We have been talking about climate change for what seems like forever; debating the causes and arguing over the consequences. The new report from the Intergovernmental Panel on Climate Change (IPCC) urges that we respond now to the risks posed by climate change.
Insurance is the business of managing risk, and the industry has built up detailed knowledge of the losses associated with some of the risks identified by the IPCC. Increased frequency of flood and storms have already led to a shortage in insurance and reinsurance capacity in this sector.
In a sense the industry has already responded. Insurance-linked securities (ILS) have been the insurance industry’s response to this lack of capacity since 1994. This enabled insurers to access the then alternative capital markets. Approximately 15% of global catastrophe reinsurance capacity is now provided through ILS. If natural catastrophes are becoming more frequent and severe then ILS will continue to grow.
The insurance industry has also found the most efficient mechanism for bridging the gap between the markets in the form of segregated accounts or cells.
The climate change challenge is obviously enormous, but the convergence of the insurance and capital markets is surely a small part of the solution.
Necessity is the mother of invention. ILS is no longer a risk specialty but a new normal. It is time to demystify and improve our understanding of this growing market and innovate with new products.