At COP28, the insurance industry reconfirmed its commitment to addressing climate change and overcoming climate protection gaps. As we head into 2024 and insurers prepare to step up their adaptation and mitigation efforts to support a sustainable transition to net zero, here are three of WTW's key takeaways on the UN climate summit from our colleagues who attended and thoughts on what this means next for the industry’s role in managing climate risk. You can also find out what we got up to during COP28 here.
Deploying cutting-edge insurance techniques, such as pre-arranged, trigger-based financing, is key to supporting climate-vulnerable countries to build resilience to growing climate volatility.
On the first day of COP28, it was announced that an agreement had been reached to operationalize the Loss and Damage Fund, which aims to support climate-vulnerable countries in addressing residual climate and disaster risk, alongside other support for adaptation.
There is recognition that core insurance principles and techniques - such as pre-arranged, trigger-based financing - may be beneficial for the Fund in supporting climate-vulnerable countries to build resilience in the face of growing climate volatility.
COP28 also highlighted the recognition of insurance as a viable risk management tool amongst climate-vulnerable countries and other stakeholders, substantiated by widespread country support for regional risk pools. This value recognition goes beyond understanding insurance as a mere liquidity tool in emergency situations, having also the ability to inform more risk-sensitive planning, preparedness and response.
Recognition of the role that nature plays in climate adaptation and mitigation continues to gain momentum.
The need to address the climate and nature/biodiversity crises in a fully joined-up way continues to drive the increase in presence and related activities of conservation organizations at COP. In particular, the expanding portfolio of tested nature-based solutions (NBS) to address climate-related vulnerabilities is a positive sign. A number of promising announcements were made during COP28, including:
The key will be to ensure announcements and political signals translate into action to avoid, reduce, and mitigate climate-related impacts on nature as well as to increasingly pivot towards nature-positive investments. At the same time, concerted efforts are required to reduce and eliminate the nearly $7 trillion of public and private finance each year that supports activities that directly harm nature – some 30 times the amount spent on NBS annually and representing nearly 7 percent of global GDP – to fully move towards a nature-positive future.
Enhanced ambition on decarbonization now needs to be matched with financing pledges. But questions still remain about the terms on which those will be made available in emerging economies. Understanding systemic risk will be key to meeting transition challenges.
COP28 saw a flurry of announcements around climate “ambition”, such as the pledges to triple renewable energy capacity by 2030 and double energy efficiency measures by the same date. Grabbing fewer headlines, but no less important, were pledges from international maritime, aviation, freight, steel and cement industries to accelerate action to test potential low-carbon substitute energy sources, materials and infrastructure, as well as collaborating with key international regulators on policy frameworks needed to incentivize these developments.
The surge in demand for capital to finance decarbonization solutions means that the role of global private finance is becoming increasingly critical. In turn, this means that these “marginal” investors are increasingly driving the agenda on which decarbonization will be financed and how. This trend may result in a deficit of funding for opportunities that do not meet the risk/return appetite of private financial institutions.
From WTW’s experience in working in countries like Colombia, Indonesia and Ghana, we understand that net zero transitions do not only need more investment in low carbon projects, but also financing for a wide range of sector- and economy-wide changes, ranging from investment in electricity grids and charging infrastructure to new economic models that reduces its dependence on coal, oil and gas extraction for taxes and export dollars.
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.
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.
Going into 2024, public actors and the risk industry will have to further enhance their collaboration to maintain the value proposition of insurance by strengthening instrument affordability and availability through adequate pricing of climate risk and facilitating enhanced investment in resilience. Insurance has to take on a wider role in quantifying the physical risks and the transition journey to drive tangible action. We can’t insure ourselves out of the climate crisis, we have to reduce the risk as well.
As for addressing impacts in the real economy, companies will likely be looking beyond this year’s summit towards ever greater support in understanding what climate risk means for their own organisations and the actions necessary to mitigate and transfer that risk. Sophisticated tools, which allow business decision-makers to clearly articulate the cost and productivity implications arising from climate impacts and resilience interventions to upgrade towards climate-proof production and business models will become critical to protect economic health and growth.
WTW has significant climate expertise, which combined with our core risk and analytics capabilities and risk management strengths, makes us ideally qualified to work alongside our clients to address barriers, develop commercial opportunities and build climate resilience.