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With a widening crisis protection gap evident around the world there is a need for a transformational expansion in the use of insurance and reinsurance mechanisms to transfer risks to the capital markets, according to a report from the High-Level Panel on Closing the Crisis Protection Gap.

The report calls for a tenfold increase in the proportion of international crisis finance that is pre-arranged by 2035.

Here, insurance and risk transfer are called out as examples of pre-arranged crisis financing that can serve to transfer financial risks away from public balance sheets, into the private and capital markets.

“In a world where risks can be modelled with ever greater precision, we should not wait to react until a crisis occurs,” explained Co-Chair of the High-Level Panel Sir Mark Lowcock, a former United Nations Under-Secretary-General for Humanitarian Affairs and Emergency Relief Coordinator. “Nor can millions of people in vulnerable communities be left dependent on underfunded, ad hoc financial appeals where more effective financing instruments exist.”

Out of the $76 billion spent on crisis finance in 2022, below 2% of this was prearranged, according to research by the Centre for Disaster Protection, while just 1.4% of that reached low-income countries.

Highlighting the scale of the gap that requires financing, the report explains that annual global economic losses from unmitigated climate change are projected to range between $7 trillion and $38 trillion by 2050.

As a result, “The High-Level Panel is calling for a transformation in the level of effort dedicated to transferring risks from public balance sheets to capital markets.”

“With human and economic costs already mounting, the world cannot afford to continue treating crises as unexpected surprises,” said Arunma Oteh, Co-Chair of the High-Level Panel and a former World Bank Vice President and Treasurer. “This is not just about the quantity but also the quality of finance which is being provided. Reactive funding is too slow, too costly, and leaves the world needlessly exposed. Prearranged finance must become the default for all predictable and modellable crises, not the exception.”

The High-Level Panel explains that it is, “unequivocal that all forms of insurance are central to this transformation.

“With projected crisis costs projected even conservatively in the trillions annually by 2050, capital markets hold relatively untapped potential for securing essential public assets like roads, hospitals, and power grids, and for transferring enormous financial risks away from public balance sheets.”

Adding that, “The High-Level Panel considers options for pre-arranged financing to be becoming more feasible and applicable due to recent technical advances in financial technology, risk transfer instruments, and risk modelling, but their use is not yet growing commensurately.”

The evolution of the insurance and reinsurance industry, including the development of insurance-linked securities (ILS) instruments such as catastrophe bonds, are seen as key for delivering the pre-arranged crisis financing that is required.

“The High-Level Panel considers options for pre-arranged financing to be becoming more feasible and applicable due to recent technical advances in financial technology, risk transfer instruments, and risk modelling, but their use is not yet growing commensurately,” the report explains.

Instruments such as catastrophe bonds, “provide governments with immediate liquidity in the wake of a disaster, enabling rapid response without destabilizing national economies.

“Much of this innovation is driven by parametric insurance, where payouts are triggered by specific data points (e.g., wind speed or rainfall levels), eliminating the delays of traditional claims processes.”

At the same time, indemnity structures are also evolving, while blended finance approaches are securing contingent financing for those exposed to crises such as climate risks.

“This growing sophistication is helping to support long-term community resilience, reduce economic and social disruptions caused by disasters, and build stronger frameworks for managing crises effectively,” the report states.

There’s a clear role for insurance-linked securities (ILS) mechanisms as a structure for transferring crisis related risks to the capital markets, while insurance and reinsurance product design and techniques can be leveraged with the help of private market participants as well.

Of course, none of this is new or groundbreaking and we’ve been calling for greater use of capital markets structures and infrastructure, alongside risk transfer technology, to close the still-widening insurance protection gap for over two decades now.

What’s needed are concerted efforts to put the onus on protection of lives, communities, livelihoods and economic activity for economic actors, with a focus on ensuring governments and corporations around the world take some greater level of responsibility for the financial exposure their respective constituents face due to crises.

The insurance, reinsurance and ILS industries are always available to help in delivering risk transfer solutions, but there needs to be buyers of protection and markets for risk.

These just don’t exist meaningfully currently, in the areas of the global economy where financial impacts of crises go uncovered. As there is no onus on those generating, deriving, or extracting economic value to account for these risks and put in place more meaningful protection of their constituents and dependents.

Transformational expansion of risk transfer to capital markets needed to finance future crises was published by: www.Artemis.bm
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COP 29, the United Nations Climate Change Conference held in Baku, Azerbaijan, has drawn to a close with agreement on certain areas and progress being made on the much-discussed Loss and Damage, as well as the Global Shield, two programs of some relevance to insurance, reinsurance and insurance-linked securities (ILS) markets.

While the COP29 meetings concluded with an agreement on financing amounting to $300 billion per-year for developing countries, concern has been raised over that figure falling far-short of the amount those nations believe is required to respond to the climate impacts they are already facing, as well as boost their readiness for and resilience to climate related exposures.

The Fund for Loss and Damage has been designed to help the countries that are most vulnerable to the adverse effects of climate change.

At COP29, agreement has been reached on fully operationalising the loss and damage fund, although there is still significant work to do on the finer details of how support and financing will be delivered.

Working with the Board of the loss and damage fund and the World Bank, the COP29 Presidency said it has advanced measure to operationalise the fund, while also appointing former Group Director General of the parametric risk pooling and parametric insurance facility, African Risk Capacity (ARC), Ibrahima Cheikh Diong as the Fund’s Executive Director.

In addition, key documents were signed at COP29, including a “Trustee Agreement” and “Secretariat Hosting Agreement” between the Fund for Loss and Damage’s Board and the World Bank, as well as a “Host Country Agreement” between the Fund’s Board and the host country, which is set to be the Republic of the Philippines.

Financial support and commitments to the loss and damage fund now exceed $730 million, with the largest contributions made during COP29 coming from Australia and Sweden.

As a result, the COP29 Presidency said that the loss and damage fund is now “ready to distribute funds in 2025 by securing contributor agreements and pledges as well as signing the host country agreement with the Philippines and hosting and trustee agreements with the World Bank.”

As well as the commitments made to the Fund, it is still expected that once operationalised there will be work undertaken to identify whether and how private capital financing instruments also have a role, in financing climate related loss and damage for the most vulnerable and developing nations of the world.

As we’ve also explained in the past, the insurance, reinsurance and insurance-linked securities (ILS) markets have a role to play here, albeit further down the line, once agreement has been reached on financing instruments, tools, structures and how to actually disburse loss and damage fund capacity, are made.

We’ve highlighted the potential for there to be an important role for responsive risk transfer, such as risk transfer and insurance delivered through structures that utilise parametric triggers and risk-sharing systems have been a topic of discussion around loss and damage since the start.

With a former ARC executive now leading the Fund, it will be interesting to see how financing structures can be hybridised, to incorporate elements of risk transfer, to finance responses to future climate disasters, as well as the pure financing for mitigation and resilience that is expected to be needed.

Around the set-up and operationalising of the fund for responding to loss and damage, insurance and related risk transfer instruments have been broadly discussed as having a role to play.

The Fund’s Board has explored examples of risk pooling and parametric insurance, while also gaining an understanding of other risk transfer instruments, including catastrophe bonds.

Premium subsidies are seen as one use-case for financing from the loss and damage fund, although there is a lot of work to do around how any instruments that require premiums to be paid to private market actors are integrated within the overall loss and damage financing deployment.

Which leads us onto the second area of progress seen at COP29 that has relevance for the insurance, reinsurance and ILS community, the setting of a strategic direction for the Global Shield against Climate Risks.

The Global Shield against Climate Risks was launched after COP27, alongside the World Bank officially launching its Global Shield Financing Facility.

These two initiatives embed disaster risk financing techniques, in particular responsive risk transfer and anticipatory financing, at the heart of global efforts to build resilience to climate change and climate driven natural disaster events.

In 2023, the Global Shield Solutions Platform (GSSP) was also launched as a multi-donor grant facility and one of the core financing vehicles of the Global Shield, designed to help vulnerable countries effectively address loss and damage exacerbated by climate change.

Now, at COP29, a strategic direction has been set for the Global Shield initiative, with at least 17 countries targeted for its initial implementation and for specific activities to be taken.

Within the scope is parametric insurance and risk transfer, with use of these instruments expected to be scaled up under the Global Shield, while insurance-linked securities (ILS) such as catastrophe bonds still feature in Global Shield related texts.

At COP29, like previous conferences, the insurance and reinsurance industry was well-represented by key players and the efforts to embed insurance at the heart of climate financing discussions continues.

Efficiency, of risk transfer, and its responsiveness, as well as the efficiency of risk capital itself, will be critical for the future of such efforts.

But so too will investment in mitigation and structural innovation, to identify equitable ways to use the funding appropriately and to harness the appetite of private capital in support of climate financing and the broader climate transition.

Also read: Risk-sharing systems must be a pillar of Loss and Damage architecture: Report.

COP29 ends with Loss and Damage fund progress, strategic direction set for Global Shield was published by: www.Artemis.bm
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During the full-year 2023, the catastrophe bond and insurance-linked securities (ILS) team at private markets focused investment manager Schroders Capital allocated over US $817 million to transactions that specifically help in reducing the insurance protection gap.

Schroders Capital has quantified this area of impact that its cat bond and ILS investment management unit has been making for a recent report on the firm’s broader sustainability focus.

While it is clear that catastrophe bonds and insurance-linked securities (ILS), as an alternative mechanism for sourcing reinsurance capital, are inherently providing protection against disaster and enabling the insurance industry to better bear the risks it underwrites, Schroders Capital has categorised transactions it specifically feels are making a difference on helping to cover more uninsured economic losses.

The investment manager sees its capital making a difference, saying that if “managed carefully, can unlock… significant improvement potential for people and planet.”

One area is in driving increased availability of insurance and reinsurance protection, specifically, “through increased climate insurance coverage in emerging markets, private equity or via ILS cat bonds.”

Schroders Capital further explained, “In 2023, only 40% of losses resulting from natural disasters globally were covered by insurance, leaving a value of US$172 billion uninsured.

“Our ILS team works to reduce this protection gap by allocating a percentage of their sustainable investment portfolios to specific transactions designed to increase insurance coverage, providing a sense of security to communities providing rapid relief when a disaster hits, and enhancing overall resilience. Developing and emerging markets are the most vulnerable to the consequences of climate change.”

In addition, Schroders Capital highlighted that between 2014 and 2023, some 85% of economic losses caused by natural disasters in Asia were not covered by insurance.

Highlighting the $125 million Charles River Re Ltd. (Series 2024-1) catastrophe bond, that was sponsored by American European Insurance Company, Schroders Capital explained why this transaction was deemed to contribute to narrowing the insurance protection gap.

“The need for such cover was exemplified with Superstorm Sandy: in such events, risks carriers often face ‘concurrent causation’ and are caught between the homeowners insurance company and the flood insurance company, one arguing that the event was caused by flood, the other one by wind. It is costly and leaves the policyholder uncovered, impacting the reputation of the insurance company and the industry more broadly.

“With this cat bond, the sponsor offered a flood endorsement on each quotation, resulting in a differentiated product with the target being value-oriented mass affluent homeowners,” the asset manager explained.

Despite certain deficiencies when it came to ESG scoring this catastrophe bond, Schroders Capital noted, “The transaction structurally and explicitly addresses the protection gap when it comes to the availability of coastal flood risk which is generally not offered by the insurance market.”

Insurance-linked securities (ILS) is an area that Schroders Capital sees as a focus in its sustainability and impact efforts.

“Our ILS sustainable strategies, including one of the world’s largest cat bond funds, are a good example: they provide a suitable reinsurance alternative for local governments or NGOs against e.g. extreme whether events, reducing insurance protection gap while at the same time delivering competitive financial returns,” the company said.

Schroders Capital has also been one of the ILS managers that have helped to drive greater ESG transparency through the catastrophe bond and broader ILS marketplace.

The investment manager was a founding member of the ILS ESG Transparency Initiative, which was formed as an insurance-linked securities (ILS) industry group focused on enhancing environmental, social and governance (ESG) transparency in the ILS market.

Schroders Capital believes that effort has made a significant contribution so far, highlighting that ESG disclosure has increased in the marketplace.

The company said that its internal data suggests “that 77% of ILS cat bond transactions have made ESG questionnaires available deals in Q4 2023,” which is a significant increase.

Georg Wunderlin, CEO, Schroders Capital, commented, “Sustainability is more critical than ever to deliver long-term competitive returns. It is simply a once in a generation business opportunity.

“Our ambition is to build a new type of private markets firm, one which is anchored in sustainability and delivers the superior performance and real-world difference our clients expect from us.”

ESG investing, sustainability and opportunities they present, remain an area of focus for the insurance-linked securities (ILS) market. Read more of our insights on this topic here.

Schroders Capital invested $817m+ in ILS that help reduce protection gap in 2023 was published by: www.Artemis.bm
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A joint report published by insurance giant Generali and the United Nations Development Programme (UNDP) highlights parametric risk transfer and insurance as a key solution that can help to close the US $1.8 trillion protection gap.

“Parametric insurance is speeding up recovery from climate-related hazards and other shock events, especially for communities in vulnerable contexts,” the pair explain.

Adding that case studies show how parametric insurance can contribute to improved financial resilience for households, businesses and global value chains.

Parametric and index-insurance products are seen as viable ways to enable governments, businesses and communities around the world to financially prepare better for what are seen as increasingly frequent and severe natural hazards, ranging from drought, extreme heat and tropical cyclones to storm surges, earthquakes and other shocks.

As parametric policies can provide pre-agreed payouts that are based on independently verified triggers, typically based on the parameters of a weather, climate or catastrophe event instead of assessed losses, it can drive faster payouts and therefore fund a faster recovery from impacts and losses.

Parametrics are seen as a “complementary risk transfer mechanism to fill gaps left by traditional indemnity-based insurance.”

Christian Kanu, CEO of Generali Global Corporate & Commercial (GC&C) commented, “This report demonstrates our commitment to addressing the protection gap by offering innovative insurance solutions that can strengthen the resilience of underinsured communities in many regions of the world. Parametric insurance can be transformative, providing cost-effective, efficient risk coverage to those previously unreachable by traditional insurance. Consequentially, this helps communities and businesses cope with natural hazards and operational interruptions. At Generali GC&C, we are proud to be the Group’s center of excellence for parametric insurance, and we will continue striving to be Lifetime Partners for our clients.”

Jan Kellett, Global and Corporate Lead on Insurance and Risk Finance at UNDP, added, “Of critical importance to this work is the role of government. Our joint UNDP-Generali report makes one thing clear – the insurance industry cannot scale parametric solutions to build financial resilience without the appropriate ecosystem. Development actors must significantly increase efforts to establish supportive regulations and policies that allow parametric insurance to contribute meaningfully to closing the financial protection gap.”

Generali’s partnership with the UNDP has “an ongoing commitment to scale financial protection by fostering wider public-private collaboration,” the pair explain.

The ultimate goal is to help “create the kind of ecosystem necessary to support the growth of parametric insurance as a tool to protect vulnerable communities.”

Previously, the two entities had announced a partnership focused on the creation of digitally enabled parametric insurance solutions.

Parametric insurance can help close US $1.8tn protection gap: Generali and UNDP was published by: www.Artemis.bm
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The global natural catastrophe protection gap widened again in 2023, rising 5.2% to US $385 billion in premium equivalent terms, but at the same time Swiss Re reports that there are signs of more protection being available, which over time should see more losses covered by insurance and reinsurance.

Swiss Re’s Institute sigma research team said that the firm’s measure for the global natural catastrophe insurance protection gap widened due to economic growth and inflation last year.

Positively though, “Global protection available increased by 10.1% yoy in 2023, greater than the 6.3% yoy rise in protection needed, resulting in improved resilience, an encouraging underlying trend in risk protection,” the reinsurance company explained.

Adding that, “These growth rates indicate that although there are more, or more expensive, assets to protect, an increasing share of them are covered by insurance.

“This is a positive trend for global resilience if it continues in the long term.”

According to Swiss Re’s analysis, global insurance resilience was stable at 58% in 2023, helped by gains in mortality resilience due to higher life insurance take-up, and in emerging markets’ health resilience as well.

Overall though, the global protection gap across insurance perils reached a new high of US $1.83 trillion in premium equivalent terms in 2023, up by 3.1% in nominal terms from a restated US $1.77 trillion for 2022.

The global protection gap has expanded by 3.6% annually in nominal terms since 2013, Swiss Re said, which roughly matches nominal GDP growth trends.

Natural catastrophe resilience, a measure of how much in economic losses was covered by insurance and reinsurance, rose to 25.7% in 2023.

But Swiss Re noted that a key driver of this was the fact 2023 saw a high proportion of severe convective storm losses, especially in the US, which is a peril and region that is relatively more insured than others.

“The past 10 years have seen improvement in global natural catastrophe insurance resilience. However, the key driver has been a strong rise in advanced markets resilience, which increased to above 38% in 2023 from around 35% in 2013. In emerging markets, resilience is typically still extremely low, and regions are almost entirely unprotected from natural catastrophe risk,” Swiss Re’s sigma team explained.

There is a significant dispersion in how resilient and protected by insurance countries are from natural catastrophe events, with some countries such as France, Denmark and the UK indexing above 80% resilient, but the United States down at 39%, and other countries as low as 5%.

Demonstrating the continued opportunity to deliver more catastrophe risk capital to support the needs of country’s with high protection gaps, the United States had a significant US $119.8 billion nat cat protection gap in 2023, while China had US $59.8 billion of the global total, Japan US $29.6 billion and the Philippines US $19.1 billion.

Swiss Re noted that global crop resilience is an area of opportunity for the insurance and reinsurance market, with a need to strengthen it further and re/insurance able to play a role.

In addition, the research suggests a growing role for innovative risk transfer arrangements such as those using parametric triggers to help in driving global crop protection higher.

While at the same time, more crop reinsurance coverage is also needed to support expansion of programs and to cover more critical global crop production.

On a more cautionary note, Swiss Re also highlighted that rising natural catastrophe and weather insurance losses are driving prices higher, which can have the effect of widening the protection gap further still.

“So far there has been little evidence that a lack of affordability of property catastrophe insurance is jeopardising resilience gains, but it is yet to be seen if this remains so in the future,” the reinsurer said.

Which speaks to the need for more efficient catastrophe risk capital to help in provision of the reinsurance needed to support primary insurers as they adapt to the nat cat reality we see today.

So, while there may be signs that more protection is available today and that is positive for the future, it appears more capital and capacity, as well as use of innovative risk transfer structures, may be required to meaningfully narrow these gaps.

Nat cat gap expands 5.2% to $385bn, but protection more available: Swiss Re was published by: www.Artemis.bm
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In a string of research reports, the World Bank Group and European Commission call on governments across Europe to utilise more in the way of disaster risk transfer and insurance to reduce the pressure from weather and natural perils on budgets, including the use of catastrophe bonds to access capital market investors for reinsurance risk capital.

The conclusion of the research is that European countries are retaining far too much of their natural catastrophe risk exposure, with the lions share of the costs continuing to be dealt with by government and European budgets, while too little is transferred to insurance, reinsurance and institutional investor markets.

The World Bank and EC reports state that the continent “needs smart investments to strengthen disaster resilience, adaptation and finance response to disaster and climate risks.”

With Europe seen as warming faster than any other continent, the pair say it is “highly vulnerable to the increasing risks associated with climate change.”

“2023 was the hottest year on record with disasters across Europe costing more than €77 billion. Projected costs of inaction in a high warming scenario could reach 7 percent of EU GDP,” they explain.

“Disasters are devasting for everyone, but can disproportionately impact Europe’s most vulnerable communities, increasing poverty and inequality,” Sameh Wahba, a Director at the World Bank said. “Without adequate systems, these events can erode development gains. There is still time for European countries to take actions that will protect people’s lives, infrastructure, and public finances from disaster and climate change impacts, though there is a narrowing window of opportunity to take action.”

Investment in resilience is a significant focus of the work, with many critical sectors of the European economy seen as exposed to multiple natural hazards.

“Investments in prevention and preparedness are urgently needed at all levels, starting with critical sectors that provide emergency response services,” Hanna Jahns, Director of the European Commission Humanitarian Aid & Civil Protection unit said. “The needs are significant and the pressure on the EU and government budgets is high. Going forward we need to invest in a smart way, prioritizing the investments with the highest resilience “dividends.””

They urge the use of risk and climate change data and analytics, to help in prioritising actions and to select the most impactful prevention, preparedness, and adaptation investments.

In Europe, climate change adaptation costs up to the 2030s are thought likely to be in the range of €15 billion to €64 billion annually, underscoring the significant investment required.

“There is a significant gap in adaptation financing in Europe,” explained Elina Bardram, Director, Directorate-General for Climate Action. “Closing it requires a major scale-up of public, private, and blended finance. Investment planning and financial strategies are not yet adequately informed by an understanding of the costs of climate change adaptation at national and EU levels. This needs to change.”

Where the reports become most relevant for our readers is around financial resilience.

The World Bank and European Commission reports state that, “too much of the disaster and climate risk is managed through budgetary instruments at the EU level and by EU Member States, with gaps concerning pre-arranged funds and the use of risk transfer mechanisms, such as risk insurance. ”

In seeking to maximise societal benefits from investments made, the use of risk transfer alongside this to cushion the costs of climate and natural disasters are seen as key.

Public finances are in some cases being stretched by multiple natural disasters each year, so upfront risk financing and transfer can help to lessen the burden on the budgets of European countries and their populations.

The reports identify funding gaps for major disasters and note that should countries face multiple major events in a year, the impact could drain funding at the EU level (as well as countries specifically).

As a result, the reports state that, “Countries in Europe need to enhance their financial resilience through better data utilization and innovative financial instruments, including risk transfer to the private sector.”

Here, catastrophe bonds are highlighted throughout the reports, as tools that can aid in preparing for financial impacts and enhancing the ability for Europe to fund the response to disasters.

The capital market is seen as one source of risk transfer that Europe should consider.

“At present there are no risk transfer products at the EU level or in the case study countries, and consideration should be given to their incorporation in future DRF strategies,” the report explains.

Citing the use of catastrophe bonds by US utilities for wildfire risk, the reports suggest a potential role in Europe.

“CAT bonds as a risk transfer mechanism are less common in the EU and should be further explored once risk models are available to see if this could provide a cost-effective option to manage the risk of wildfires,” one of the reports says.

Both index and parametric insurance techniques are also suggested as applicable to the disaster funding gaps faced in Europe, as these can help to make for responsive risk transfer tools, that can help in financing recovery quickly after disasters occur.

The European Union Solidarity Fund (EUSF) is seen as a financial structure already in existence that could be supported better by risk transfer.

One of the reports states, “The existing EU level instruments take time to disburse, which may delay emergency response. Due consideration should be given to the introduction of a EU level instrument to provide a top-up to national governments to help them finance emergency response. Such an instrument could be embedded within the European Union Solidarity Fund (EUSF).”

Disaster risk financing and transfer tools and techniques can help European countries and budgets reduce their liabilities after disaster strikes, including through responsive techniques and by tapping the capital markets.

The report continues, “A parametric risk transfer instrument — e.g., a catastrophe bond — could be introduced to secure private capital when needed. This approach would recognize the significant opportunity cost of holding reserves at the EU level and instead structure an additional instrument to release finance into the EUSF when severe events occur.”

The report uses the example set by Mexico, in its use of private insurance, reinsurance and capital markets through its catastrophe bonds, as setting an example that Europe can draw from.

The World Bank sees Mexico as “setting the standard” for disaster risk management through its use of financial instruments such as cat bonds.

The reports go into much more detail around how Europe can put in place safety nets, both for its budgets and for its populations, while making the best use of modern financing techniques, risk transfer tools and the appetites of private and capital markets.

It’s encouraging to see the discussion on Europe continuing, as in the last year we’ve also seen the European Central Bank (ECB) alongside a macro-prudential oversight body it operates, the European Systemic Risk Board (ESRB), calling for greater use of catastrophe bonds to address the insurance protection gap and mitigate catastrophe risks from climate change in the European Union.

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An innovative parametric insurance product that provides protection to fund repairs following storm damage to coral reefs in Hawaii has been renewed and its coverage expanded, while global reinsurance firm Munich Re is again backing the cover, which is arranged by WTW.

Back in November 2022, WTW alongside The Nature Conservancy launched the parametric coral reef insurance concept in the United States for the first time with a policy focused on Hawaii. Munich Re underwrote the risk for that first Hawaiian coral reef parametric insurance arrangement.

The same parametric risk transfer product concept had already been utilised in Mexico and was then expanded to also cover the Mesoamerican Reef system.

As we reported earlier this month, broker WTW has now taken the coral reef insurance concept across the globe to cover a South pacific coral reef in the Fiji archipelago as well.

Now, the Hawaii instance of the product has been renewed, with expanded coverage and higher payouts available, so that it can make more impact on the reef and the communities that rely on it.

The new parametric coral reef insurance policy expands coverage around the main Hawaiian islands and increases payouts after qualifying storms, WTW explained.

The new Hawaiian policy adds 314,976 square miles to the coverage area so that it can capture more storm events, with a maximum payout of $2 million total over the year-long policy period and $1 million possible per storm.

At the same time, the minimum payout after the parametric trigger is activated has doubled to $200,000, enabling a more meaningful post-storm response.

Payouts can be triggered when tropical storm winds of 50 knots or greater occur in the core of the coverage area.

Once again, a Munich Re insurance entity was selected as the coverage provider from seven competitive bids.

WTW said that more companies bid on this year’s policy, which it noted shows “increasing interest among insurers in nature-based solutions to protect against climate impacts.”

“Parametric insurance is increasingly demonstrating value in addressing disaster risk for natural assets, in this case providing Hawai’i with a tangible solution to quickly finance post- storm restoration activities that help reefs better recover and maintain resilience in the face of increasing climate impacts,” explained Simon Young, Senior Director in WTW’s Disaster Risk Finance and Parametrics team. “Increasing recognition of this value by conservation organisations, government bodies and other stakeholders on the demand side and by insurers on the supply side is mainstreaming parametric protections, driving accessibility and sustainability.”

“We are building something really transformative for communities and ecosystems as we respond to increasing storm activity associated with the climate crisis,” added Ulalia Woodside Lee, Executive Director, The Nature Conservancy, Hawai‘i and Palmyra. “The first policy provided momentum to develop response plans and partnerships. With these now in place and an increased minimum payout, we will be able to start damage assessments and reef repairs after a storm as soon as it’s safe to get in the water. This is important because corals must be reattached within several weeks after breaking or they will likely die.”

René Mück, Munich Re’s Global Head of Natural Catastrophe Parametrics, also said ”Using parametric risk transfer as a means to contribute to TNC’s conservation objectives in Hawaii aligns exactly with the objectives of Munich Re’s parametric business unit. We are proud to support TNC in Hawaii and appreciate the work with WTW on such initiatives.”

The parametric coral reef insurance product has already demonstrated its utility, when Hurricane Lisa’s landfall in Belize on November 2nd 2022 triggered the Mesoamerican Reef system parametric insurance product.

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An innovative parametric insurance program has been taken across the globe to cover a South pacific coral reef in the Fiji archipelago, with broker WTW saying it will provide up to US $450,000 of cover for reef restoration and community assistance if cyclones hit.

The payout would go to Fiji’s island communities, if a cyclone hits the coral reef system of the South Pacific Ocean’s volcano-formed Lau Group of islands.

The Indigenous people of Lau depend on the reef ecosystem as a source of food and income, so protecting it using a parametric risk transfer insurance product that will pay out after a cyclone strikes which could damage the reef, can enable the community to recover faster and put funds into reef conservation, restoration and resilience.

Development insurer and risk pool the Pacific Catastrophe Risk Insurance Company (PCRIC) is the insurer for this South Pacific parametric reef insurance, winning the bid after what WTW called “a competitive placement process.”

WTW worked with local correspondent broker Insurance Holdings (Pacific) Pte Ltd. and Fiji’s Vatuvara Foundation (VVF), which is the policyholder of the parametric insurance programme.

As well as helping to protect and repair the reef in the event of a cyclone, the parametric insurance payouts can be used to support the community with assistance activities to help address food and water security concerns caused by storm damage.

The initial coverage is for Vatuvara Island, a protected natural reserve; Yacata, where the local community resides; and Kaibu, the Vatuvara Private Islands Resort, while further sites in the Lau Seascape may be covered in future years.

Broker WTW has successfully renewed a similar parametric coral reef insurance product for the Mesoamerican coral reef a number of times now, expanding it with each renewal.

Sarah Conway, Director and Ecosystem Resilience Lead, WTW, commented “We are grateful to BHP for supporting the design and implementation of the first coral reef insurance programme in Fiji. Building on lessons learned from our involvement with similar initiatives in other countries, this programme provides an exciting opportunity to innovate beyond rapid reef response to also include community assistance, enhancing the resilience of the ecosystem and those who depend on it.”

PCRIC CEO, Aholotu Palu, stated, “PCRIC is very pleased to demonstrate its commitment to serve non-sovereign entities with innovative parametric insurance products, in line with PCRIC’s mission to help the island communities of the Pacific to better prepare, structure and manage finances to foster disaster resilience and ensure rapid access to funds; the work of the Vatuvara Foundation, both in reef conservation and in local community empowerment, is recognised by the Government of Fiji as being in the national interest and consistent with development priorities, particularly the Blue Pacific Strategy, as well as commitments to climate change adaptation and disaster risk management.”

Katy Miller, Director, Vatuvara Foundation, added, “We are thankful that the innovative parametric policy will allow for the prompt access to funds following a destructive cyclone event to identify reef damage and assist reef recovery with a community-led team in Northern Lau. Increased frequency and severity of extreme weather events is expected in the area, and protecting natural ecosystems in the Lau Group is crucial to build long-term community resilience to anthropogenic threats including climate change.”

Ashley Preston, Head of Climate Resilience, BHP, also said, “BHP is funding an innovative parametric insurance product, which aims to support the conservation of coral reefs and surrounding local communities in Fiji’s northern Lau Group, and build the knowledge base for how similar financial products could be used to improve climate resilience. We are pleased to work with WTW and Vatuvara Foundation on this project, which supports BHP’s commitments to action on climate, conservation and empowering communities.”

Parametric insurance to cover South Pacific coral reef in Fiji archipelago was published by: www.Artemis.bm
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A few signs emerged at the recent January 1st 2024 reinsurance renewals that bode well for protection buyers as we move through this year and into the next, as broker Aon highlighted that appetite is returning for some of the more challenged products and areas of the tower.

Over the last couple of years appetite to underwrite aggregate reinsurance or retrocession and lower layers of towers, had dried up in many cases, as reinsurers shied away from the business that had driven so many losses to them in the years prior.

But certain factors are beginning to drive more appetite to support insurer and protection buyer demand for cover, in aggregate form or lower down.

Aon’s Reinsurance Solutions team recently highlighted that one of the factors driving more appetite for these risks is the fact many reinsurers remain keen to grow, but the growth opportunity higher-up may now be less available, or facing more competition and a slight softening of prices.

Joe Monaghan, Global Growth Leader at Aon’s Reinsurance Solutions said that, at the January renewals, “Some reinsurers were also more flexible in more challenging areas, such as peril-specific lower layers and aggregate covers, particularly where insurers were able to offer potentially profitable participations elsewhere.”

By supporting cedents needs, reinsurers are able to secure better shares higher-up, is a common feature of a reinsurance market that is now stabilising and where capital has been less of a challenge to secure.

As well as leverage, using the aggregate and lower layers as a way to elicit more share of the most attractive layers, there are also reinsurers that believe the market has reset considerably, with much higher pricing and updated terms making some of these previously more challenges areas of the catastrophe reinsurance tower appealing again.

“Following the resetting of the property market and much improved results in 2023, many reinsurers are now keen to grow. As a result, some reinsurers were more accommodating at the renewal when it came to meeting the needs of individual insurers in more challenging areas, such peril specific lower layers and aggregate covers, as well as reinstating certain terms and conditions,” Aon’s Reinsurance Solutions team explained in more detail.

They added, “The increases in deductible levels a year ago have helped mitigate reinsurer losses, and reinforced necessary changes in the insurance value chain that should ultimately result in a much healthier and more sustainable market.

“In the meantime, reinsurers that want to grow in the segment should look to support insurers with flexibility in lower layers, aggregate covers and structured solutions.”

At the 1/1 2024 renewals most reinsurers went into negotiations with a desire to grow in property catastrophe reinsurance, Aon explained.

This gave insurers the ability to use their upper-layers and specialty portfolios as ways to attract reinsurer support for lower catastrophe layers and frequency coverage.

Aon said that the reinsurers that were most supportive at renewals in 2023, have benefited most from these market dynamics in 2024.

Aggregate covers are now “back on the table” Aon believes, with the reinsurance broker saying that more reinsurers are willing to consider them, at the right price and terms, in 2024.

Aon has called before for the market to innovate to narrow the reinsurance protection gaps that had emerged, when it comes to secondary perils and frequency exposures.

As we also reported, model confidence had been a driver of lower certainty in the ability to predict secondary perils and we asked whether the pendulum may have swung too far on catastrophe risk retention as well.

Aon’s Joe Monaghan again highlighted the broker’s concerns over whether the reinsurance market has retrenched too far, away from frequency and secondary perils.

He said, “As capacity continues to build, there will be opportunities for insurers to buy additional limit at the top of programs, and for reinsurers to work with brokers and clients to share the burden of secondary perils more equitably.”

Monaghan believes the industry must work to restore more of a risk-sharing balance, “The increases in retentions a year ago have mitigated reinsurer losses and contributed to their positive returns in 2023. But this has come at the expense of increased retained losses for insurers many of whom are struggling to achieve the improvements in primary pricing and underwriting which are often slowed by regulatory approval process quickly enough given their limited sources of capital to sustain increased catastrophes.

“We must work collectively to create the solutions necessary to sustain re/insurance symbiosis.”

Through greater participation in appropriately structured and designed aggregate covers, as well as lower-layers and finding ways to support secondary peril coverage, while also working to enhance risk models for these exposures, the reinsurance market can rebuild a way back into the critical areas of towers.

But, it does need to happen in an equitable way, where the rates paid by cedents are risk commensurate and the proportion of risk retained to ceded does not shift dramatically back to how it was around five to ten years ago, at the height (low) of the last soft market.

Read all of our reinsurance renewal news coverage.

Aggregate reinsurance back on the table, lower layers see more support: Aon was published by: www.Artemis.bm
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A new reinsurance fund has been launched to support delivery of innovative insurance products to protect smallholder farmers in Africa, with One Acre Fund Re expected to become a source of capacity to back what will likely be largely parametric risk transfer instruments.

The initiative has been launched by One Acre Fund, a social enterprise supporting smallholder farmers across Sub-Saharan Africa, with a focus on enhancing food security and resilience to climate risks, with a goal of supporting the development of prosperous communities.

The reinsurance fund, named One Acre Fund Re, has been designed with the support and partnership of the International Finance Corporation (IFC), U.S. International Development Finance Corporation (DFC) and parametric risk transfer specialist and risk pooling entity the African Risk Capacity (ARC).

One Acre Fund Re will provide a critical financial safety net for 1 million smallholder farmers in 2024 and that figure is expected to scale steadily in future years.

The idea is to improve the insurance offering for farmers in the face of devastating impacts on crop yields.

The goal is to cover at least 4 million farmers by 2030, with a range of insurance products, backed by reinsurance from One Acre Fund Re.

One Acre Fund Re will use One Acre Fund’s on the ground presence and rigorous data gathering, to allow for the design and implementation of new insurance products with direct payouts, in a way that more effectively responds to farmer experiences.

Right now, agricultural insurance is only available in 4 out of 54 countries across Africa, and currently, only 3% of farmers have insurance coverage for their farms.

So there is an enormous opportunity to bring together capital sources and create a new risk pool specifically focused on delivering smallholder farmer specific parametric insurance and crop covers.

It’s not immediately clear how this will be structured. But we assume that African Risk Capacity (ARC) will lend its expertise in risk pooling and the design of parametric insurance, to assist in the creation and roll-out of One Acre Fund Re.

On the reinsurance capital side, it could be interesting to see if One Acre Fund might find the new reinsurance fund a way it could crowd in private capital to support the rolling out of more insurance product in years to come.

There is a significant opportunity to leverage risk pooling and risk diversification techniques, alongside the learnings of the ILS market in utilising the appetite for insurance-linked returns, to generate efficiencies in the delivery of smallholder insurance products.

Even if the reinsurance fund is donor supported, there are still significant efficiencies to be had by better structuring a system for delivery of micro-insurance in both indemnity and parametric forms.

Annie Wakanyi, Director of Global Government Partnerships, at One Acre Fund, commented, “Smallholder farmers make up one of the most climate-vulnerable populations on the planet, facing increased frequency of climate events with devastating consequences on yields and household stability. This insurance offer has the potential to provide smallholder families with a strong safety net when these events occur; yet current market failures mean that most insurance products are too expensive or too limited in coverage to support meaningful resilience. But it doesn’t have to be this way.

“Agricultural insurance can support lasting impact and resilience for small-scale farmers. With economic growth from agriculture 11 times more effective at reducing extreme poverty than any other sector in sub-Saharan Africa, One Acre Fund Re aims to support smallholder families to achieve long-term poverty reduction and resilience.”

The Netherlands Ministry of Foreign Affairs is a long-term strategic partner of One Acre Fund, working together since 2016 and it recently extended its support up till 2027.

Marchel Gerrmann, Ambassador for Business and Development Cooperation of the Netherlands, also said, “When climate shocks hit, like the devastating cyclone we saw earlier this year in Malawi, farmers have no safety nets to fall back on. They are forced to pull children from schools they can no longer pay for, take out high-interest loans, sell assets, and endure protracted hunger.

“One Acre Fund Re aims to transform the way financial entities support smallholders and all profits will be used to increase impact and decrease climate risk.”

Johannes Borchert, Global Head of Risk & Resilience at One Acre Fund, added, “We are planning to roll out One Acre Fund Re in 2024 to five out of nine country programs. From year one, it will benefit over 1m farmers across Africa. As this facility grows, we will extend our services to farmers in all our areas of operation and beyond. We believe the data, experience and underwriting capacity we bring should be extended to offer climate safety nets to as many smallholder farmers as possible.”

One Acre Fund Re reinsurance fund launched at COP28 with ARC, IFC, DFC backing was published by: www.Artemis.bm
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