Harnessing Insurance for Sustainable Development

Jeremy McDaniels is one of the author of the report "Insurance 2030: Harnessing insurance for sustainable development", produced jointly by the Principles for Sustainable Insurance (PSI) Initiative and the UNEP Inquiry into the Design of a Sustainable Financial System. 

Published in June 2015, the report is part of a wider partnership between the insurance industry and the UN to strengthen the industry’s contribution to a greener future, and overall sustainability goals. In this article he discusses the special role that the insurance can play in achieving inclusive and resilient growth.

The Global Financing Challenge
These are daunting times. The world is facing the prospect of an unprecedented environmental crisis, as natural capital stocks are irreversibly degraded, global environmental systems are pushed towards tipping points, and climate change begins to manifest in increasing extreme weather. The international consensus on the Sustainable Development Goals (SDGs) and the 2030 Agenda has underscored the imperative to find durable, long-term solutions to these challenges. Annual financing of US$5-7 trillion is needed realize the SDGs, ranging from investments in green infrastructure and clean energy to water and sanitation, health, and agriculture. Importantly, financing sustainable development will require capital flows to be directed away from assets that deplete natural capital. It will also require significant investments in risk prevention and resilience, as well as financing for the rapid recovery when disaster strikes. The United Nations Environment Programme (UNEP) Inquiry into the Design of a Sustainable Financial System was established in early 2014 to tackle these issues by identifying policy options to align the financial system with sustainable development.

Insurance and Sustainable Development

Through its engagements around the world, the UNEP Inquiry has identified the unique role of the insurance industry in addressing sustainable development challenges. In its role as risk manager, risk carrier and investor, insurance plays a critical role in supporting sustainable development through the financial system. The insurance business model is built on the principle of mutualization of risk – making it a particularly effective tool for the management of collective sustainability issues. As underwriters, insurers help improve resilience by promoting good physical risk management, before carrying and transferring financial risk from local to global levels, including the securitization of environmental risks to financial markets. As investors, insurers aim to match liabilities with stable, long-term investment returns.

In collaboration with other UN agencies including the Principles for Sustainable Insurance, the UNEP Inquiry has identified multiple innovations emerging from insurance firms and regulators around the world tackling risk, access and investment challenges. We suggest that three main priorities – closing the protection gap, increasing resilience through prevention, and addressing systemic risk – should be at the insurance efforts going forward.

Closing the protection gap

In the poorest 100 countries, less than 3% of the population is served by effective insurance protection against natural hazards. According to Swiss Re, this “protection gap” continues to grow – with uninsured losses of USD$75bn in 2014. Our research shows that there is no single approach to closing this gap: different jurisdictions employ tailored mixes of fiscal support, policy directed provision and purchase, alongside regulatory concessions and market development. In developing countries such as India, South Africa, and the Philippines, such efforts have lead to increasing uptake of micro-insurance products by households and small business.

Technological innovations in deployment and distribution systems, including mobile-based financial services in Africa and Asia, can facilitate the availability of insurance products. Regional collaborations to pool risk are also gaining momentum, with mechanisms like the African Risk Capacity continuing to expand its membership and coverage. Closing the protection gap also requires enhancing financial literacy about the benefits of insurance products. In South Africa, under the Financial Sector Charter of 2012, specific penetration targets for the extension of financial services to low-income markets were implemented. Other countries in Africa where microinsurance regulation is under consideration include member states of the Inter-African Conference on Insurance Markets (CIMA), as well as Nigeria.

Partnerships for Resilience

Increasing resilience to environmental risk through prevention is recognized as a critical priority in vulnerable countries, and can achieve multiple human health and development co-benefits. Disasters are becoming more frequent and more severe; together with higher exposure through population growth, urbanisation and climate change, this is expected to result in a significant increase in losses over coming decades. An important objective for insurers is to become more proactive in partnering with local governments before disaster strikes – as capacity building, knowledge sharing, and investing in prevention can facilitate better policymaking, and ultimately decrease damages and claims.

Addressing Systemic Risk

At the international level, major global insurers and re-insurers are working together to apply insurance risk assessment and valuation techniques to potential “systemic risks” brought on by climate change for financial markets.

Critical to the harmonization and scale-up of these industry efforts will be concurrent innovations within insurance policy and regulation at national and international levels. Momentum is building: in September 2015 the Prudential Regulation Authority of the Bank of England – the UK’s Insurance Supervisor – undertook a review of risks the UK’s insurance sector posed by climate change. Looking across physical risks, transition risks stemming from financial market disruptions, and liability risks, the PRA’s review is the most intensive review undertaken to date – and has been hailed as a major step forward.  Importantly, action on environmental risk is also advancing at the highest level of financial sector governance. In response a request from G20 ministers, the Financial Stability Board convened an initial meeting of private and public stakeholders to examine risks posed by climate change to financial stability. Speaking after the meeting, FSB chairperson Governor Mark Carney suggested the development of a Climate Disclosure Task Force to enhance carbon reporting globally, alongside a focus on environmental stress testing.

Scaling up action through enhanced industry networks

Over the years, insurance industry initiatives that address sustainable development challenges have generated risk awareness and stimulated innovative insurance solutions. Greater coordination between them could potentially lead to even greater impact. Enhanced networks to facilitate coordination at the industry level could create a more strategic, coherent and systemic approach to sustainable development challenges.

Carrying forward the momentum

The global sustainable finance agenda is moving faster than ever before. Insurance is increasingly being recognized as a critical element of the sustainability transition – including within international accords like the Sendai Declaration, Addis Ababa Accord, and the SDGs. Looking towards to the UNFCCC Climate Change conference in Paris in December, it is crucial that the insurance industry – from small local firms to global industry giants – is deeply engaged in national and global efforts to unlock sustainable development. Insurance regulators should collaborate to share best practice and learn from each other, potentially through a Sustainable Insurance Policy Forum. The need for collective industry leadership has never been greater. To share words from UNFCCC Executive Secretary Christiana Figueres, “please do not underestimate the power of what you, the insurance industry, can do in the solutions space – hold it in your hands to plan the sustainability transition in an orderly way.”

 

More on the author:

Jeremy McDaniels is Senior Analyst with the UNEP Inquiry into the Design of a Sustainable Financial System.

The Inquiry’s Global Report “The Financial System We Need” can be downloaded at www.unepinquiry.org