The ‘Insurance’ masterclass was the fifth in a series of six sessions in the Cotton 2040 series co-hosted by WTW and Forum for the Future in October 2022. The sessions cover a range of topics, tailored for brands and retailers, to encourage a shift towards a sustainable, regenerative and climate-resilient cotton sector. The focus of this masterclass was on the ways in which insurance, combined with risk management techniques, can be used to manage supply chain risk.
Climate change will impact all areas of society and the cotton industry is no exception with the top 6 production countries – India, Pakistan, Brazil, China, the US, and Turkey – significantly exposed to climate instability. The textile and apparel industry has a vested interest in better understanding the risks that are embedded in their supply chains, and how to increase resilience to climate shocks.
Managing climate risk requires long-term thinking, and innovative financing solutions, for example, through microinsurance products for small farm holders or rapid-paying parametric insurance products. Building resilience at the source will be imperative to improving long-term resilience to climate shocks. Financing approaches can also be used to incentivise sustainable farming practices, which we will discuss through reference to nature-based risk mitigation.
The driver: why insurance?
Part one of the masterclass explored why the textile and apparel industry should work to better understand the risks that are embedded in cotton supply chains, and how to increase resilience to climate shocks. Physical climate risks have direct impacts on cotton farmers, with knock-on impacts further down the supply chain.
Women in particular, are disproportionately affected by disasters and are less resilient when it comes to preparing for and recovering from them. Building resilience at every link in the supply chain, from farmers and producers to brands and retailers, is imperative to improving long-term resilience to climate shocks. Insurance is one of many tools that can be used to manage climate risk in the supply chain.
The cotton industry faces numerous potential disruptors to its supply chain. Developing and applying techniques like insurance will allow actors to quantify these risks and proactively manage them.”Dr Jamie Pollard | Senior Associate at WTW Climate and Resilience Hub
As the presenters explained insurance can be applied at different stages of the cotton supply chain: at the producer level, at the company level, and at the industry level.
Climate-related hazards, such as drought, will impact cotton producers through reduced cotton production, associated loss of income, and threatened livelihoods. It is often difficult to plan for, and fund response to, these kinds of unexpected events. While producers have experience dealing with inter-annual changes in production/income (e.g., by building up savings), exposure to extreme or repeated climate hazards may exceed the ability of producers to respond.
Insurance, and specifically parametric insurance, offers one form of “protection” against these events. Parametric insurance is based on an understanding of the hazards faced by producers. This form of insurance can be very cost-effective since it is based on publicly available datasets. It can also provide payments very quickly, providing immediate income support to producers.
A short video from Naveen Patidar, Chief Executive of the Aga Khan Rural Support Programme provided valuable insights into the different ways he works with cotton farmers in India to help them build resilience to disasters. Mr Patidar spoke about the rehabilitation of soil health, biodiversity and water productivity, amongst other things.
The cotton supply chain can be disrupted at other points as well as the producer level. A good example of this is disruption to critical infrastructure. Critical infrastructure includes nodes like ports, airports, production facilities, and also networks like roads and rail which are used to transport cotton products at their various stages of production. Mapping critical nodes in your supply chain is an essential first step, followed by an understanding of the hazards that could potentially disrupt this point in the chain. “Business interruption insurance” is one way to manage this risk. This form of insurance provides cover against lost income that may result from these unexpected events.
Both at the producer and at the company level, the aim of risk management is to increase resilience of the supply chain to disruption. At the producer level, this means encouraging environmentally and socially sustainable production practices. At the company level, it is about quantifying and protecting against unexpected events.
In both cases, cross-industry collaboration represents a valuable approach to develop a future cotton industry that is resilient to the potentially damaging impacts of climate-related hazards. The insurance industry might traditionally be thought of as a highly competitive environment. However, there are several successful examples where cross-industry collaboration has helped to extend risk management expertise to new geographies and sectors.
The Insurance Development Forum is an example such collaboration extending across the insurance industry, but also to academic institutions, NGOs, and government departments. The IDF has been successful in creating a pre-competitive environment in which insurance industry representatives can collaborate through a series of working groups focusing on different themes: risk modelling, regulation, and humanitarian applications of risk finance. These groups seek to build consensus on important topics – for example on open-access risk modelling platforms.
To wrap up the masterclass, the presenters emphasised that by using insurance as a means of managing supply chain risk, brands and retailers are taking steps to proactively manage risks that may disrupt the supply chain. This contributes to greater resilience for the benefit of all actors along the value chain, from producers to the brands and retailers themselves.
This is the session recording from Masterclass 5: Insurance held on October 25, 2022. This was the fifth of a six-part “Insights to Action” masterclass series on climate risks to the cotton and wider apparel sector.