Global Shield against Climate Risks: a solution fit for COP27

29-11-2022

Global Shield against Climate Risks: a solution fit for COP27

shutterstock/Billion Photos

The V20 and G7 have agreed on a global financial protection cooperation against climate risks. The InsuResilience Secretariat explains to Bermuda:Re+ILS how this initiative, “Global Shield against Climate Risks”, heralds progress in climate adaptation and resilience.

The V20 Group of Finance Ministers from climate vulnerable economies and the G7 Presidency announced on October 14 they had agreed on a financial protection cooperation that helps address and mitigate loss and damage as a contribution to the Paris Agreement on climate change. V20 and G7 were jointly to launch the Global Shield against Climate Risks at COP27 in a wider effort to accelerate pre-arranged financing at speed and scale.

The Global Shield builds on the InsuResilience Global Partnership which the V20 and G20 previously introduced with a goal of protecting 500 million people in climate vulnerable countries by 2025. The Global Shield is a wider and systematic approach that encompasses a substantial scale-up of these efforts including social protection schemes, with V20, G7 and further members.

Formed in 2015, the V20 Group of Finance Ministers is a dedicated cooperation of economies systematically vulnerable to climate change. InsuResilience Global Partnership for Climate and Disaster Risk Finance and Insurance (CDRFI) Solutions is a V20 and G20+ led multi-stakeholder partnership convening more than 120 members under a common vision to increase resilience of poor and vulnerable people through the use of climate and disaster risk finance and insurance.

The Global Shield against Climate Risks accelerates action on climate risk finance and builds upon the efforts and structure of the InsuResilience Global Partnership. It includes:

  • Strengthened coordination within the global CDRFI architecture across G7, V20 and other climate vulnerable economies to ensure coherence of different institutions and donors’ efforts at the global, regional and national level.
  • A global, flexible, and collaborative financing structure to mobilise and pool respective donor and other funds and enable a more systematic global approach to closing protection gaps.
  • Sustained protection in the face of increasing climate risks by scaling up existing successful CDRFI programmes, including social protection schemes, and preparing country-specific, needs-based CDRFI support packages, including the scaling up of smart premium and capital support to address affordability barriers.

“The insurance industry is the societal risk manager.”

Societal risk manager

In an interview with Bermuda:Re+ILS, Astrid Zwick, head of the InsuResilience Secretariat, noted that COP21, which produced the Paris Agreement in 2015, “was where insurers first appeared more prominently and strengthened their role in addressing increasing climate risk”.

“The insurance industry is the societal risk manager,” Zwick stressed, “and with its long-term risk experience it can play a core role in supporting the public sector in understanding, measuring and mitigating climate risks and support developing the most efficient and effective solutions for vulnerable countries.”

The Global Shield uses three major principles to guide its work, she added. They are that CDRFI efforts become more coherent, that financial and technical support is provided more systematically and with full country ownership, and that the financial protection provided becomes sustainable.

Zwick, with her dedicated team in the InsuResilience Secretariat, is responsible for the coordination and support of the InsuResilience Global Partnership that is geared to enabling access to financial protection against climate risks for people in developing and emerging countries. Her previous roles include head of corporate responsibility at Munich Re, sustainable development manager at Allianz Group, and scientific officer at the European Commission Joint Research Centre’s Institute for Prospective Technological Studies.

Jennifer Phillips, an advisor at the InsuResilience Secretariat, stressed that the Global Shield will help make COP27 a “big opportunity” for scaling up financial protection, and for further engagement by insurers.

“We work on developing CDRFI solutions and understand that a mix of financial instruments is needed,” she said. “COP is a great way for both the private sector and the public sector to recognise how to work together. With the launch of the Global Shield, this type of work can hopefully be expanded in the near future.”

Phillips recently joined the InsuResilience Secretariat from the United Nations, where she worked as a project manager on the Pacific Insurance and Climate Adaptation Programme. She explained how large reinsurers can support local insurance companies based in countries that are the most vulnerable to climate change.

“Insurance products developed for a local market need to be registered by the local insurers, but insurers often need reinsurance capacity because they will be offering these products to a much larger number of people than they currently insure,” she said. “The focus of these products is to reach those who don’t normally qualify for, or have access to, insurance.”

“Underwriting renewable energy projects is another key role insurers can play.” Increasing focus on adaptation

Alongside resilience and adaptation efforts, re/insurers can offer solutions to mitigation—the reduction of carbon emissions, Zwick said, noting the UN-convened Net-Zero Asset Owner Alliance (NZAOA) as an initiative of the United Nations Environment Programme.

“Insurers are huge investors. They own about $20 trillion in assets that have been built up through their premiums and past earnings. This means insurers have investment power, which they can apply to a range of different sectors. If they direct their investments into sustainable technologies, such as renewable energy, then that helps strengthen mitigation efforts by reducing global greenhouse gas emissions. It is a very strong role that insurers can have.

“On the liability side, again looking at mitigation, underwriting renewable energy projects is another key role insurers can play. By covering a renewable project’s risk they can help attract investment to such projects. Low-carbon technologies need to be de-risked if they are to be developed further. We have seen this in the development of the (on-shore) wind energy sector which, without insurance, would not have been developed so rapidly, according to our research. Due to the fast growth cycles in wind turbine technologies, the testing was shifted to the project phase. Like in many other areas of new technologies, insurance and reinsurance play a strong role in de-risking technological development and, in the context of climate change, pushing markets towards net zero.”

The NZAOA and other initiatives can work towards producing common and global standards to define what constitutes ‘low-carbon’ technology in the clean energy transition, Zwick said, and support zero emission investments.

Zwick noted how, one month before COP26, UN Secretary General Antonio Guterres called for an increase in support for adaptation financing to a level equal to that for mitigation efforts. Guterres said that, in order to meet the goal of the Paris Agreement—to reduce emissions to limit temperature rise to 1.5 degrees from pre-industrial levels—$100 billion was needed each year for climate action in the developing world.

“COP27 will mark an important milestone for adaptation,” Zwick stressed.

“Even under a 1.5 degree climate change scenario, as simulated in the latest report by the Intergovernmental Panel on Climate Change, we still need to deliver climate-smart adaptation. The countries that are hardest hit by global warming are the most vulnerable ones. If we look at countries in the global north, they usually have a high penetration of insurance at household and business levels, and overall stronger financial resilience to climate shocks at the state level. This means that, after a catastrophe, such as floods and windstorms, they can get back on their feet much faster and much better. Unlike developing countries, they don’t have to wait for humanitarian aid to cover the costs of climate change events.”

A notable example is index-based insurance, whereby a payout is triggered after a certain threshold has been reached, Zwick noted. This means that a certain number of days without rain leads to a payout before the full effects of drought impacts the population of the affected region.

She continued: “The beauty of index-based insurance for climate-related losses is that it is paid out in a timely manner. Not all the financial losses will be covered, but the fast payout covers immediate and urgent needs, such as disaster response and contingency plans triggering the distribution of food, water and seeds for planting crops. Overall, insurance enables fast and efficient liquidity after a shock.”

“The beauty of index-based insurance for climate-related losses is that it is paid out in a timely manner.”

Finance is faster than aid

Phillips has done research into the different financing instruments that are available to communities in the Pacific and Caribbean regions, and also into their preferences.

“Savings are very difficult for many people in these regions because any money they manage to save goes towards the next unexpected personal event, which could be somebody needing to go to the hospital, or for school fees that come up, or for car repairs. It’s often very difficult for them to save up specifically for any type of climate event.

“And accessing credit after an event is often difficult for many of them because it can be contingent on having land ownership or having some type of collateral which many of them don’t have. Even for those who can access credit, it can be very expensive, with interest rates being extremely high. Another reason why credit is not an attractive option is that, if they work in agriculture, they might be facing a much less productive season due to damages from hurricanes or cyclones. To have the additional pressure of needing to pay back a loan without knowing how the next season is going to perform makes credit an even less attractive option.”

For many, then, the prospect of an index-based insurance product that can pay out within two weeks, directly into their mobile phone accounts or digital bank accounts, is much more attractive, Phillips said. This is especially relevant when crops are impacted by cyclones and hurricanes, and are still edible for one to two weeks, after which they start to rot.

“It’s right at that weak point when they really need some additional financing in order to purchase food for their family. That’s why it’s so important for them to get quick financial support and not have to wait for months, which is sometimes how long it takes for them to receive humanitarian aid or government support,” she said.

“It’s right at that weak point when they really need some additional financing.”Risk layering

COP27’s attention to adaptation means looking closer at more comprehensive adaptation strategies, Zwick stressed.

“CDRFI is part of such a climate-smart adaptation. For such a strategy, first and foremost, you have to understand the risk. In a comprehensive risk management strategy you will try to reduce your risk. Risks that cannot be reduced or mitigated can then be transferred into the capital markets. This is done well through CDRFI,” she said.

A holistic approach to adaptation is needed and can be realised by working closely with organisations developing Nationally Determined Contributions, a requirement of the Paris Agreement.

Zwick also described the approach of “risk layering” because not all types of risks require an insurance cover.

“There are risks that are recurrent and small, for which you can build up budget reserves or set up contingent credits. But risks occurring every 50 or 100 years need insurance or catastrophe bonds as an efficient way to pre-arrange finance for disaster response and reconstruction,” she said.

The power of partnership

Zwick described how the Global Shield is the result of a desire to collaborate by a range of organisations working towards supporting vulnerable countries.

“The InsuResilience High-Level Consultative Group, our highest steering committee, came together to decide on truly global collaboration, a Global Shield against Climate Risks. Its goal is to enable more and better pre-arranged risk finance through a systematic, coherent and sustained approach, with greater ownership of countries along the process,” she said.

“The Global Shield has been established also to address a very fragmented landscape in these efforts, with the various development organisations and the private sector carrying baskets full of solutions. But finance ministries in vulnerable countries are often lacking transparency and guidance on the different types of support offered and therefore not knowing where to start. This is why the Global Shield, an initiative under this year’s German G7 presidency, aims to better coordinate the flow of money and support.

“This support will be channelled through a new financing structure, giving countries the opportunity to request tailor-made support for financial protection, and mobilising the range of instruments and solutions available across the institutional landscape in a coherent manner. It foresees that the vulnerable countries become the owners of their strategy, supported by the actors under the Global Shield. The financing structure will also be comparable to the Global Fund to Fight AIDS, Tuberculosis, and Malaria, which has been very successful. This fund also works on the basis of country ownership and is regularly supported by donor funding.”

Phillips concluded that the Global Shield aims to learn the lessons of adaptation and CDRFI projects to date, so that countries vulnerable to the impacts of climate change can select the options that are most appropriate for their needs, supported by cooperation between the public and private sectors.

InsuResilience, Global Shield against Climate Risks

More on this story

V20 and G7 jointly launch Global Shield
16-11-2022

Bermuda Re