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Can we Prepare for Climate Change through Risk Transfer?

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A new report examines how public and private entities, including those in developing nations, are mitigating the financial impacts of extreme weather events and supporting climate change adaptation by transferring risk to private insurance and capital markets.

“Using Risk Transfer to Achieve Climate Change Resilience” is one of the first reports to comprehensively examine how governments, water utilities, transit agencies, corporations and small farmers are using risk transfer instruments—such as catastrophe bonds and weather risk transfer contracts—to adapt to climate change. The report discusses opportunities to expand the use of risk transfer for adaptation and details key challenges in this still emergent market.

The report, found at the bottom of this post, provides three key takeaways:

1. With support from development banks and donor countries, many developing nations are incorporating risk transfer into their adaptation strategies. 

Buyers range from sovereign governments such as Mexico and the Philippines that have secured hundreds of millions of dollars in protection annually, to small farmers in Kenya, Senegal and other African countries who are becoming more resilient to climate risks by purchasing small insurance policies. Yet, the report finds that many public and private entities still require subsidies from donor countries, and that the use of risk transfer is constrained in some regions by lack of weather data. The report explores solutions including new business models for risk transfer, cost-sharing strategies and advances in remote sensing and weather data analytics. 

2. More infrastructure managers are using risk transfer.

Public infrastructure organizations, such as water utilities and transit agencies, are particularly susceptible to extreme weather events such as droughts, wildfires, severe storms and floods. As a result, some are on the leading edge of using catastrophe and weather risk transfer instruments to reduce their risk exposure. For example, since Hurricane Sandy, Amtrak and the New York Metropolitan Transit Agency have purchased hundreds of millions of dollars in catastrophe protection to mitigate their risks from flooding. This report examines the opportunities and challenges to transit agencies and water utilities seeking to use risk transfer to improve their resilience to extreme weather and climate change.

3. Many corporations are considering risk transfer for climate change adaptation.

Many publicly held corporations are being asked by regulators and investors to assess, disclose and mitigate the climate change risks that could negatively impact their earnings and long-term growth. The report explores how corporations in a wide range of industry sectors could mitigate their climate risks with weather risk transfer contracts—a strategy already in use by corporations in highly weather-sensitive industries such as energy and agriculture. A recent example occurred in Australia, where agribusiness GrainCorp announced in April 2019 that it would transfer weather risks to reinsurance investors in order to reduce the impacts of volatile weather on earnings.

“Using Risk Transfer to Achieve Climate Change Resilience” fills a knowledge gap in the increasingly urgent public dialogue around weather and catastrophe risk in a world with a changing climate.

“So far, media coverage of this topic has largely missed a key strategic consideration for addressing climate change: risk transfer,” said Barney Schauble, chairman of Nephila Climate. “Innovative weather and catastrophe risk transfer coverage mechanisms have evolved over the last 20 years and are now viable tools for confronting climate change in both developing and mature economies.”

Sponsored by Nephila and written by Jim Hight, an independent environmental journalist and communications consultant, the report draws on published research and interviews from development organizations, insurers and reinsurers, catastrophe risk modelers, weather and climate risk analysts, climate change consultants, transit agencies, water utility associations and others.

Nephila sponsored the report in order to provide a thorough examination of the opportunities and challenges to using weather and catastrophe risk transfer mechanisms to support climate change adaptation. Nephila is a pioneer in creating weather risk transfer vehicles and today is the largest investment manager in that market.

The Report is found below

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