Month: November 2023

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In a perhaps surprising turn of events, the opening hours of the COP28 climate talks today have seen a landmark agreement to operationalise and provide initial funding for the much-discussed loss and damage fund, that is designed to help the countries that are most vulnerable to the adverse effects of climate change.

cop28-logoThe fund had been agreed on back at COP27 and much-discussed ever since, with agreements as to who should fund it, how that funding should be used, what kind of financing products should disburse funding and how should funding be triggered, all still seeming to be up in the air, to a degree at least as COP28 began.

Which is why we say ‘perhaps surprising’, as most had expected discussion and negotiation over the loss and damage fund to run on for at least a few days, if not the majority of the COP28 event.

There have always been discussions about whether some of the funding could be used to pay risk transfer premiums, to help the countries most vulnerable to the effects of climate change lock-in long-term insurance-like risk financing.

Agreements as to how the loss and damage fund will be put to work remain missing or unclear so far, but the agreement to operationalise it today and the initial funding announced is a good step towards this actually becoming reality, despite all the disagreement that has gone before.

The UAE, the host of this years COP28 climate talks, said today that it will commit $100 million to the loss and damage Fund, a move it hops will pave the way for other nations to make pledges.

COP28 President Dr. Sultan Al Jaber said, “What was promised in Sharm El Sheikh, has already be delivered in Dubai. The speed at which the world came together, to get this Fund operationalized within one year since Parties agreed to it in Sharm El Sheikh is unprecedented.”

“This Fund will support billions of people, lives and livelihoods that are particularly vulnerable to the effects of climate change,” added Dr Sultan, “I want to thank my team for all their hard work to make this possible on day one of COP28. It proves, the world can unite, can act, and can deliver.”

Other significant commitments to the loss and damage fund included Germany, which committed $100 million, the UK, which committed £40 million for the Fund and £20 million for other arrangements, Japan, which contributed $10 million and the U.S., which committed $17.5 million.

The agreement and initial funding for the loss and damage fund was welcomed by the most vulnerable nations, but there is a clear recognition that the details will matter, as well as the follow-on funding, with over $400 billion a year estimated by some studies to be the cost of loss and damage each year.

Other countries are going to be expected to commit, while there will also be efforts to see how private capital can be crowded in to support the loss and damage financing needs of the world’s climate vulnerable nations.

The insurance, reinsurance and insurance-linked securities (ILS) industry do have a role here, albeit likely further down the line, once agreement has been reached on financing tools, structures and how to disburse capital, are made.

Risk transfer and insurance products remain at the heart of discussions and it’s clear that, as private capital gets considered as an elastic source of funding, the catastrophe bond and insurance-linked securities (ILS) could be up for discussion as potential options.

So too should responsive risk transfer options, using parametric and index triggers that could provide rapid payouts for use in disaster relief after climate-related events.

It’s a positive start to COP28, with agreement on an issue that has been discussed now for years.

Although, in reality, the perhaps lengthy discussions can now begin on the details that really matter.

Including, implementation, how funding will be gathered, used, and disbursed, as well as whether any of it can fund premiums to pay for upfront, longer-term risk transfer instruments, to support the most climate-vulnerable nations and their populations.

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

Loss and damage fund agreed at first day of COP28 was published by:
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Having spent time in Bermuda and attended the recent PwC Insurance Summit on the island, the equity analyst team at BMO Capital Markets has concluded that the insurance and reinsurance industry is suffering a lack of confidence in its risk models, which they say has been a key driver in capital flight and retrenching higher.

light-question-ideaSpecifically on natural catastrophe risks, the BMO analysts team say that, “The industry is suffering from a lack of confidence in its models.”

Continuing to explain that, “Even if its models are more correct going forward, that mental dynamic will simply take time to fix.”

Weather is changing faster that what the climate models had suggested, the analysts state, which has been a driver of capital becoming “skittish” in reinsurance.

Capital becoming “skittish” means some has exited, but the analysts note that it has also led to capital asking for “more price and less risk”.

Capital will recover though, particularly, “If reinsurance returns are excellent this year and into the future, more capital should inevitably flow back into the marketplace.”

While demand is rising for capital to help out on bringing volatility back under control for corporates, insurers and others in the risk transfer chain.

Brokers are beginning to voice concerns and the BMO Capital Markets analysts said that, “Aon believes the pendulum has swung too far in terms of corporates being forced to take on higher deductibles, and it believes the market’s insurance policy terms & conditions will eventually ease.”

There is evidence that the utility of risk capital has reduced somewhat, for certain buyers of risk transfer protection, as they retain more of the ground-up losses themselves and find capital buffering from insurance or reinsurance has been reduced by the higher attachments and more restrictive terms.

Of course, capital has naturally retrenched higher and away from frequency risk, in response to the losses suffered and the fact models were seen to have been less effective on that specific period of catastrophe and weather loss activity.

The question then is whether climate is seen as a driver and how that evolves over time as well, as another factor impacting confidence to deploy capital to layers where loss activity can be more volatile.

To know all the answers needed, we really need to see a next phase of evolution in the models that are available, to deliver the confidence that might now be required in this volatile risk landscape.

Has the pendulum swung too far on catastrophe risk retention?

As we’ve explained recently, the increasing retention of catastrophe losses is becoming more of a challenge, as evidenced by some major insurance groups.

Aon had previously highlighted this issue as a critical area for market focus, where innovative efforts could help to fill some of the reinsurance protection gaps that have appeared.

While, a recent survey from reinsurance broker Gallagher Re showed that reinsurer appetite for writing aggregate coverage and lower-layers remains limited and is likely to remain so at the key January 2024 renewal season.

Plus rating agency Moody’s highlighted that the lack of aggregate reinsurance cover is now considered a business risk to the UK P&C insurance sector.

All of which has led to some, like US insurer Allstate, to enter the reinsurance market looking at aggregate stop-loss solutions that could help it cap the growing volatility in its results.

As well as an expectation that traditional reinsurance terms loosen somewhat, the BMO Capital Markets analysts believe we will see “creative alternative capital solutions” to this issue of greater catastrophe risk retention and weather volatility.

But the two issues, of confidence in models and resuming the underwriting of lower-layers and aggregate covers, are connected to a degree, as the confidence in the models is an element that gives capital more confidence to expose itself to greater potential volatility.

While structuring and capital markets innovation can certainly help here, without clearer visibility of the risks and a greater appreciation of the accuracy of models that help in understanding them, capital could remain cautious it seems.

At the same time, the inflationary effects on losses will continue, as values-at-risk in catastrophe exposed regions continue to rise.

Which means the number of large loss events that impact insurance and reinsurance capital can be expected to rise, meaning greater retention of volatility for as long as risk transfer solutions to lower-layers and aggregates remain less available.

Some in the industry are determined to remain at the higher-layers only and to avoid aggregate covers in the majority of cases.

The quota share is gaining favour as a solution to help in risk sharing of some lower-layer volatility, with sidecar activity elevated this year as a result.

But true solutions to the kind of frequency and volatility that delivers the most pain, both on the reinsurance and retrocession side, remain much less available at this time, despite a number of markets staying committed to provision of products that offer some support here.

On the risk model side, evolution continues apace and the advent of newer models, such as those utilising artificial intelligence, could help to restore more confidence in them.

But, models are only ever as good as their interpretation and the portfolio management and hedging decisions taken by their users, which of course is one area where the alpha in the industry is generated.

With model outputs directional, informing the choices that need to be made over how to construct portfolios, including what risks, regions, counterparties, and layers to underwrite or invest in, the models can feed into industry confidence which should in time help capital to become more willing to absorb frequency risks and lower-layer volatility.

But, whether we’ll ever see the kind of soft market products that have emerged in the past, remains to be seen.

Hopefully, we’ll see the market develop solutions that have an inherent alignment to them, that can help cedents with more of their volatility and frequency problems, while delivering risk commensurate returns to those providing the capital.

On model confidence, volatility, frequency and emergent reinsurance protection gaps was published by:
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Delivering a speech in Canberra today, Andrew Hall, the Executive Director and CEO of the Insurance Council of Australia (ICA) explained that insurance and reinsurance markets are repricing risk globally and for reinsurers, writing risk in Australia is no longer seen as the diversifying hedge it used to be.

australia-flooded-map-flagWhich is contributing to the development of insurance protection gaps, Hall said, driving a need for a partnership approach to reduce the pressure on premiums for consumers and ensure coverage is sustainable.

Australia has been beset by natural catastrophe and severe weather events in recent years, with the losses falling to the insurance and reinsurance market rising fast.

Hall explained the role of inflationary costs in driving claims quantum higher, highlighting that a repeat of the $3.3 billion 1999 Sydney hail storm could drive an insurance market loss of almost $9 billion today.

With the number and value of buildings increasing all the time in severe weather and catastrophe exposed regions, insurance is even more critical today.

Urbanisation, geopolitical strife, growing weather volatility, increasing cyber threats, rising exposure values, all mean “We are living in a time now though when risk is being reassessed,” Hall explained.

“The certainties about how we see the world are changing,” Hall said, “Risk isn’t receding, it’s accelerating.”

Hall stated, “All of these pressures have come together to create a perfect storm in insurance markets.

“Risk is being repriced.

“The pressures and costs are increasing. The trend lines are all going one way. Because of these pressures, insurers’ input costs are going up and up. One of those costs is capital.”

He went on to explain how the global capital markets have supported Australia’s insurance industry, in particular through the global reinsurance markets.

Saying that, “Reinsurance is our way of accessing a wider pool of protection when disasters strike. Year to year the financial performance of the insurance sector can be volatile, as we’ve seen in the years since the 2019 Black Summer fires. Reinsurance allows insurers to smooth their losses, protecting themselves and the Australian financial system from the impact of significant loss – usually as the result of a large event. And reinsurance is how global capital helps underwrite Australian risk.”

He continued to say, “Australia used to be seen by reinsurers as a good hedge against events in the northern hemisphere such as Japanese earthquakes, or Florida hurricanes.”

But, “Not anymore.”

Hall said that, due to the trends towards volatility in a world of rising values, “Australia is being re-assessed by reinsurers.”

“After wearing losses over several years in the Australian market they are having to put through significant increases in the cost of their cover,” Hall explained.

Which is being reflected in the price of premiums and has led to, “Some of the biggest price adjustments in nearly two decades have gone through the insurance system.”

With these price hikes in insurance hitting consumers at a time of high inflation, energy costs and a cost-of-living crisis, Hall said that this is driving a widening of the insurance protection gap.

Which means pressure on people, the economy, as well as banks and the financial system.

Hall said, “Extreme weather events in areas of growing population mean banks are increasingly exposed to the protection gap risks. It will also place greater pressure on governments to bear recovery costs.”

Posing the question, “What can we do in partnership with all levels of government, other stakeholders like banks, and customers, to alleviate the pressure on premiums, and not let the gap turn into a chasm?”

Then stating that, “For the industry this is the key problem to solve in this time of dramatic change.”

Hall has laid down the key challenge facing global insurance and reinsurance markets, maintaining adequate coverage at affordable prices, in a time of rising risks, exploding values, increasing volatility, climate change and currently a trend towards a retrenching of capital away from those factors, not towards them.

Hall, in his speech today, provided insights into what he and the ICA see as potential answers and the progress being made by the Australian insurance industry.

But, critical to the industry there, is going to be the cost of reinsurance over the longer-term, as this can act as a brake on insurers own capital deployment and ability to assume risk.

Australia faces the same issues as the rest of the world, which have become especially evident in insurance markets in California, Florida and elsewhere.

With consumer insurance premiums likely to keep rising, while reinsurance costs look set to remain higher than experienced over the last two decades, the industry must start to look for where efficiency gains can be made.

To lower the cost of risk capital, for its users. While maintaining adequate returns for the global capital providers, to ensure more capacity becomes available to help the world absorb volatility, rather than less.

Risk repriced. Australia no longer a “good hedge” for reinsurers: ICA CEO was published by:
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A new report calls on the world to implement risk sharing systems, such as parametric triggers in insurance, reinsurance and insurance-linked securities (ILS) such as catastrophe bonds, as a central pillar of the Loss and Damage architecture required to protect the most vulnerable nations against climate, weather and natural disasters.

cop27-loss-damageThe report published by lead author Dr Ana Gonzalez Pelaez, Fellow at the University of Cambridge Institute for Sustainability Leadership and prepared with the support of insurance and reinsurance broking group Howden, looks at how risk transfer can be a key component of global loss and damage mechanism design.

Specifically, the report provides a risk-sharing action plan to scale up the much discussed Loss & Damage (L&D) funding needed for Global South countries, some of the most vulnerable to climate change and disasters.

It found that the smallest and most vulnerable countries are at-risk of losing more than 100% of their GDP from extreme climate shocks next year.

But noted that these are insurable risks and research undertaken claims they will remain insurable, using insurance industry techniques, right up to 2050 at least.

“A solution using the power of insurance and capital markets could dramatically scale up the impact of Loss & Damage funding,” the report suggests.

It suggests utilising donor funding to pay premiums for risk transfer, using whatever instruments are most appropriate across insurance, reinsurance and the capital markets, including catastrophe bonds, and leveraging structuring techniques such as parametric triggers in order to deliver the financing just-in-time.

The aim would be to provide “guaranteed financial protection to exposed communities now, and through to at least 2050” the report explains.

The report estimates that $1 billion of donor-supported annual pure premium could be utilised to protect all 30 of the world’s smallest and most climate vulnerable countries with a population of less than one million from losing more than 10% of their GDP from climate shocks, through an umbrella stop-loss mechanism design.

By making risk sharing, insurance, reinsurance and instruments such as catastrophe bonds, a central pillar of the Loss & Damage initiative, the reports authors say the economies of the most vulnerable countries can be protected.

The report shows that risk sharing systems, such as insurance and capital market risk transfer, can be an efficient way to leverage the depth of expertise and financing available in private markets.

By putting some of the donor funding that could be put towards Loss & Damage to pay premiums, long-term risk transfer can be locked in to protect economies of those regions most vulnerable or climate, weather and natural disasters.

The research found that donor-supported annual pure premium of $10 million per country could equal roughly $25 billion of financial protection, contractually guaranteed, across 100 countries.

This is important work, as it takes a quantitative approach to demonstrating how funding can be made to go further, while risks shared, by utilising concepts from insurance and insurance-linked securities (ILS) markets, to mobilise significant private capital to support the most vulnerable countries in the world.

As we’ve stated before, responsive risk transfer and efficient capital markets can come together to provide the kind of protection vulnerable nations need, while also ensuring that donor funding is put to work in a manner that can offer real liquidity just when it is needed most.

As we have been saying for more than a decade, insurance-like structures should be dovetailed into these efforts to finance climate and disaster risks, such as the loss and damage initiative, to ensure there is access to capital for climate change disaster response, recovery and rebuilding.”

Finally there is a piece of work that can help to demonstrate the utility of this approach, which should help in gaining more traction for this idea in development circles as COP28 fast approaches.

The briefing paper on this important study can be accessed here.

Dr Ana Gonzalez Pelaez, Fellow, University of Cambridge Institute for Sustainability Leadership and lead author, explained, “We have demonstrated how public-private finance can be combined to protect billions of people, now and in the decades ahead. We are calling on the international community to make risk-sharing systems a pillar of the Loss and Damage architecture for all countries and introduce umbrella stop-loss mechanisms to protect the economies of the world’s smallest and most climate-vulnerable countries.

“The Action Plan presented in this study is ready and can be implemented using existing institutions to provide vulnerable countries with guaranteed payouts from the risk capital markets after a disaster. These funds could be used for critical priorities such as humanitarian assistance; rebuilding schools, hospitals and vital infrastructure; sovereign debt repayments; restoration of agriculture and ecosystems.”

Howden undertook actuarial and financial modelling analysis to establish the technical cost of reducing financial risks through the use of parametric solutions to implement the so-called umbrella stop loss concept and the $10 million standard pure premium allowance.

Umbrella Stop-Loss Protection is already a well-established concept in the global insurance and reinsurance industry.

It means that all defined losses above a given threshold are protected against, providing an overarching and strategic protection beyond lower-level losses.

This study saw the umbrella stop-loss structure applied for the first time to protect national economies at scale, using GDP as a reference and across six climate hazards.

The research notes that thresholds for attachment can be set at any chosen level, but in their analysis the authors opted for 10% because it can provide significant protection to small, vulnerable countries at risk of losing over 100% of GDP while still remaining affordable to donors.

Rowan Douglas CBE, CEO Climate Risk and Resilience, Howden, and Chair, Operating Committee, Insurance Development Forum, added, “The pure maths and dispassionate economics in this analysis are clear. Risk sharing systems empower hard won Loss and Damage funds to provide structural financial security to the widest range of vulnerable countries. We can mobilise existing expertise, institutions and partnerships to put this essential protection in place quickly. With this groundbreaking research by CISL, world leaders are guided by an Action Plan based on a bedrock of open science, rigorous analysis, shared alignment and collective purpose.”

Dr Mahmoud Mohieldin, UN Climate Change High-Level Champion, also said, “This innovative initiative has the potential to protect vulnerable countries from climate- related losses with pre-arranged financing at a large scale, unlocking the risk capital markets to multiply the impact of donor funds. Mobilising private finance alongside the new loss and damage fund is crucial in addressing these impacts, and more such initiatives are needed.”

Dr Youssef Nassef, Head of Adaptation, United Nations Framework Convention on Climate Change also commented, “Umbrella Stop-Loss provides a practical concept to the L&D common stance that it is an international responsibility that countries and individuals should not suffer, due to climate change, above a certain limit.”

Co-author Dr James Daniell, Natural Hazards Engineer, Risklayer GmbH; Centre for Disaster Management and Risk Reduction Technology (CEDIM) at Karlsruhe Institute of Technology and the University of Adelaide, further explained, “We have produced plausible, mid-range, estimates of climate risk for these countries using leading data sources and robust methodologies. This analysis frames Loss and Damage implementation within objective physical and economic realities, essential for effective outcomes. This pioneering research also opens up a vast global community of academic and professional expertise that stands ready to build on this work and support the urgent mission of bringing Loss & Damage protection to vulnerable countries worldwide.”

Risk-sharing systems must be a pillar of Loss and Damage architecture: Report was published by:
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Tenax Capital, the London based hedge fund investment manager that operates a catastrophe bond strategy, has joined the insurance-linked securities (ILS) industry working-group that focuses on enhancing environmental, social and governance (ESG) transparency in the ILS market.

tenax-capital-logoTenax Capital joined the ILS ESG Transparency Initiative and noted its commitment to incorporating ESG considerations into its investment processes.

As we reported recently, the formation of the ILS ESG Transparency Initiative came about as what was a Swiss-based working group of ILS managers focused on ESG transparency welcomed its first international members.

The Switzerland-based insurance-linked securities (ILS) investment fund managers created the working group to develop a data transparency proposal to advance environmental, social and governance (ESG) in the ILS market, with the initiative informally known as the Zurich ILS Working Group.

The founding members were, Credit Suisse Insurance-Linked Strategies; LGT ILS Partners; Plenum Investments; Schroders Capital ILS; Solidum Partners; and Twelve Capital.

The expansion and renaming to the ILS ESG Transparency Initiative saw the following new members joining: AXA Investment Managers; Leadenhall Capital Partners; SCOR Investment Partners; Securis Investment Partners; and Tangency Capital.

Now, Tenax Capital can also be added to that list.

Tenax Capital noted that the ILS ESG Transparency Initiative currently counts some of the largest and most respected ILS managers as members.

“The primary scope of the initiative is to improve and standardise the ESG disclosure and data related to ILS transactions, in an effort to enhance transparency with respect to covered risks and ultimate beneficiaries of coverage,” Tenax Capital said.

Adding that, “At Tenax we are committed to make ESG considerations a key driver of our investment management process, and we actively work to raise awareness of ESG within our investor community and the broader markets.”

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

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Parameter Climate, the parametric climate risk transfer focused underwriter and advisor, has completed a management buyout of seed investor SiriusPoint, as the latter continues to reduce its equity ownership in program and MGA businesses.

parameter-climate-logoParameter Climate was founded by long-standing weather risk transfer industry executive Marty Malinow and staffed by a very experienced senior team that had worked together over numerous years.

The company launched to provide specialist advisory, structured financial products, distribution, and underwriting services to the growing market for climate risk transfer, with parametric risk transfer at its heart.

Parameter Climate then secured a relationship and seed investment with specialty insurance and reinsurance player SiriusPoint roughly two years ago.

Now, the Parameter Climate management have bought SiriusPoint’s stake in the company, while SiriusPoint is set to continue supporting the firm through the provision of underwriting capacity.

“We thank SiriusPoint for its significant contributions to our launch two years ago and look forward to continuing to provide underwriting advisory to SiriusPoint and others,” Martin Malinow, Founder and CEO of Parameter Climate explained.

Scott Egan, CEO, SiriusPoint added “SiriusPoint is pleased to have contributed to the creation of Parameter Climate, which addresses an important protection gap in the climate and weather risk management market. While this transaction is consistent with our strategy to reduce our equity investments in programs and MGAs, we look forward to continuing to support Parameter Climate with underwriting capacity based on its strong underwriting results to date.”

Since its launch, Parameter Climate has also developed its own risk analytics platform, focused on climate exposures, with the ClimateDelta product now available for licensing as well.

In addition, the company is also adding advisory and brokerage services for both vertical-based protection buyers and capacity providers to its specialised climate risk transfer focused offering.

Malinow went on to say, “Our dialogues with both existing and new clients in a variety of industries illustrate a significant and growing need for climate and weather risk management, yet there remains a gap in advisory, intermediation and analytics. We created ClimateDelta to streamline the process of risk assessment, structuring and transaction management for both buyers and sellers, and look forward to using our 20+ years of market expertise to turn this need into transactions.

“With increased climate and weather volatility, risk transfer is becoming a strategic imperative for protection buyers in a number of industries and an important opportunity for a growing group of capacity providers,” Malinow added. “Parameter Climate will make this risk insurable and investable by combining the market’s most experienced advisory team with cutting-edge analytics.”

Parameter Climate team buyout SiriusPoint stake, expand offering was published by:
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