The importance of risk transfer in dealing with climate-related dangers
David Bresch Head of Sustainability and Emerging Risk Management, Swiss Re
Over the past 50 years, severe weather disasters have caused some 800,000 deaths and over a trillion dollars in economic loss – yet knowledge about future climate, particularly the local impacts of global climate change trends, is incomplete. With damage reaching record levels in the last decade, the problems related to uncertain climate patterns can no longer be ignored. At the same time, leaders cannot fully rely on available information and will have no option but to make policy and investment choices under uncertainty.
As protectors against risky future outcomes, insurance companies are in an ideal position to offer practical and sustainable solutions to problems arising from increasingly erratic weather patterns. Swiss Style met with David Bresch, Head of Sustainability and Emerging Risk Management for Swiss Re, to discuss the topic in depth.
“As an insurer of insurance companies, Swiss Re deals with a diverse pallet of risks,” Bresch says. “Given that climate change affects many places on earth in unknown ways and is a great source of uncertainty, it is a key concern of ours. Insurance companies are in an ideal position to offer efficient and effective solutions to the problems we face.”
Adapting to climate change
With the goal of developing a framework for climate-resilient economic development strategies, Swiss Re joined forces with McKinsey & Company, Climate Works, the European Commission, the Rockefeller Foundation and Standard Chartered Bank to form the Economics of Climate Adaptation (ECA) Working Group.
In 2009, the group published a report, “Shaping Climate-Resilient Development”, which offers comprehensive tools to determine and counter the risks that climate change imposes on economies.
“In order to guarantee the flexibility and applicability in any setting, the methodology was tested in localities within eight different countries, which together represent a wide range of climate hazards, economic impacts, and development stages,” Bresch comments. Using these cases, Bresch and his colleagues came to some interesting and fresh conclusions: “The overall findings from the eight case studies showed that easily identifiable and cost-effective measures – such as improved drainage, sea barriers and improved building regulations, among many others – could reduce potential economic losses from climate change for all the regions. We have also seen that risk transfer plays an important role in stabilizing societies and can help people become more resilient against uncertain outcomes. Insurance measures are key, especially when addressing low-frequency, high-severity weather events, such as once-in -100-years floods.”
Risk-free farming
Climate resilience is particularly an issue in the developing world. “Six of the eight cases in the report are in developing countries. As time goes on, we can expect a rise in weather volatility. If societies are already at the margin of subsistence, any further shock to them will be devastating. This is why we are dedicated to strengthening societies’ resilience, especially in the developing world,” Bresch responds.
Effective measures to help societies adapt to growing climate risks also have very important spill-over effects. In many cases these measures proved to also be effective steps towards strengthening economic development. In Mali, for example, the implementation of climate-resilient agricultural could potentially bring in billions of dollars a year in additional revenue.
“When we discuss the issue of climate change affecting agriculture, one of the main aspects is the change in volatility. It is not going to suddenly stop raining in the next ten years, but the randomness of rain patterns will likely increase. Agricultural resilience to unpredictable rainfalls can be affected by using water more efficiently.”
However, Bresch warns against limiting action to production optimization and preventive action. “Farmers should also insure against volatility. In this manner they can escape the poverty trap in the case of a failed crop. They could still buy the seeds for the next season with the insurance payment.”
Thus, insurers can offer an effective buffer against poverty. Even amongst poorer households in developing countries, such measures have proven a useful complement to preventive measures.
Concrete risk management
Starting in 2004, Swiss Re pioneered weather-risk-transfer instruments in developing countries when it embarked on a project in India reaching over 350,000 smallholder farmers. In 2008, in cooperation with Oxfam, Swiss Re launched an innovative pilot project to introduce weather insurance for a staple cereal crop in the village of Adi Ha in Ethiopia. As Bresch puts it, “We chose Ethiopia because drought-related risks are a primary concern throughout the country and because 85% of the population is dependent on smallholder, rain-fed agriculture.”
Swiss Re helped set up and finance workshops to educate farmers in the realm of finance and insurance and expose them to micro-insurance and improved risk management techniques. Some 65% of the project’s enrollees were participants in Ethiopia’s Productive Safety Net Program, a federal cash-for-work programme that serves 8 million chronically food insecure households in Ethiopia.
Having conducting educational workshops, the pilot project managed to convince 20% of the village (200 households) to purchase insurance. “So we managed to educate people about the importance of insuring themselves and their investments and this was a very important first step in term of changing attitudes,” adds Bresch.
Insuring foundations
Whereas developing countries need to take a grass-roots approach to strengthening climate resilience, the path of industrialized countries is different. Apart from preventive action, risk transfer is a highly effective method of furthering climate resilience in developed nations.
“Yet instead of focusing on micro-insurance, in these cases the emphasis is on macro-insurance, given that many advanced and expensive infrastructures in these countries are at risk from various climate-related risks,” Bresch comments.
He sees a growing need for governments in the richer world to insure certain of their assets: “Infrastructures, such as key bridges and tunnels, are often not insured. Governments have to ask themselves: does it make sense to run the risk of infrastructure loss or damage, or should we insure certain assets?”
The advantage of private insurance is the efficiency and speed with which reconstruction could commence in the case of severe damage or destruction. “Once a catastrophe happens, the coverage immediately comes into play. If you have to run these risks on government budget, it is not easy to find the means right after the event to finance reconstruction, especially in these dire economic times,” Bresch argues. “Thus, insurance can play a great role in rendering reconstruction more efficient.”
The need to cooperate
Governments play a big role in shaping the work of insurance companies. “Although risk transfers are often a purely private endeavour, states are absolutely key to defining a framework within which insurance can take place. Governments set the rules and define the playing field in which private insurers operate,” Bresch comments.
The public sector also influences insurability in a more direct manner. “By imposing building standards and construction laws that prohibit building in dangerous places, governments assist insurance companies in putting a price tag on risk.”
Therefore, already in merely identifying risk there is a need for public and private actors to combine their forces. This is also the case when contemplating various ways of financing adoption measures. The existing range of assessments suggests that the vast majority of the funds required to strengthen climate resilience will have to come from the private sector. Bresch is also convinced that future developments will highlight new investment opportunities and so should help unlock innovative public-private partnerships.
And what could be a better place to address these issues than the World Economic Forum meeting in Davos? “Dealing with risks starts with a proper dialogue,” Bresch replies. “This is something I realized at last year’s Meeting. The Forum is an ideal platform to discuss approaches to mitigating the effects of climate risk because it lets participants discuss general concerns but also focus on particular issues. The Forum is key in helping us map out and prioritize the risks we face.”
Article by David Sidler
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