Risk matters: making resilience add up in a Net Zero transition

As global leaders and their negotiators gathered on the second day of climate talks in Glasgow, Willis Towers Watson kick started the Resilience Hub programme at COP26, with a robust conversation between thought leaders from insurance, risk analytics, academia and central banking who tackled the issues that are most pressing as countries and communities build resilience to a changing climate.

Diana Fox Carney moderated the session with questions that included:

• What role does risk analytics play in building resilience and what innovations and new approaches to risk management are emerging?
• How are central banks and regulators responding to the need for resilience?
• How can insurance bridge the huge protection gap in lower income countries?
• What is at stake when there is a lot of uninsured risk, and how can we begin to turn that around?
• The role of governments and financial institutions and the importance of public-private partnerships?

What does resilience mean?

Dr Nicola Ranger, Deputy Director, UK Centre for Greening Finance and Investment, University of Oxford: The climate emergency is already here. A lot of the discussions here at COP26 about how we get to Net Zero, but we also desperately need to address the risk that people already face. In the past 18 months of COVID it’s shown us that it can’t just be about climate we have to build resilience in a much more systemic way. The world has faced not just a climate emergency but a climate, health, economic and financial emergency. And many people in the world continue to do so.

Andy MacFarlane, Head of Climate, AXA: We think about resilience in two ways – financial resilience and physical resilience. With financial resilience it’s thinking about our customers, our economy, as we transition to Net Zero and how we’re able to maintain that resilience in the economy. Physical resilience is the direct impacts – bricks and mortar and how we Build Back Better and bring in new technology and new ideas to make them more resilient.

Levels of insurance penetration correlate with the speed of recovery – the higher the coverage, the quicker the recovery.

Ekhosuehi Iyahen, Secretary General, Insurance Development Forum: When you speak to negotiators, the question of adaptation is pressing – adaptation is what people experience. It is the loss of lives, it is the loss of livelihoods, it is devastation to economies. And there is an urgency to think about how do we strengthen the understanding around risks that we are faced with as a community, as a society, as an economy, as people, and how do we develop solutions.

I try not to think of it as insurance as the technical term. I think about it as the challenge of what are the protection systems that we need to deal with the kinds of challenges that we face today but we are inevitably going to encounter given what we’re seeing with climate change. And that’s a question that straddles both developed and developing countries. When we think about COVID and think about how our systems floundered it is a question about protection systems.

Elsie Addo Awadzi, Deputy Governor, Bank of Ghana: In Ghana we’re seeing that climate change is happening very quickly and hitting us where it matters – agriculture cycles are disrupted, rainfall patterns have changed considerably and we’re seeing droughts, floods and massive displacement of communities.

This is affecting not only the production cycles but also the value chains – it’s feeding into prices, into export revenues, balance of payments. These are real problems for central banks and they are being fed these into our assessment of risk.

Access to finance can also be a critical agent for change when it comes to adaptation in developing countries and emerging markets so that vulnerable groups can equip themselves and be empowered by inclusion in the financial system.

Rowan Douglas, Head of the Climate & Resilience Hub, Willis Towers Watson: Resilience is the marriage of three systems that turns physics into finance: first, human and physical geography, like a glorified atlas. It’s time that geography took over from economies in understanding how the world works as a system. The second discipline is engineering and the metric and methodologies engineers have established to allow structures to be stable. Stress tests, return periods, exceedance probability curves all the things you lean in 101 engineering were the magic code to that we needed to apply the same structural tests to financial portfolios. The third discipline is actuarial science which allows us to understand and simulate distributions of events that have never happened.

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It’s time that geography took over from economies in understanding how the world works as a system. ”

Rowan Douglas | Head of Climate & Resilience Hub, Willis Towers Watson

Key takeaways

Risk & analytics:

• We can do all this fantastic work in terms of gathering information on hazards and vulnerability, etc. But what’s the point? Risk modelling is critical because it’s a way to bring transparency – to give voice to what are the risks we are facing as a community and what can we do to address that.
• IDF has launched a partnership with V20, 48 of the most vulnerable countries in the world to climate change on a risk and analytics partnership to ensure that analytics are applied as tools and action to empower decision making by governments.
• Our understanding of risk has a lot of gaps particularly in developing countries, but also in the developed world. There’s a need to not just improve our understanding of risk but to increase access to understanding that risk.
• No one organisation has the solution and we need to bring that knowledge together and build a strong integrated view of risk, make that information available and understand more about how shocks move across different systems.
• Compound shocks can amplify risk by 150%, according to research from Oxford University.

Innovation:

• AXA’s Coastal Risk Index launched at COP26 is a tool to accurately the value of coastal ecosystems– that tool is going to be launched later in the week at COP26.
• The initial index focuses on the physical risk impacts, wave heights, storm surge and change in climate at different time periods for extremes looking out to 2030, 2050 under the most severe RCP scenarios. But work will continue to look at the economic and social vulnerability – what that means for coastal communities.
• The disaster risk reduction capacity of countries can increase though regional arrangements beyond what a country can do on its own – African Risk Capacity now has 35 members from 54 African Union countries who can pool resources together to help with crises such as in the Sahel.
• ARC initial focus was on drought and what does a deficiency in water mean in terms of crops – for governments those are precisely the kinds of conversations around insurance that try to translate the natural hazard into something that is very tangible. We then get into questions around debt sustainability about how we diversify the toolkit to provide other types of risk transfer and ex ante risk financing instruments. Insurance can play a role in building an understanding of risk and also informing diversification in financing options.

Policy & regulation

• Vulnerable groups must have a voice on international platforms to develop policy and regulation;
• The needs of the developing world and emerging markets are not always represented because the rules are made by developed economies;
• Many central banks in Africa are aware of what is going on with the development of disclosure frameworks for reporting climate risk but the process is dominated by advanced economies;
• Developing countries and emerging markets do not sit at the table and are often playing catch up and trying to understand what is going on with South Africa being the only representative from Sub-Saharan Africa on the main Financial Stability Board.