Clyde & Co Resilience Climate Change Risk Liability Report

Insurance issues and solutions: a new risk market


“Parametric” insurance is a good example of how the industry can harness the power of climate change science and the prevalence of data to create solutions to the risks. Rather than indemnifying a specific loss, a parametric policy allows insureds to receive pay-outs if a specified triggering event happens, such as when, for example wind-speeds, flood levels or power outages hit a certain level, measured against a pre- determined index. With huge volumes of data measurable from space and available instantly, this creates new opportunities for coverage, and minimises costs and delays for insureds, by removing the need for loss adjustments. Pay-outs could theoretically even be received before a claim is made, providing excellent customer service to those hit by weather-related catastrophes, and helping to create strong, long-lasting client relationships. Insurers as advisers: risk modelling and resilience planning Increasingly, the insurance sector is offering value-added services to clients, by developing risk modelling, resilience mapping or other data analysis capabilities in addition to their core insurance and risk transfer products. Such options are enabling insurers to develop deeper client relationships, acting in an advisory capacity as they provide tools which help increase insureds’ visibility over their business-critical vulnerabilities.

Developing novel risk transfer instruments For insurers, reducing their exposures while developing solutions for clients to help build resilience to climate change risk is a delicate balancing act. There is, of course, a danger that some kinds of risks simply become uninsurable, but the industry is working hard to come up with innovative solutions to ensure that doesn’t happen, and to find ways to extend coverage to more communities and businesses that aren’t currently insured. In this, the role of the Insurance Development Forum (IDF) is instrumental. Launched by leaders from the insurance industry with the United Nations and World Bank at the Paris climate summit, the IDF’s aim is to address climate change issues and build resilience through the use of insurance and by deploying the sector’s risk management capabilities. Its work includes developing a sustainable platform to help governments “assess and understand their risks and develop and deploy effective integrated insurance solutions tailored to their unique challenges”, and to deliver “microinsurance” solutions to vulnerable people around the world. Across the industry, novel risk transfer instruments are being developed, based on a deeper understanding of the risks and creating new ways in which insurance products can respond, for example, using the power of insurance pricing to incentivise investing in resilience measures or the development of “parametric” insurance.

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