Risk financing for a better, resilient future

At the COP28 climate summit, the insurance industry reaffirmed its commitment to tackling climate change and addressing gaps in climate protection. As 2024 approaches, insurers are gearing up to enhance their adaptation and mitigation strategies to support the transition to net zero.

As part of its efforts to support the transition to a more resilient future, WTW’s delegates at the summit revealed implications for the industry’s role in managing climate risk, as well as considerations for risk managers and their firms.

Financing loss and damage

The establishment of the Loss and Damage Fund at COP28 was seen as a significant step towards supporting climate-vulnerable countries. The fund, designed to address residual climate and disaster risks, aims to benefit from insurance principles like pre-arranged, trigger-based financing. This method is crucial for building resilience against increasing climate volatility.

COP28 also underscored the growing recognition of insurance as an effective risk management tool, not just for immediate liquidity in emergencies but also for informed risk-sensitive planning and response. The support for regional risk pools by various countries highlights this acknowledgement.

The importance of protecting nature

The intersection of climate change and biodiversity is receiving heightened attention, evidenced by the growing involvement of conservation organisations at COP. The focus is on nature-based solutions (NBS) to combat climate-related vulnerabilities.

However, the challenge lies in translating political commitments into concrete actions to mitigate climate impacts on nature and to shift towards nature-positive investments. An urgent need exists to redirect the nearly $7 trillion annually, equivalent to about 7% of global GDP, spent on activities harming nature to NBS and nature-positive initiatives.

Financing the transition

Ambitious decarbonisation goals now require corresponding financial commitments, particularly in emerging economies. Understanding systemic risk is vital for addressing these transition challenges. COP28 was marked by numerous declarations around climate ambition, including significant pledges in renewable energy and energy efficiency.

Equally important, though less publicised, were commitments from sectors like maritime, aviation, and industrial manufacturing to explore low-carbon alternatives and collaborate on policy frameworks to facilitate these changes.

The increasing role of global private finance in decarbonisation highlights a trend where these investors are shaping the financing landscape. This shift could lead to a funding gap for projects that do not align with the risk-return profiles of private financial institutions.

“COP28 has served to highlight the insurance industry’s wider role in measuring and managing climate risk, that goes beyond simply providing liquidity in emerging situations to developing frameworks and risk mechanisms to close the protection gap in the most vulnerable regions,” WTW said.

“Looking ahead, maintaining the momentum generated at this year’s summit may, however, face certain headwinds. Escalating costs of risk transfer to private markets could threaten to dilute the impact of premium financing intended to expand the number of beneficiaries of insurance,” the firm stressed.

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