Property/casualty insurance industry innovation can help tackle environmental disaster risks as they emerge around the world, a Willis executive and UN official assert.
Margareta Wahlström, the UN Secretary General’s special representative for disaster risk reduction, and Rowan Douglas, Willis CEO for capital, science and policy practice, spoke about the issue following their presentation at the Economist’s Insurance 2015 Conference in London on March 3.
They joined a conference on world risk reduction from March 14-18 in Sendai, Japan, the epicenter of the 2011 earthquake and tsunami, where up to 8,000 delegates from around the world met to map out future plans for disaster prevention and relief. It is a forum designed to explore allying private sector insurance expertise with governments to develop disaster risk management and reduction strategies
“In Sendai, we have a very significant number of some of the top insurers in the world, and they are there because that’s where they know it’s going to start playing out. They share the vision that 2015 could very well be the year of absolute change about the section of how resilience can be built,” Wahlström said.
Wahlström and Douglas argued that insurance industry expertise, data and capital will be key to mitigate disaster risk and are also important for responding to environmental disasters such as tsunamis and earthquakes. That job is more difficult in an age of climate change and continued population growth in coastal zones, they said.
“Some of the big issues that have come to bear over this decade show that we need to put a lot more effort into understanding risk in all its perspectives,” Wahlström said. There is a “need for data, for free and open access to data, [and] for collaboration with science,” a very, “inclusive, way of managing risk together.”
To do this, Wahlström said that government and insurers must develop a better understanding of “the challenges of reconstruction,” both on how you anticipate challenges as well as how you can avoid and mitigate them.
“Capital is now driving risk” she said. “Can capital be motivated to embed risk in itself so there is a motivation for risk mitigation in capital,” she asked.
“Can we convince major growth areas and major growth economies to look at risk in an anticipatory manner? Most of the economic growth in the world today is not in our part of the world,” she said, pointing to growth areas in Africa and Asia as the “right spot for insurance.”
She added that “if you look at the map of our insurance, it’s covering the world today,” but with less co
So what can reinsurers and insurers do?
Douglas pointed to science, regulation and investment as the areas where insurers and reinsurers can tackle disaster risk.
He said that the insurance sector, over the last 25 years, has come up with “the most sophisticated scientific and engineering gearbox” that enables it to both understand and evaluate global natural disaster risk and make it tractable into current financial operations and valuations.
“Now, we’re reaching the opportunity where those tools and techniques can become much more widespread in enabling many others to understand that risk,” he said. “Once risk is understood, it can be managed.”
Governments, seeking to cope with environmental disasters, could also harness the insurance/reinsurance industry’s expertise by addressing regulatory issues, Douglas said. He pointed out that the industry has “integrated [disaster] risk into our financial system through the stress tests of 100- and 200-year resilience, through the ways that the credit rating agencies take this, the way that it’s accounted in our books.”
“We’re the only sector that actually accounts for this risk in their operations,” he added, “and we’re the only sector where insurance capital is recognized on balance sheets as a contingent source of capital against contingent risk. People are waking up to the fact that as soon as you make this risk tangible in the financial system, people start looking to manage it.”
Douglas continued: “Insurers represent one third of assets under management…We have tremendous influence to become a driver of investment resilience, climate smart investment—not because it’s green, not because it’s sustainable with a cuddly polar bear, but because it’s purely about risk.”
Given these factors, “making insurance far more ubiquitous” is a real goal. “We have 25 percent coverage in the world, but much less in many places,” Douglas said. “Meanwhile, even [in] North America, Europe and Australia, and even Japan, we are facing crises in our developed world systems of insurance.”
He said that insurance must be made more inclusive globally, because “once people are included in the system, not only are they protected but, actually, a whole set of broader, sustainable behaviors emerge.”
Wahlström and Douglas have been hard at work preparing for a series of conferences and meetings dedicated to integrating the re/insurance industry’s expertise, data and capital into reducing global disaster risks. Their initiative dates from the earthquake and tsunami that struck Indonesia and the Indian Ocean in December 2004. They first presented their main ideas at the IIS Conference in London last June, and they have continued to be fleshed out into a working program.
After the Hyogo conference in Sendai, subsequent meetings on the issues of climate risk, health and investment will take place through 2015 in Addis Ababa, Ethiopia, New York and Paris.
Wahlström and Douglas see these international conferences as ways to “incentivize action” for addressing climate change and increasing the insurance industry’s presence and participation in doing so on both the climate and investment sectors.