ETH Risk Center Workshop

ETH Risk Center Workshop:

SRSG

Natural Catastrophe Prevention and

Insurance: Market and Policy Issues

Zürich, 17 January 2019

KEYNOTE SPEECH

    Excellencies, ladies and gentlemen, friends and partners, good afternoon. It is a pleasure to be here today to reflect with you about how the insurance sector can play a better role in reducing the risks of disasters and building resilience.

    The discussion is very timely. We only have to look at the news these days to see why. Reinsurers (Swiss Re and Munich Re) reported yet another year of record economic losses caused by disasters. The overall economic impact was US$ 160bn, US$ 140 adjusted for inflation, of which US$ 80bn was insured.

    And these numbers do not even reflect the full picture. A recent study we undertook with CRED – the Centre for Research on the Epidemiology of Disasters at the University of Louvain - showed that there is no economic loss data for 63 percent of the disasters recorded over the last 20 years. Furthermore, the recorded data do not account for the full spectrum of small and slow onset disasters, indirect economic losses and only a fraction of man-made disasters.

    In today’s increasingly interconnected and complex risk landscape, this is no longer sufficient. Indeed, current and predicted losses may soon start to threaten our economic, financial, social and political systems. OECD estimates global infrastructure investment needs of USD 6.3 trillion per year over the period 2016-30 to support growth and development, without considering further climate action (relative to mid-2016, OECD 2017).

    If this investment is not risk informed, it presents a missed opportunity on an unprecedented scale with potential grave consequences for economies and communities worldwide. Yet, the UNISDR Making Cities Resilient Report 2018 showed that incentives for different segments of business and society to support resilience building and the use of insurance as a risk transfer mechanism were notably low in almost all of the 200 cities assessed.

    But why has more not already been done, when climate and other disasters are in the news day by day, in addition to the clarion call by scientists in the recent IPCC 1.5-degree report?

    When new research confirms that prevention saves anything between 7 and 105 USD per 1 US$ invested; (National Institute for Building Sciences, 2018 Report ‘Hazard mitigation saves’; Analysis by FM Global, 2018; ADB 2017) and that infrastructure investment needs of USD 6.3 trillion mentioned above are estimated to be just a fraction higher if climate resiliency and decarbonization in a 2°C climate change scenario are to be considered; (USD 6.9 trillion, or about 10%; OECD 2017) then why is the insurance industry, in particular, cat modelers, seemingly not more concerned about the situation?

    To a large extent this may come down to our own nature of short term thinking and tendency to ignore risks until they become a reality. The only way to reverse this is for science, governments and the private sector to do a better job of capturing the economic-loss data from disasters and communicating the resilience dividends from both a business profit perspective as well as societal wellbeing and development. By measuring risk, communities, cities, local and national governments can better identify, plan and manage risk to build resilience to shocks and stresses.

    Because only that which is measured can be managed.

    The good news is, there is a global blueprint for resilience: The Sendai Framework for Disaster Risk Reduction, adopted by all UN Member States in 2015 as one of the 2030 agenda agreements, outlines a clear path for action and calls for better understanding of risks and increased investment in disaster risk reduction by all. Next to the reduction of mortality and affected people, the Sendai Framework prioritizes reducing economic losses (Target C) and increasing the resilience of critical infrastructure (Target D).

    In response, countries across the globe are actively engaging in making sure they have national and local strategies for disaster risk reduction by 2020. UNISDR and partners are actively promoting the interlinkages between a good understanding of risk with more sustainable development and the related financing strategies required to sustain long term societal and environmental gains.

    But – again – much more needs to be done, including on the related regulatory frameworks.

    So, what does this mean for the insurance industry? At its heart, it means better business! We at UNISDR traditionally work very closely with this sector, which for centuries has been providing protection for people and property from disasters. But insurance should not be just a claim paid when shocks occur. Insurance must be embedded in larger risk management systems and must promote - or even enforce - resilience thinking and action. Importantly, this must be done through both the premiums and asset management side of the business.

    Understanding and engaging the communities at risk, delivering on specific needs to increase resilience and reducing disaster risks to co-create services is the paradigm shift needed to move beyond merely providing insurance products to creating a platform for risk reduction and sustainable insurance protection.

    Smart insurers are also very aware of the business benefits of better understanding the nature of risk, including ongoing and emerging risk drivers. Smart insurers are actively investing in activities which aim to trial new approaches at community level in developing countries so that – equipped with a more accurate understanding of how to plan for and address risk- premiums can be potentially lowered in order to increase both market size and existing market penetration.

    Alongside this, the insurance industry must also take a lead in shifting the thinking of the broader finance and business community towards ground-truthed risk-informed business and investment decisions. Here, the industry has already shown leadership, such as in the creation of the G20 InsuResilience initiative, the Insurance Development Forum and the Bloomberg Task Force on the Financial Disclosure of Climate Risks.

    Yet, in the overall discussions on sustainable financing, a glaring issue remains to pick just one example post-Katowice: climate change mitigation will not save us, if not combined with increased efforts to build resilience and adapt to the rapidly changing risk landscape. This includes applying a multi-hazard approach as well as looking at the physical risks as much as transition risks -that is i.e. the risks from turning to a carbon-neutral economy- and litigation risks from disasters.

    This will require much greater collaboration from the insurance industry, the science community, but also governments, regulators, the private sector including large investors, and last but not least, society at large as citizens, customers, employees, voters and investors.

    I look forward to the discussions over the next two days on concrete examples and ideas on what we can do together to make the shift to a more resilient world for all.

Thank you.