Re/insurance potentially 'decisive' in tackling climate change, Bank of England’s Mark Carney tells UN Climate Action Summit 2019

Mark Carney, the governor of the Bank of England, said the re/insurance sector has a “crucial” role and “unique contribution” to make in tackling climate change and smoothing the transition to a 1.5 degree world.

“This sector brings three things: expertise, money and perspective and those are all crucial in helping society adjust to the reality of that transition,” he said at the Insurance, Risk Financing and Development event, a side meeting of the UN secretary general’s Climate Action Summit 2019 on September 22.

“My message is, whether it’s reducing the protection gap, financing resilient infrastructure or improving reporting, risk management and return optimisation across the financial sector, your contributions could be decisive. The insurance industry has a unique contribution of large capital (over $30 trillion), deep risk management expertise and long-term perspective.

“Insurers are well aware that the physical risks of climate change are being felt across the globe with a plague of extreme weather events.”

In a call to action, he said both sides of re/insurers’ balance sheets needed to be put to work.

“On the liability side, the focus must be reducing the protection gap and supporting the resilience of households and companies to growing climate risks.

"Better understanding of past losses can obviously help. Projects like the open-source Oasis Loss Modelling Framework of the IDF are leveraging the expertise of the private sector, the public sector and academia to improve the data available for risk analysis in low and middle income countries.

“New products, such as insurance-linked securities based on parametric triggers, are vital to help reduce macro protection gaps and increase resilience. These are generally cheaper to structure and administer and more efficient to blend with commercial finance if required.”

He said that increasingly climate-related tail risks “could prove uneconomic for private sector insurers to cover”, adding that this is where development agencies and multilateral development banks can step in. “Disaster reinsurance could be one of the most effective uses of development financing,” he said.

On the asset side, infrastructure investments will be essential, according to Carney. “To transition to net zero, all countries need to step up their investments in sustainable energy. The reality of climate change also means that all countries, but particularly developing and emerging economies, will need to invest in new climate-resilient infrastructure to adapt to the new realities of a hotter and more volatile climate.”

He highlighted various “enormous” estimates that range from $70 to 90 trillion over the next decade, with three quarters of this in emerging and developing economies.

“It’s imperative to act now to create practical tools and frameworks to support climate-resilient infrastructure investments – ranging from broader use of catastrophe bonds to greater risk pooling for the most vulnerable countries.

“Climate-resilient infrastructure assets are well suited to life insurers that need reliable returns over long-term investment horizons. This is even more compelling in a low-for-long interest rate world.”

However, as the IDF has flagged currently just 2.5 percent of insurance assets managed are allocated to infrastructure.

“So the world needs much more investment in infrastructure, and greater risk sharing of climate risks. Insurers have a unique ability to meet both needs.”

Carney also called for the transformation of climate risk management to help tackle climate change, a call to action he reiterated the following day as he spoke at the UN Climate Summit, General Assembly on Monday September 23.

He said “a new, sustainable financial system is being built”, which will help amplify the effects of climate policies and accelerate the move to a low carbon economy.

“But the task is large, the window of opportunity is short, and the risks are existential,” he added.

He called for the introduction of “mandatory” climate-related financial disclosures, adding “the UK and EU have already signalled their intents”.

Under the Task Force on Climate-related Financial Disclosures (TCFD), giving information is voluntary.

Voluntary disclosure currently has the backing of financial firms with balance sheets totalling $120 trillion, which includes the world’s top banks, asset managers, pension funds, insurers, credit rating agencies, accounting firms and shareholder advisory services.

Carney said that four fifths of over 1,100 top G20 companies now disclose these risks in line with some of the TCFD recommendations, while three quarters of users of the information have seen a marked improvement in the quality of climate disclosures.

But he said: “The next step is to make these disclosures mandatory. It’s time for every country to get involved because the world won’t get to net zero if the financial sector doesn’t know how our companies are responding. In order to watch we must be able to see.”

He said that the he providers of capital – including banks, insurers, asset managers and those who supervise them – “all need to improve their understanding and management of climate-related financial risks”.

In support of this, the BoE has set out its supervisory expectations for the governance, management and disclosure of these risks by the banks and insurers in the world’s leading international financial centre.

“And the bank will be the first regulator to stress test its financial system against different climate pathways, including the catastrophic business as usual scenario and the ideal—but still challenging—transition to net zero by 2050 consistent with the UK’s legislated objective," he said.

“This test will mainstream cutting-edge risk management techniques, and it will make the heart of the global financial system more responsive to changes to both the climate and to government climate policies.”

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