Climate change risk and liability report 2021
Clyde & Co, led by Partner Nigel Brook has contributed to a major new report from the University of Cambridge Institute for Sustainability Leadership (CISL), calling for urgent, paradigm policy shifts around insurance, as a vital asset in the fight to tackle climate change
The financial system at large, and the insurance sector in particular, have a vital role to play – and a major vested interest– in urgent efforts to implement an orderly and fair transition to net zero carbon emissions and create resilience to climate risk.
With this in mind, Clyde & Co is delighted to have contributed to a major new report from the University of Cambridge Institute for Sustainability Leadership (CISL) entitled “Risk sharing in the Climate Emergency: Regulation for a financial resilient, net-zero, just transition”.
Launched to coincide with the start of the COP26 international climate summit in Glasgow, the paper is a hard-hitting call to arms to use targeted insurance mechanisms to tackle this systemic threat, by better quantifying and managing risk, more closely integrating climate policy and financial regulation, and expanding risk-sharing systems. Importantly, it delivers a practical roadmap for action, outlining a suite of recommendations to put the insurance sector right at the heart of the solution, as both underwriters and asset owners, as part of the wider financial ecosystem.
With a foreword by former Bank of England Governor Mark Carney, the paper has been guided by a heavyweight Advisory Board that includes representatives from the OECD, the UN, the International Association of Insurance Supervisors (IAIS) and the Bank of International Settlements (BIS).
Nigel Brook, Clyde & Co Partner and co-author of the report comments, “This paper pushes boundaries. It puts insurance into the broader context of risk-sharing, looking at how, the right response from policy makers could do more to achieve a timely, global transition to net zero, in a way that is fair to all and embeds resilience. It also creates a framework that goes beyond the financial, putting the issues into cultural, economic and social perspective, and opening the way for meaningful actions to be taken.”
Nigel Brook - Partner, Clyde & Co
A must-read for policy-makers, regulators, insurers and more
The paper is aimed at policy-makers, financial authorities and markets, insurance regulators, climate authorities, international bodies and NGOs as well as insurance providers, who collectively can effect rapid, sustainable behavioural change.
Its central argument is that a more robust, innovative, and joined-up policy and regulatory response is required and that radical reforms are needed more closely to align climate and financial policies and how they should be implemented. It therefore proposes a number of insurance-informed policies to quantify risk and enlarge risk-sharing pools across public and private financial systems, from microfinance to global financial institutions.
The first three chapters provide the basis on which the costs, risks and rewards of the climate emergency can be funded and shared in a viable way, laying the foundations for the concrete actions proposed in chapters four and five.
Part 1: Examines the range of current risk-sharing systems (i.e. systems that protect populations and assets against defined risks), such as tax-based protections, informal community solutions and the insurance sector. It outlines the size of this global domain and identifies the actors who will need to work together to undertake the actions required for change.
Part 2: Identifies the distinctive contributions that insurance risk-sharing and management can make to tackling the systemic climate crisis and to climate policy. In particular, it introduces the new PCL framework, an emerging system to guide decision-making, based on questions around: what should be protected, what should be insured, and how risk should be shared.
Part 3: Provides an overview of the architecture of global insurance regulation and its interaction with wider financial standards setters. It looks at the regulatory mandates and processes that can support the adoption and implementation of the report’s recommendations.
Part 4: Proposes insurance reforms, in terms of further development of the insurance sector’s climate risk quantification practices, and calls for a paradigm shift to disseminate insurance-based quantification techniques and capabilities across public and private financial systems.
Part 5: Focuses on how regulators can support improved climate resilience through more extensive risk sharing, as a second paradigm shift that will enable the global transformation needed to achieve net zero while safeguarding lives and livelihoods.
Ramping up radical action
The report identifies 20 discrete but complementary concrete actions and distils these into six specific recommendations that require policy signals from COP26 leaders as a matter of priority, for immediate application. These are:
For policy-makers to reinforce financial inclusion and sustainable development priorities within insurance regulators’ mandates to meet climate objectives.
This involves: increasing insurance regulators’ capacity and resources, reinforcing the IAIS’s strategic plan priorities on climate risk, financial inclusion and sustainable economic development, and confirming regulatory and supervisory mandates to close protection gaps.
For public and private financial authorities to significantly expand risk-sharing pools across the financial system to manage global-to-local and inter-generational climate risks.
This involves: considering how climate risk insurance can be used to manage climate risks across public and private financial systems; and deepening and diversifying sustainable risk pools, applying climate risk management and governance disciplines.
For financial markets to accelerate consistent physical climate risk quantification through insurance experience, methods, metrics and resources.
This involves: supporting the wider financial community to evaluate and manage exposures to physical climate risks, in line with the Financial Stability Board’s (FSB) Climate Roadmap, the COP26 Private Finance Agenda and the regulators’ Climate Training Alliance.
For insurance regulators and climate authorities to explore ways for members of the United Nations Framework Convention on Climate Change (UNFCCC) and the IAIS to cooperate on shared climate risk objectives.
This involves: increased dialogue and data sharing, for example including IAIS data presentations at COP meetings.
For the insurance sector to become pioneers of climate-related disclosures, prudential supervision and climate stewardship.
The involves: the insurance sector developing comprehensive and consistent climate risk assessment capabilities in conjunction with the Sustainable Insurance Forum of regulators, to enable implementation, supervision and management of the requirements of the Taskforce on Climate-related Financial Disclosures (TCFD).
For academia and NGOs (non-governmental organisations) to research the role of the insurance system in managing the social risks of the net zero transition.
This involves: working alongside regulators and industry partners to research how social protection and insurance systems can support a just transition to climate resilience and net zero carbon emissions for exposed and vulnerable communities.
“The transition to a net zero economy will require an unparalleled level of investment in new technology and infrastructure that will require complex financial and risk transfer solutions developed and delivered at unprecedented speed,” says Brook. “Beyond the products they provide, insurers have the knowledge, expertise and skills to play an invaluable, not to mention unique role in building resilience and addressing the risks associated with the climate emergency.
I’m delighted to have been involved in putting together this important publication that tackles these difficult challenges head on.”
Nigel Brook - Partner, Clyde & Co
It’s clear that this report will provide much food for thought at the COP26 summit and beyond. To find out more click below to download the “Risk sharing in the Climate Emergency: Regulation for a resilient, net-zero, just transition” report.
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Head of Insurance, Australia