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In the 23rd session of the Committee of Experts for Public Administration, the working group on institutions, climate action and environment facilitated an expert panel to discuss the topic of “regulating and reforming the insurance industry to combat climate change and accelerate implementation of the 2030 Agenda”, based on the working group’s paper on the topic. Main findings of the paper and discussions are listed below.
The insurance industry plays a critical role in partnering with governments to mitigate the impact of climate risks. The public sector frequently relies on it to help assess new and emerging risks and to provide coverage to limit liability for damage. The volatility and severity of catastrophic weather events in the face of climate change have led insurers and reinsurers to reprice and reduce risk coverage, particularly in the area of property and casualty insurance, with devastating impacts for governments and individuals, especially for vulnerable groups.
The principle of "leaving no one behind” is central to the 2030 Agenda. In the context of insurance and climate risks, “leaving no one behind” involves ensuring that climate resilience efforts benefit everyone, especially those who are at the highest risk. The widening protection gap—the difference between losses covered by insurance and actual economic damage from climate events—poses a significant risk. This is especially true in less developed regions where insurance penetration remains low, risks of climate-change related losses are high, and economic capabilities to recover from disasters are limited.
Cities are often on the front line of climate impact. They are in a unique position to build resilience to climate change, and to protect public assets, urban dwellers and businesses from climate-driven hazards. Achieving these goals is, however, being hampered by challenges that subnational governments face worldwide, including difficulty in accessing adequate insurance coverage at reasonable cost, which is crucial for controlling exposure to climate-induced damages. Additional challenges include limited budgetary resources and lack of fiscal autonomy. Cities also often suffer from a lack of available risk data and difficulty in analyzing and interpreting the limited data they have. All of this makes it challenging to identify risks and manage them effectively.
There is a need for greater regulation and reform of the insurance industry, and the role it can play, while enhancing its resilience and agility to address climate change. Regulatory efforts are required to encourage sustainable practices within the industry and to better align insurance mechanisms with long-term climate resilience goals. This includes improving data access and quality and fostering critical cross-border cooperation between governments, insurance companies, financial institutions and international organizations. Available data should be examined to show where adverse climate impacts will be most severe and where the protection gap is likely to widen, possibly resulting in so called “insurance deserts”. This requires collaborative scenario modeling. It is also important to keep those without assets, particularly refugees, in mind when conducting such analysis.
The insurance industry should be engaged in advancing decarbonization and reducing emissions, rather than solely focusing on adapting insurance products for improved climate responsiveness. The industry should also harness its massive asset base to invest in sustainable solutions, which would lower risk of failure at the same time as it helps lower emissions.
Good practices exist around the world and numerous innovative insurance solutions are being rolled out which provides a basis for optimism. One example of innovative insurance models is parametric insurance, which pays out benefits based on the occurrence of predefined trigger events (such as rainfall or wind speed) rather than traditional case-by-case loss assessments. Such models can expedite payments and reduce administrative costs, making them particularly effective in rapid response scenarios. Other examples are microinsurance products designed to offer affordable coverage to low-income populations who are at high risk, and risk-pooling mechanisms. Among the examples presented during the 23rd session were a citizen safety insurance program in the Republic of Korea, which had recently been expanded to better include climate-related health risks (e.g., heat or sunstroke); a risk intelligence methodology from China, which uses novel tools enabling insurance companies to identify, quantify, manage, and foresee climate-related risks; and Pula’s innovative insurance and digital products offered to smallholder farmers in Africa, helping them to manage climate-related yield risks, improve farming practices, and increase their incomes.
Reforms cannot happen in isolation. They require cooperation and buy-in from numerous stakeholders. Multi-stakeholder partnerships should be established, involving the public sector, international organizations, the insurance industry, academia and civil society to find improved ways to address current challenges. Fostering insurance innovation is fundamental to cope with the devastating and ever-growing social, economic and environmental impacts of climate change, both in the developed and the developing world.
By Linda Bilmes, Soonae Park, Mauricio Rodas, Devon Rowe, Aminata Touré and Lan Xue, Members of the Committee of Experts on Public Administration