification of the resilience value of coastal ecosystems, AXA XL hopes to build the case for nature-based solutions as powerful and cost-effective climate risk mitigation tools.[4]

U.N. Environment Programme’s Principles for Sustainable Insurance

At COP26, the U.N. Environment Programme’s Principles for Sustainable Insurance Initiative (PSI) and several partner organizations hosted 5 virtual events exploring the role of insurance and insurance regulation in the transition to a net-zero economy.[5]  Highlights from these sessions include a discussion of the Net-Zero Insurance Alliance and the launch of the Global Risk Modelling Alliance and Sustainable Insurance Facility.

Net-Zero Insurance Alliance

The Net-Zero Insurance Alliance (NZIA) was launched at the G20 meeting in July 2021 with 8 founding members.[6]  Ahead of COP26, an additional 7 insurers joined the NZIA, bringing the total number of insurers in the NZIA to 15, including some of the largest insurers and reinsurers in Europe.[7]  NZIA members have pledged to achieve net-zero GHG emissions in their underwriting portfolios by 2050 through engagement with policyholders and the use of science-based guidelines and underwriting criteria.[8]  At the COP26 event, NZIA members shared their motivations for joining the NZIA and discussed approaches to helping policyholders decarbonize their operations.

Global Risk Modelling Alliance

Because financial protection tools such as disaster risk insurance are least available and affordable in the Global South, more than 98% of losses in many developing economies are uninsured.[9]  Without insurance, individuals, governments, and aid organizations bear the burden of disaster losses, which further strain government budgets and result in economic and social hardship for those directly affected by the disaster.[10]  At COP26, the Insurance Development Forum (IDF) and V20 (comprised of 48 climate-vulnerable countries with a combined population of 1.2 billion people) announced a new global public-private partnership known as the Global Risk Modelling Alliance (GRMA).[11]  The GRMA is designed to build risk analytics capacity in V20 countries through the use of insurance-based methodologies, tools, and experience.[12]  The goal of the GRMA is to enable V20 members to strengthen their physical climate risk management capabilities and create the trust and confidence necessary to attract investment in adaptation and risk financing solutions.[13]

Sustainable Insurance Facility

At COP26, the V20 also launched the Sustainable Insurance Facility (SIF), which is a Project Pipeline Development Facility designed to assist the members of the V20 in assessing the financial protection needs of micro, small, and medium-sized enterprises (MSMEs) in the context of climate change.[14]  The purpose of the SIF is to mobilize international financial and technical assistance to enable domestic and regional insurers to offer climate-smart insurance products to protect MSMEs and the millions of people that rely on them for their jobs and livelihoods.[15]

Start Ready

At COP26, the Start Network (a coalition of over 50 humanitarian charities) and the IDF announced a new partnership called Start Ready.[16]  The Start Ready tool “will provide pre-agreed funding at scale for relatively predictable crises like droughts, flooding, and heatwaves.  It is based on locally led action and intelligence, and uses innovative risk analysis, collective planning, pre-agreed triggers, and pre-positioned financing to anticipate and respond to needs around the world.”[17]  Start Ready incorporates insurance principles such as risk-pooling, and IDF member countries will provide technical assistance and support for climate and financial risk modelling and strategic decision-making.[18]  A major goal of Start Ready is to mobilize local humanitarian aid even before a disaster strikes, in order to better protect both lives and livelihoods.[19]

References

[1] Insurance Survey 2021, Goldman Sachs Asset Management, https://www.gsam.com/content/gsam/us/en/institutions/market-insights/gsam-insights/insurance/2021/insurance-survey-2021.html.

[2] Ocean Risk Initiative at AXA XL, AXA XL, https://axaxl.com/about-us/ocean-risk-initiative.

[3] Coastal Risk Index: Building Resilience Through Nature, AXA XL Ocean Risk Initiative, Nov. 3, 2021, https://experience.arcgis.com/experience/763f26c5ad73471b9d7b60d09ecdb94c;

AXA XL Launches Coastal Risk Index, The Insurer, Nov. 5, 2021, https://www.theinsurer.com/cop26/axa-xl-launches-coastal-risk-index/19254.article.

[4] Id.

[5] Principles for Sustainable Insurance at COP26: Series of Events, UNEP Finance Initiative, https://www.unepfi.org/events/principles-for-sustainable-insurance-at-cop26-find-out-about-the-series-of-events/.

[6] Net-Zero Insurance Alliance, UNEP Finance Initiative, https://www.unepfi.org/net-zero-insurance/.

[7] COP26 and Insurance – A Complex Journey to Net Zero, Herbert Smith Freehills LLP, Nov. 3, 2021, https://www.herbertsmithfreehills.com/insight/cop26-and-insurance-%E2%80%93-a-complex-journey-to-net-zero.

[8] The Net-Zero Insurance Alliance Statement of Commitment by Signatory Companies, UNEP Finance Initiative, https://www.unepfi.org/psi/wp-content/uploads/2021/07/NZIA-Commitment.pdf.

[9] V20 Group and the IDF Call for Joint Collaboration and International Support to Strengthen Global Physical Climate Risk Management Capabilities, Vulnerable Twenty Group, Sept. 17, 2021, https://www.v-20.org/our-voice/news/press-releases/v20-group-and-the-idf-call-for-joint-collaboration-and-international-support-to-strengthen-global-physical-climate-risk-management-capabilities.

[10] IDF Summit 2021: Insurance Sector Ramping Up Its Critical Role in Accelerating Global Climate Resilience, Insurance Development Forum, June 17, 2021, https://www.insdevforum.org/idf-summit-2021-insurance-sector-ramping-up-its-critical-role-in-accelerating-global-climate-resilience/.

[11] IDF Sets Up Global Risk Modelling Alliance with V20 Group, Reinsurance News, Nov. 5, 2021, https://www.reinsurancene.ws/idf-sets-up-global-risk-modelling-alliance-with-v20-group/.

[12] PRESS RELEASE: COP26: IDF and V20 Announce Partnership in Risk Understanding to Build Global Resilience to Climate Risk; IDF Announces other Multi-Partner Resilience Actions, IDF, Nov. 3, 2021, https://www.insdevforum.org/press-release-cop26-idf-and-v20-announce-partnership-in-risk-understanding-to-build-global-resilience-to-climate-risk-idf-announces-other-multi-partner-resilience-actions/.

[13] Weathering Climate Risk: V20 Group and the IDF Call for Joint Collaboration and International Support to Strengthen Global Physical Climate Risk Management Capabilities, IDF, Sept. 17, 2021, https://www.insdevforum.org/weathering-climate-risk-v20-group-and-the-idf-call-for-joint-collaboration-and-international-support-to-strengthen-global-physical-climate-risk-management-capabilities/.

[14] Collaborative Efforts to Invest in Resilience and Close the Financial Protection Gap: V20 Sustainable Insurance Facility Becomes Operational, Vulnerable Twenty Group, Nov. 9, 2021, https://www.v-20.org/our-voice/news/press-releases/collaborative-efforts-to-invest-in-resilience-and-close-the-financial-protection-gap-v20-sustainable-insurance-facility-becomes-operational.

[15] Id.

[16] COP26: New Insurance Sector and NGO Partnership Will Protect World’s Most Vulnerable from Climate Risks, Start Network, Nov. 3, 2021, https://startnetwork.org/news-and-blogs/cop26-new-insurance-sector-and-ngo-partnership-will-protect-world%E2%80%99s-most-vulnerable.

[17] Id.

[18] Id.

[19] Id.

Comments are closed.