CISL: Massive upscaling of risk-sharing required to address climate emergency

A new study by the Cambridge Institute for Sustainable Leadership (CISL) has called for a significant expansion in the availability of public and private risk-sharing pools to address the climate emergency.

These will need to include tax-based and premium-based mechanisms, ranging from community programmes to those operating on a multi-national level, working together in what CISL describes as a “public-private-mutual risk-sharing continuum”.

The report said this will both protect greater numbers of people from physical and transition-related climate risks, as well as stewarding the behaviour of individuals, society and capital required for the sustainability of a risk pool.

The study highlights several actions that insurers can take, calling on the industry and its supervisors to lead best practice physical climate risk disclosure through incorporating future scenarios and stress tests, slow-onset perils, as well as impacts on assets and investment portfolios.

“Insurers and regulators should develop best practice for evaluating current contingent climate related liabilities for additional physical, transition and liability risks and consider appropriate treatment of future contingent liabilities across underwriting and investment portfolios,” the report said.

While P&C insurers typically operate on short-term horizons due to one-year underwriting policies, CISL has called on the sector to blend its analytical expertise in short-term extremes and long-term projections to develop integrated climate risk assessments across their underwriting, assets and operations.

“Insurers and regulators should highlight the potential impact of physical, transition and liability risks on the sector, wider economy and society,” the report said.

CISL also called on policymakers to enable insurance regulators to assess and communicate the scale and dynamics of the physical climate risk protection gap by region, sector and community.

And the study calls for policymakers and the insurance sector to develop a defined low carbon resilient infrastructure asset class.

This would help address the urgent need for sustained financial sector allocation in resilient, low carbon investments.

Qualifying investments would receive proportionate treatment by supervisors, including capital charges, to balance risk and liquidity requirements, the report said.

Dominic Christian, global chairman at Aon’s Reinsurance Solutions and chair of ClimateWise, said there is a great opportunity to step forward as leaders in managing climate risk.

“We welcome and appreciate the calls to action set out in the report that give a clear direction and aspiration for insurance, finance, regulators and government,” he said. “Stepping forward together gives us the best chance to deliver impact at a scale commensurate with the accelerating climate crisis.”

He added: “To share climate risks at scale, they must be measured consistently. Within risk-sharing systems, the insurance sector (premium-based risk-sharing) has unique risk quantification and management skills, overseen by regulation.”

Bronwyn Claire, senior programme manager at ClimateWise, noted that traditionally expertise in risk sharing has sat with the insurance industry.

“Through our collaborative insights and desire to accelerate the transition to net zero, ClimateWise has seen how the expansion of these skills and understanding into a much wider group of economic and policy decision makers is vital in the race to tackle climate change,” Claire said.

“COP26 leaders gathered in Glasgow have the opportunity to recognise the importance of risk sharing to support the transition to a resilient, net zero economic and finance system.”