Last year was a momentous year in many ways.
Never has the risk landscape seemed more threatening – the impacts of climate change are becoming increasingly visible through extreme weather patterns. This, underpinned by stagnation of the world economy, increasingly polarized societies, profound social unrest with mass migration, crowned by unthinkable terrorist attacks. Hyperconnectivity is clearly an aggravating factor: crisis is no longer local, but one thing leads to another on global basis, and we must all take responsibility.
It is therefore encouraging that world leaders are taking the climate threat seriously at last, also recognizing that future stability and prosperity can only be possible if all parts of society work together.
The most recent and urgent example of this new spirit of collaboration is the COP21 agreement in Paris, which united 195 countries in the common goal of limiting carbon emissions to levels of 2C above pre-industrial levels – and if possible even further to 1.5C – in order to prevent island nations and coastal areas from being submerged by ice melt.
While the COP21 agreement is a first important milestone, what happens next? How do we support these 195 nations in reaching their individual climate commitments? In practice, what measures, innovations and lifestyle sacrifices will need to be made? Will there be squabbles over who does what? And by the time the goals have been reached, will it already be too late to save the planet as we know it?
While I'm not claiming that insurance is a silver bullet to resolving the world's collective problems, I do believe it can be a valuable and effective tool to putting some of the foundations in place. These are some of the reasons why.
Re/insurance puts a price tag on risks. This includes the cost of doing nothing.
We advocate a pre-emptive risk management approach, putting resources at the disposal of governments, regional and city administrations, critical utilities, companies with regard to supply chain risk management; and of course, individuals. This, in order to raise risk awareness and encourage collaborative efforts that can help reduce the protection gaps our societies currently face.
Governments that adopt a preemptive risk management approach, and establish regulation supporting the development and maintenance of effective insurance markets, will also become more attractive to investors. This allows governments to attract funds for resilient infrastructure developments, for example, in turn spurring entrepreneurship and innovation.
Altogether, these measures allow countries to become stronger financially, and better able to prepare for and bounce back from major shocks.
I'm an active member of the CEO Climate Leaders group and will be taking part in the post-Paris discussions in Davos. The conversation will certainly focus on the questions I've raised above. How can we achieve the COP21 carbon reduction targets in practice, and what needs to happen next?
My message will be clear:
• Today, only a fraction of natural catastrophe damages are insured – the gap between economic and insured damage is widening, mainly driven by socioeconomic development. In many regions, the protection gap will be aggravated by climate change. Public-private partnerships, like the government disaster risk pooling CCRIF and ARC, as well as collaborations like InsuResilience, the Climate Insurance Fund and 100 Resilient Cities, are expected to help narrow this gap.
• Aligning capital and community interests via the mechanism of insurance is a very effective way forward. This not only increases shock absorbing capacity, but adds rigor in terms of risk analysis and helps to incentivise risk reduction.
• The COP21 Paris agreement contains provisions to establish a "clearing house for risk transfer and facilitates the implementation of comprehensive risk management strategies". This acknowledges the positive role insurance plays to strengthen societal resilience, and I hope this will open the door to more innovative and concrete public private partnerships.
Importantly, we must act quickly, and we must be concrete – there is no time to waste, no planet B.
Author: Michel M. Liès, Group CEO, Swiss Re.