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29 November 2022Article

Joining the dots: how to link policy, projects and finance

WTW (formerly Willis Towers Watson) recently appointed Sarah Conway as head of its Ecosystem Resilience practice and director in the Disaster Risk Finance/Parametrics unit within the company’s Climate and Resilience Hub. Previously she was lead climate finance negotiator for the US delegation to the UN Framework Convention on Climate Change. Conway spoke to Bermuda:Re+ILS.

I have three main objectives in my new role. First, to build out WTW’s already impressive and award-winning ecosystem resilience work by continuing to attract and mentor colleagues who share a commitment to utilising risk analytics to help address climate and nature challenges.

Second, to build on WTW’s great momentum to design, deploy and scale financial instruments that offer a triple win—benefiting people, nature and climate, and to make sure that these achieve the outcomes they’ve been designed to achieve and also receive the attention they deserve. WTW has been doing so many amazing things that have been flying under the radar and I want to get its work out to the broader community—the insurance sector, of course, but also governments in emerging economies, donor countries and the private sector.

Third, I want to build out a medium-term strategy, say to 2030, that expands beyond our disaster risk finance tools and to other opportunities. For example, considering potential offerings related to the forthcoming Taskforce on Nature-related Financial Disclosures (TNFD), which is following on the heels of the Task Force on Climate-related Financial Disclosures (TCFD). We’ll also be looking at broader conservation and climate finance tools, beyond parametric insurance solutions. For example, the financing of mangroves to enable blue carbon sequestration. We see immense opportunity to support WTW’s public and private sector clients on a range of ecosystem-related issues.

The Climate and Resilience Hub (CRH) is a multidisciplinary team with expertise spanning climate modelling, finance, regulation, legal liability, nature-based solutions, adaptation and resilience, and disaster risk finance. At its heart is Climate Quantified, which is WTW’s suite of climate data and analytical tools. These tools help our clients address the risks—the physical risks that arise from extreme weather-related events, as well as the chronic effects of climate change; the transaction risks related to changes in economic activity due to the transition to net zero; and the liability risks arising from losses caused by the impacts of climate change or by a failure to manage climate risks adequately. Our clients span the public and private sector. We help them improve their governance, manage their asset portfolios, transfer risk and, ultimately, build resilience.

“The reef brigades are trained and ready, so the funding will be rapidly dispersed.”

Innovative programmes

Our Disaster Risk Finance/Parametrics unit (DRFP) covers the whole landscape of disaster risk financing and parametric products. Within the DRFP, I lead the Ecosystem Resilience practice, which primarily designs parametric insurance solutions that aim to enhance the resilience of natural assets (such as coral reefs or mangroves) and/or to support the communities that are dependent on those assets (such as fisherfolk).

One example is our partnership with Mesoamerican Reef Fund, for which we designed an innovative model that captures the relationship between the levels of hurricane intensity and reef damage at seven reef sites across Mexico, Belize, Guatemala and Honduras. The programme uses fast-paying parametric insurance to fund prompt, community-led restoration of critically endangered reef systems, if and when a triggering event occurs. The first triggering event for this programme occurred recently, with Hurricane Lisa, and a pay-out will be made within seven to 10 days of the event. The reef brigades are trained and ready, so the funding will be rapidly dispersed to allow them to get in the water to assess damage, clear off the debris, reattach corals, and minimise the impacts of the storm. Being able to jumpstart the regeneration and recovery of reefs is absolutely critical because their ability to recover and thus restore crucial ecosystem services is increasingly threatened by a multitude of stressors to reefs such as marine heatwaves, overfishing, and agricultural run-off. Notably, Lisa was only a category 1 hurricane—with a wind speed of about 70 knots—but it hit the bull’s eye of the model and so triggered a pay-out. WTW will expand its coral reef insurance to new geographies, including other parts of the Caribbean, but also to the Pacific and, potentially, to developed countries. For example, we have been partnering and supporting The Nature Conservancy’s team in Hawaii to develop the first ever US domestic coral reef insurance policy.

We’re also looking at the potential for parametric insurance solutions that address the impacts of excess rainfall and coral bleaching, and also for ecosystems beyond coral reefs, including mangroves, which provide coastal protection and carbon sequestration services. Excess rainfall is increasingly a by-product of hurricanes, and also leads to run-off. For example, sedimentation associated with farming practices that are close to a water zone impact terrestrial, coastal and marine ecosystems, from the ridge to the reef. We are developing solutions to deploy resources, either before or after events, and also to change behaviours so that the impacts are minimised.

We are looking closely at the livelihoods that are critically dependent on the health of ecosystems. For example, we’ve been working with a partner in the Philippines, Rare, to design innovative parametric insurance products for the small-scale fishing community—specifically, a product to address lost fishing days that they experience due to bad weather exacerbated by climate change. Instead of just having a trigger linked to one extreme event, we’re developing a model where the trigger is linked to the cumulative number of days of bad weather. Having such coverage means these fishers and their assets are protected: the fishers have financial resources and do not need to put themselves or their boats in danger, and the reefs and fish stocks from fishing activities that would threaten their recovery after a period of bad weather. We and our partner in this insurance project to protect fishers in the Philippines have just secured some additional funding from the Ocean Risk and Resilience Action Alliance and the Canadian government. This means we can take a feasibility study of this parametric insurance solution to the pilot implementation phase in 2023/2024. That will include, to start with, about 50,000 fishers, which is a pretty significant number.

A final example in the ecosystem resilience space is the world’s first sovereign debt “resilience wrapper” (also referred to as a catastrophe or cat wrapper) that WTW helped design and place to provide insurance protection for Belize’s 2021 blue bond issuance. The multi award winning solution means the next semi-annual debt servicing payment that the government is due to pay is waived and is instead paid for via a parametric pay-out if a triggering event occurs. This enables the government to focus their resources on the immediate disaster response and economic recovery efforts. It is a great step beyond the previous approach, the “Hurricane Clause”, introduced in Grenada in 2016, which allow payment deferments. WTW’s resilience wrapper goes beyond payment deferments by servicing the debt with the parametric pay-out—this helps to encourage stronger debt sustainability.

“A final example in the ecosystem resilience space is the world’s first sovereign debt ‘resilience wrapper’.”

Conservation and finance

My background is a unique and fairly eclectic mix of traditional finance and conservation and climate finance for both the private and public sectors. I think my time with the US government gave me a deeper understanding and appreciation for the overarching political landscape—the sort of “top down” or enabling environment piece—both from a US domestic perspective as well as in the context of the UN Framework Convention on Climate Change (UNFCCC) negotiations. Given the role that government plays in sending political signals, building the enabling environment for, and helping to catalyse private investment in, climate adaptation and mitigation, understanding the system is quite important. Separately, at the more “bottom up” level, my time based in Indonesia and really working at the local level, helped me to understand some of the practical realities of actually implementing meaningful projects on the ground—it’s hard! Then of course a strong foundation in finance, and how finance flows, underpins all of this and is important when connecting all of the dots from the ground to the political level.

Turning to the COP, I served on the US delegation to the UNFCCC as the lead climate finance negotiator at COP20 in Lima and at COP21 in Paris, in 2014 and 2015, respectively. Being a negotiator at a COP is a completely different experience to being an observer from the private sector. That said, because I have an understanding of how those politically charged conversations unfold, I can work out ways that WTW and the broader insurance sector can present pragmatic solutions to complement the negotiated outcomes.

WTW recently made a formal submission to something called the Executive Committee of the Warsaw International Mechanism for Loss and Damage, which was established in 2013 while I was a climate negotiator on behalf of the US government. Developed and developing country representatives of that Committee, which is under the UNFCCC, responded to our submission with constructive feedback, particularly on the use of practical, on-the-ground solutions for averting, minimising and addressing loss and damage associated with the adverse effects of climate change. A criticism of the COP process is that negotiations are often at a high level politically, which can be difficult to link to what is happening on the ground. Relatedly, there is often a disconnect between the people representing countries in the negotiating context and what is actually being prioritised in their countries. So trying to inject real world examples into the discussion is really important.

“Trying to inject real world examples into the discussion is really important.”

Defining climate risk finance

Climate finance is the flow of funds to activities that reduce greenhouse gas emissions or help society adapt to climate change, whereas climate and disaster risk finance and insurance (CDRFI) is to fund or facilitate resource flows towards a diverse range of activities that make disasters less damaging for people and for assets.

CDRFI can be further disaggregated to three parts: funding that is directed towards protecting and managing the impacts of risks on lives and livelihoods; funding that is directed at reducing the damage that events cause on assets and facilitate the reconstruction of those assets, as well as the services they provide after a deconstructive event; and finally, funding that covers the immediate operational and humanitarian needs after a disaster strikes.

In summary, there are instruments that target risk reduction, risk retention, and risk transfer.

On the risk reduction side, there are, for example, loans, grants and tax breaks. On the risk retention side, there are government budget contingencies, reserve funds and lines of contingent credit. And then, in the risk transfer piece—which is where insurance sits—are indemnity, parametric, micro insurance, agricultural insurance, risk pools, and catastrophe bonds.

“There are instruments that target risk reduction, risk retention, and risk transfer.”

The role of insurers since COP21

The recognition that climate risks pose a really fundamental challenge to the global economy in general, and to financial services and insurance industries, more specifically, has been growing for more than a decade. There’s also an increasing recognition of the role that insurers can play in supporting the transition to a low emission and climate resilient future. A lot of that has been thanks to the positive momentum from COP21. We’re starting to see the sector support risk management through proactive climate friendly measures and policies, and new innovations in the products that insurers are offering. They’re more proactive now and not just simply trying to reactively respond to claims following a disaster or loss.

On the nature side, things are moving more slowly because nature-related risks are not yet being assessed in the context of the underwriting efforts of the majority of re/insurers. For the most part, that is playing out in their investment or environmental, social and corporate governance factors-related activities. This stems from a lack of awareness of what these risks are because of a lack of sufficient data to incorporate into models. There’s also a lack of regulatory and supervisory guidance to underpin those efforts.

Hopefully, just as COP21 helped to expedite the role of the insurance sector in fighting the climate emergency, the COP15 for the UN Convention on Biological Diversity this December will mean nature starts receiving as much attention. A global target to protect 30 percent of the planet for nature by 2030 (known as ‘30x30’) is expected to be included in the post-2020 Global Biodiversity Framework, to be agreed at COP15. Last year, the G7 announced that the world must not only become net zero, but also nature positive. That was a good signal of a paradigm shift in how some of the largest economies are viewing nature.

“The litmus test for success is that there is progress towards mobilising finance for addressing ‘loss and damage’.”

My expectations from COP27

COP27 is being billed as an ‘implementation COP’ to further underscore the need for action, and also as an African COP, given that the host country is Egypt. The litmus test for success is that there is progress towards mobilising finance for addressing ‘loss and damage’. Since COP26, this past calendar year has been marked by some pretty wild climate-related, natural hazard events: devastating flooding in Pakistan, South Africa and Nigeria; droughts in Somalia, Kenya and Ethiopia; the list goes on. The pressure, then, is high and mounting for developed countries to address the calls for loss and damage finance and in a much more meaningful way that, if not puts money on the table, then at least signals a process for that.

An important initiative is The Global Shield against Climate Risks that will be formally announced at COP27 by the V20 Group of Finance Ministers and G7 that will hopefully be well received by COP negotiators and by the media. For a long time now, finance ministries have been under-represented in the UNFCCC process so it is great to see more involvement, generally, and this specific V20-G7 initiative, specifically.

There are two main avenues for discussions on ‘loss and damage’. First, COP26 established the Glasgow Dialogue to discuss the arrangements for the funding of activities to avert, minimise and address loss and damage associated with the adverse impacts of climate change. This is a two-year initiative and so we’re halfway through it and there’s a lot of pressure to ensure that loss and damage is, from COP27 onwards, on the agenda of negotiations. Second, the call for additional funding dedicated to loss and damage under the UNFCCC, which will hopefully lead to an agreement at COP27 on a process to develop arrangements that could be formalised at COP28.

There is also the Santiago Network under the UNFCCC and created at COP25 aimed at catalysing technical assistance for averting, minimising and addressing loss and damage at the local, national and regional level, in developing countries that are particularly vulnerable to the adverse effects of climate change. What they need to agree to at COP27 relates to institutional and financial arrangements for that network to ensure that it remains operational.

I think the main outcome from COP27 on loss and damage is likely to be a time-bound, decision-making process for formalising a funding arrangement that is a coherent part of the larger landscape of finance outside the UNFCCC, including The Global Shield.

At COP27, there will also be side events happening alongside the formal negotiations, and my hope is that public and private actors, including ourselves and others from the insurance sector, can really begin to highlight tangible options for addressing various aspects of loss and damage.

More on this story

16 November 2022   The broker has designed parametric risk transfer for a Global Shield funded UNICEF initiative.
20 July 2022   The renewable energy company is the first to receive full accreditation.

More on this story

16 November 2022   The broker has designed parametric risk transfer for a Global Shield funded UNICEF initiative.
20 July 2022   The renewable energy company is the first to receive full accreditation.