February 8, 2025
Climate risk reshaping the insurance sector in emerging markets

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With the launch of a new joint initiative to support the countries most vulnerable to climate change, the global insurance industry is evolving in ways that could have significant implications for business in emerging markets.

The Global Shield Against Climate Risks (GSCR) was announced by the finance ministers of the so-called Vulnerable Twenty Group (V20) and G7 after the COP27 United Nations Conference on Climate Change in Sharm El-Sheikh Egypt last November. It aims to address weaknesses in the financial protection architecture in climate-sensitive economies through pre-arranged finance delivered before or just after disasters.

The urgency of the climate crisis has been especially clear this summer, when the hottest June on record was followed by the 10 hottest days on record in early July. Scientists estimate that 2023 has an 81% chance of being the warmest year ever.

Initial contributions to the GSCR included approximately $170 million from Germany and more than €40 million from other countries, including the first recipients of the Global Shield package – called pathfinder countries – including Bangladesh, Costa Rica, Fiji, Ghana Pakistan was included. , Philippines and Senegal.

The World Bank, on its part, has created a Global Shield Financing Facility to help developing countries access financing to recover from natural disasters and climate shocks.

legacy issues

The failure of developed countries to meet the annual $100 billion in climate finance promised at the COP15 United Nations Conference on Climate Change in Copenhagen in 2009 has serious implications for the implementation of mitigation and adaptation measures. According to V20, the group has collectively spent more than $525bn on climate impacts since 2000.

The problem for the V20 countries may be deeper than previously understood. Recent research found that approximately 98% of the approximately 1.5 billion people in the V20 countries lack financial security. As climate change damages mount, the cost of capital and debt is rising to unsustainable levels, especially in climate-vulnerable economies whose workforces are mainly employed by small and medium-sized enterprises .

risk reimagining

The GSCR presents a huge opportunity for the insurance industry to expand its offering to V20 countries, leading to strategies for relevant bodies such as the Climate Vulnerability Forum – a group of 58 emerging markets disproportionately affected by climate change – And one more helps in shaping. Effective global response to climate change.

The industry is beginning to leverage collaborative platforms including the Insurance Development Forum (IDF) and the Insurresilience Global Partnership (IGP) to develop mechanisms to enact the GSCR.

At the IGP’s annual forum in Bonn, Germany in June 2023, the V20 and G7 launched the Global Shield Solutions Platform, a multi-donor grant-making facility to support Global Shield countries.

Meanwhile, the Task Force for Nature-Related Financial Disclosures, which was also launched at COP27, made significant progress by developing a set of recommendations, to be published in September, for assessing and reporting financial risk associated with nature-related risks. Will play a role opportunity.

In recent years insurers have already developed a more holistic approach from models focusing on a specific industry and its operational risks, which is best applied to the modeling of climate risk and the adoption of clean energy technologies. By modeling the risks and potential impact of climate-induced catastrophic events, insurers can develop appropriate policies for customers as well as investors.

The Global Risk Modeling Alliance (GRMA), established after COP26 in 2021 in partnership with the IDF, will be a key resource for the GSCR. GRMA aims to use open-source technology and standards adapted to public sector use cases; a public good fund to help countries fill model and data gaps; and a technical support team of public and private sector practitioners to work with V20 countries on implemented projects.

In July Ghana held its first consultation with government officials, as well as local and international stakeholders, on climate and disaster risk finance and insurance to identify strategies and priorities and how to leverage support from both the GSCR and GRMA. Ghana is the chair of the V20 until 2024, taking over from Bangladesh in 2022.

Insuring Green Energy and Finance

COP28 will be hosted by the UAE in November, which is also the headquarters of the International Renewable Energy Agency, and is likely to build on the progress the insurance industry has made so far, not least because of the UAE’s commitment to compliance . Environmental, social and governance principles have declared 2023 as the Year of Sustainability.

The UAE has pioneered innovative solutions addressing climate risk for the financial services sector, and has made a concerted effort to implement the recommendations of the Task Force on Climate-Related Financial Disclosures, which launched in 2017 a private Area profiling was initiated. Develop common global standards for corporate climate related disclosures.

In March, the Abu Dhabi Global Market’s Financial Services Regulatory Authority and other members of the UAE’s Sustainable Finance Working Group launched a public consultation on a new set of draft principles for UAE-based financial sector firms.

Insurers can take advantage of the emergence of ambitious national-level policies to enable the energy transition and commercialize new clean energy technologies, along with new public-private partnerships in their efforts to develop innovative risk management and financing solutions. can include.

With the rise in the use of renewable energy – especially solar energy – in the Middle East, insurance companies can also provide information on how to reduce risk. For example, by analyzing issues related to the construction of certain solar panels or solar fields or power stations, companies can apply their industry knowledge to build critical projects more quickly.

Linking Net Zero with Insurance

Another big opportunity for insurers to help businesses reduce climate risk is to use the worldwide momentum to set a net-zero goal with a robust energy transition plan, something many insurance and reinsurance companies have already done. She has been setting goals ever since.

In January, at the World Economic Forum, the United Nations-hosted Net-Zero Insurance Alliance (NZIA) launched its first goal-setting protocol, which will allow NZIA members to independently determine science-based, intermediate rates for their respective insurance and reinsurance underwriting. Enables you to set goals. Portfolio in line with the net-zero transition path.

However, in July the coalition dropped the requirement that all members set such goals due to political pressure in the US, which is expected to slow the initiative.

Nevertheless, insurers looking to expand their customer base have plenty of opportunities to underwrite and invest in green energy infrastructure systems, carbon markets and nature-based systems in Africa, where many new net-zero-target -based plans have been deployed.

The voluntary Africa Carbon Market Initiative aims to generate 300 million carbon credits annually by 2030 and 1.5 billion credits annually by 2050 through the commercialization of natural assets, while the Alliance for Green Infrastructure in Africa, launched by the African Union, African Development Bank Gone is an initiative. Groupe and Africa50 aim to raise $500 million for early-stage project development. According to a 2021 report by carbon market consultancy Bezero, the voluntary carbon market – carbon credits as well as nature-based carbon offset projects such as planting new forests – could lead to an estimated $1.3 billion in demand for new specialist insurance policies and services Is. Carbon and insurance brokers Howden Broking and Blackford are raising up to $2bn-4bn under more optimistic scenarios.

by Oxford Business Group

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