Summary of seminar 6 April, 2016.
Photo: Linda Freiner from the Zurich Insurance group holding her presentation.
This seminar was arranged 6 april 2016 at the Royal Swedish Academy of Sciences as a follow-up to the publication by Victor Galaz et al. of the opinion article “Why Ecologists Should Care about Financial Markets” in Trends in Ecology & Evolution in May 2015, and to the subsequent letter by Birgit Müller and David Kreuer “Ecologists Should Care about Insurance, too” published in January 2016, also in TREE.
Three invited speakers provided insights from various viewpoints, both from academia and the private sector, about the importance of insurance instruments for addressing urgent sustainability challenges.
Birgit Müller, Helmholtz Centre for Environmental Research, introduced the innovative concept of weather index insurance in agriculture, which gives farmers a payment if an index (based on an objective measure such as rainfall, temperature or vegetation) falls below a pre-defined threshold. Weather index insurances are a promising instrument notably because they are easier to monitor than traditional crop yield insurances. However, as Birgit Müller emphasised, these agricultural insurances may have some undesired consequences as they don’t incentivise to long-term resilience building or adaptation to climate change.. The key is then to design the insurance instruments in a way that is adapted to the local social-ecological systems and to provide the right incentives for long-term adaptation and risk reduction.
Linda Freiner from the Zurich Insurance Group presented her company’s efforts to integrate sustainability in its risk expertise, through the case of the “Zurich Flood Resilience Programme”. Floods represent a huge and interconnected risk, for which insurance is actually not the best solution. This is why the programme goes beyond insurance to include investments in risk prevention, risk reduction and early warning measures. In this context, Linda Freiner stressed that resilience thinking is remarkably relevant to the insurance industry, specifically in order to measure a community’s resilience to floods over time, and ultimately to find better ways of rebuilding after a flood event and to incentivise risk reduction and prevention.
Martin Hedberg, chief meteorologist at Entropics Asset Management. shared his experience working with investors and a type of insurance-linked securities called “catastrophe bonds”, or “cat bonds” for short. These instruments are meant to cover natural disasters such as hurricanes and earthquakes and transfer insurance risks to the capital market. The principle is that investors buy a bond, which yields a certain return as long as no catastrophe occurs. However, if a catastrophe does occur, the investors lose their money, which is used for society recovery, for example reconstruction and insurance liabilities. Martin Hedberg advocated for cat bonds as useful tools to provide insu rance coverage in developing economies, where traditional insurance instruments may be lacking. In addition, cat bonds may be appealing for investors because they have a low correlation with other financial assets and they provide a “moral return” in case of loss.
The key messages highlighted by the speakers, commenters and participants of the seminar were:
•Business leaders are taking the climate risk more and more seriously, and insurance can be a very effective instrument in this context. But insurance is not necessarily the most appropriate tool.
•The main challenge is how to incentivise risk reduction and sustainability through the use of innovative insurance instruments.
•The emphasis should be on encouraging community resilience, as well as measures towards adaptation and transformation.
Galaz, V., Gars, J., Moberg, F., Nykvist, B., & Repinski, C. (2015). Why ecologists should care about financial markets. Trends in Ecology & Evolution, 30(10), 571–580.
Müller, B., & Kreuer, D. (2016). Ecologists Should Care about Insurance, too. Trends in Ecology & Evolution, 31(1), 1.