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Insurance sector, vulnerable nations initiate effort to quantify climate risk

09 November 2021 Amena Saiyid

The insurance sector and a group of nations most vulnerable to climate change jointly launched an initiative on the sidelines of the COP26 meeting to model and assess climate risks faced at the local and country level.

Countries such as Bangladesh and Pacific island nations that are most vulnerable to climate-fueled sea level rise and other weather impacts have to determine where they are most vulnerable.

For that task, these countries need climate data at the local and national level.

The Insurance Development Forum (IDF) and the Vulnerable 20 Group of Ministers of Finance for climate-vulnerable countries (V20) signed an agreement 3 November to set up a public-private partnership known as Global Risk Modeling Alliance (GRMA) to provide analytics capability where it is needed the most.

Complementing this effort will be the development of the Global Resilience Index Initiative (GRII), which will provide a globally consistent model to assess resilience across sectors and geographies.

Greater access to climate risk data

The idea behind the alliance and the index initiatives is to enable countries to take ownership of their own risk analysis by leveraging established insurance-based methodologies, tools, and experience.

"As an industry, we have consistently recognized that climate change is the biggest challenge of our time. A fundamental pillar of addressing it will be greater access to climate risk information, tools, and standards, as well as benchmark metrics that will shed light on the climate risks of today and on future impacts," AXA Group and IDF Chairman Denis Duverne said in a statement.

The IDF is in a position to help because it is a public-private partnership led by the global insurance sector and supported by the UN and other international organizations. Its goal is to extend the use of insurance and its related risk management capabilities to build greater resilience and protection for people, communities, businesses, and public institutions that are vulnerable to disasters and their associated economic shock.

Risk analysis remains the foundation for "mainstreaming" climate and disaster risk finance, the panelists said.

Answering tough questions

Underscoring the importance of risk data models and analytics in building climate resilience, Amal Mandal, joint secretary for the Bangladeshi Ministry of Finance's economic relations division, said vulnerable nations need climate data at the local and national level to be able to answer these most difficult of questions and to "climate proof" their economies.

"What lands do we preserve and what might be consigned to oblivion with the rising tide" as vulnerable nations prepare their climate resiliency plans, asked Mandal at a 9 November session on the collaborative solutions needed to build up a resilient world.

"What happens when our people are pushed against their will to stave off the irreversible wave?" and "How do we maintain our financial and economic resources?" he added.

The half-day session was chaired by the V20 Presidency, which Bangladesh currently holds, and convened by the IDF, and the UN Environment Programme Finance Initiative (UNEP FI) Principles of Sustainable Insurance.

On hand to discuss the significance of the risk modeling initiative was IDF Secretary General Ekhosuehi Iyahen, who said understanding country-specific risk is not only important for tailoring solutions for climate impacts, but also to drive "greater traction" around conversations on climate adaptation and finance.

Identifying and financing climate adaptation projects remains a challenge both for the developed countries that would fund them as well as the developing countries that would be the beneficiaries. The plan to disburse the $100 billion a year in climate financing, which the UK COP26 Presidency released 8 November, doesn't make it clear what procedures would be followed for identifying projects in countries that are most in need.

The alliance's work, however, will allow vulnerable countries to develop their own analysis to inform local decisions, rather than have someone externally do the work who is not familiar with local conditions, she said.

Assisting micro, small, and medium businesses

During that session, the IDF, V20, and UNEP FI also launched the Sustainable Insurance Facility (SIF), which is charged with developing and promoting the adoption of climate-smart insurance solutions by micro, small, and medium-sized businesses.

As explained by Marshall Islands Climate Envoy Kathy Jentnil-Kijiner, SIF will consist of bundled insurance products designed to enhance climate value at affordable levels, aiming ultimately to bolster the ability of these enterprises to embrace climate-friendly solutions.

These products will both protect these businesses from potential damages associated with climate impacts as well as enabling a low-carbon transition through guaranteeing energy savings, which can be accomplished through investing in rooftop solar or energy efficiency measures.

In the event of weather-related hazards or shocks, decentralized energy systems can be resilient for the community as a whole, V20 Senior Advisor Sara Jane Ahmed said.

When faced with the issue of a high upfront cost of capital and high interest rates, Ahmed said, insurance can de-risk financing. This reduces the cost of capital and thus makes decentralized energy systems more viable.

In East African countries like Kenya, Uganda, and Tanzania, an initiative like SIF would be most welcome as people's incomes are low and insurance penetration below 3%, said Caesar Mwangi, CEO of Kenya-based ICEA LION Insurance Holdings.

Posted 09 November 2021 by Amena Saiyid, Senior Climate and Energy Research Analyst

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