Climate risk protection gaps need capital market (ILS) solutions

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The physical climate risk protection gap, so the gulf between climate related losses covered by insurance, reinsurance or risk transfer and those going uncovered, is widening, but instruments such as insurance-linked securities (ILS), catastrophe bonds and other blended financing solutions can help to narrow this gap.

In real estate the climate risk protection gap is particularly stark and financing tools are needed urgently to help absorbing some of the climate exposure that is uncovered at the moment, Fitch Ratings explained in a recent report.

The rating agency looked at the need for risk transfer and risk financing instruments that can help in the global response to longer-term climate related exposures, explaining that there are a patchwork of insurance and reinsurance related solutions, but that in insurance-linked securities (ILS) we perhaps get a glimpse of emerging financial products that could, in future, make a significant difference.

How to close Asia’s insurance protection gap

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Asia will drive the growth of the global insurance market in the years to come. Technological innovation along with solid financing and the right policies will be needed to make sure as many people as possible in the region get the insurance protection they need.

The demand for insurance in Asia in the coming decade will be shaped by rising household income levels of a rapidly expanding middle-class, policy measures to accelerate financial inclusion, and strengthening social protection and government insurance programs.

Governments are also increasingly making businesses, households, and individuals responsible for managing the adverse financial consequences of risks to assets, lives, incomes, and livelihoods.  One can, therefore, expect increased spending on buying protection and an expanding role for the insurance and capital markets to manage contingent liabilities better. The same holds for access to medical care, which will be spurring demand for health insurance.

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Interview to Investing in Private Markets, Europe 2020 Report: “Growth potential and resilience of ILS as an alternative capital”

PDF VERSION AVAILABLE HERE. FULL REPORT CAN BE DOWLOADED FOR FREE HERE.

Investing in private markets remains a prevalent strategy for institutional asset owners, and one that has demonstrated resilience even through the duration of the first quarter of this year as the Covid-19 pandemic spread across the globe. This is not to say private markets investment has been without issue, in the early months of the pandemic investing capital proved problematic in part because businesses were under financial pressure, and in part that funds were unable to access financing.

This report brings together UK and Wider Europe based Investment Actuaries, Heads of Insurance Asset Management, Investment Managers, Head of Investments and Senior Specialist. We explore regulatory improvements, investigate the due diligence that investing in private markets requires, dissect the information disadvantage, evaluate diversification as a key benefit, discuss the supply and demand imbalance, and address the increased role of climate positive and infrastructure related investments.

The BRI and the need for its transit infrastructure protection against natural disasters

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Countries in Central Asia and Eastern Europe that have been recipients of Chinese investment via projects associated with its Belt and Road Initiative (BRI) should use parametric sovereign cat bonds to insure themselves against the risk of natural disasters.

Belt and Road Initiative has created an even greater need for comprehensive protection solutions across Central Asia and Eastern Europe as China has spent tens of billions of dollars in infrastructure across the region but practically none of it is properly insured against physical damage, despite the region being at high risk of natural disasters with earthquakes in particular.

In countries such as Uzbekistan, Kazakhstan or Tajikistan it is not a question of if an earthquake will hit, but when—and how devastating it will be. In Western Balkans that is prone to earthquakes itself there is an additional threat of massive floods as climate change consequences.

La BRI et la protection des infrastructures contre les désastres naturels

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Les pays d’Asie centrale et d’Europe de l’Est qui reçoivent des investissements chinois dans le cadre de l’initiative « Belt and Road » (BRI) pourraient être intéressés par l’utilisation d’obligations souveraines paramétriques pour se prémunir contre les risques de catastrophes naturelles.

L’initiative « Belt and Road » a créé un besoin important de solutions de protection complète en Asie centrale et en Europe de l’Est, car la Chine a investi des dizaines de milliards de dollars en infrastructures dans ces régions, mais la plupart de ces projets ne sont pas correctement assurés contre de possibles dommages, bien que  ces régions présentent des risques de catastrophes naturelles en particulier des tremblements de terre.

Dans des pays comme l’Ouzbékistan, le Kazakhstan ou le Tadjikistan, il ne s’agit pas de savoir si un tremblement de terre va se produire, mais quand et à quelle intensité il se produira. Les Balkans occidentaux qui sont eux-mêmes sujets aux tremblements de terre, sont aussi sous la menace d’inondations massives en raison du changement climatique.

ILS tells a compelling ESG story: Carey Olsen

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Amid the ongoing expansion of the market for sustainable investment, there’s an opportunity for the insurance-linked securities (ILS) sector to show its alignment with environmental, social and governance (ESG) factors, according to law firm Carey Olsen.

Intensified by the wide-ranging effects of the ongoing Covid-19 pandemic, heightened awareness of the complex ESG challenges currently faced by society has accelerated the need for global businesses to demonstrate a commitment to sustainability, in terms of both individual business practices and external investment policies.

Against this backdrop, Artemis recently spoke with Gavin Woods, Partner, and Sheba Raza, Counsel, at offshore business focused law firm, Carey Olsen, about the increased focus on sustainability in what’s been a challenging and transformative year.

Catastrophe bonds a win-win for governments & investors, says APEC

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The Asia-Pacific Economic Cooperation (APEC) continues to see the development of a regional catastrophe bond market as positive, highlighting at a recent workshop that cat bonds are a win-win relationship for governments and investors.

The workshop last week was convened by The World Bank Treasury alongside the APEC Business Advisory Council (ABAC) and Asia-Pacific Financial Forum, to educate on the use of catastrophe bonds as disaster risk transfer instruments for the APEC Regional Disaster Risk Financing and Insurance Solutions Working Group.

The goal is to expand the understanding of the role catastrophe bonds can play, as well as the important role insurance and reinsurance risk transfer products play in protecting the fiscal budgets of countries against impactful natural disasters.

Cat bond & ILS coupons should compensate as climate increases hurricane risk: Twelve Capital

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Climate change, variability and the expected increases in Atlantic hurricane risk that these factors will drive, is still likely to be compensated for in catastrophe bond and private insurance-linked securities (ILS) coupons, as pricing should rise and consequently returns, in line with the risk, according to ILS manager Twelve Capital.

Twelve Capital, the Zurich headquartered insurance sector specialist fund manager, works with machine learning focused climate technology company, reask on hurricane risk analysis. The pair have looked at how climate change and climate variability will influence the market and impact portfolios of ILS or cat bonds.

They expect we will see a “modest increase in Atlantic hurricane risk over the forthcoming decades as a consequence of climate change.”

Sovereign Parametric Catastrophe Bonds as means to address the protection gap in emerging countries

As mentioned by AON in their Weather, Climate & Catastrophe Insight: 2019  Annual Report, last year brought $232 billion of economic losses from natural disasters whereby only $71 billion was actually insured. It outlined that the world continue to face a fundamental issue of insurance gap, especially in emerging and developing countries, where losses for businesses and governments are only increasing following a decade-long rise in natural catastrophes linked to the climate change.

Protection gaps exist in both emerging and developed markets. However, with estimated by Swiss Re 35% level of catastrophe risk coverage in advanced economies versus 6% in emerging economies, the issue is far more important for the developing world, where the cost of disasters is not just measured in the deaths and injuries that they cause, but also in their long lasting economic impact on survivors and countries. Natural disasters there do not just destroy homes, factories, shops and fields; they can altogether annihilate years of economic growth, which is essential for the low and mid-income countries.

GREEN INSURANCE LINKED SECURITIES FRAMEWORK

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Generali has developed its first Green Insurance Linked Securities Framework, in line with the Group’s sustainability strategy.

Insurance Linked Securities are alternative financial instruments allowing for the transfer of insurance risk to institutional investors.

This Framework aims to be the first contribution to develop guidelines for Green ILS structures going forward.

The future Green Insurance Linked Securities will be characterised by the investment of the collateral in assets with a positive environmental impact, and by the allocation of the transferred solvency capital to sustainable initiatives.