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Insurance sector has key role in climate agreement

Posted On: Jan. 17, 2016 12:00 AM CST

The international insurance industry is set to play a significant role in fulfilling the promise of the global climate agreement reached in Paris last month, both as providers of products and services and as investors.

In December, nearly 200 countries adopted a climate deal that aims to limit the increase in global temperatures to 1.5 degrees Celsius, establishes commitments by countries for their contributions to this goal and commits all countries to submit more progressive climate plans every five years, among other actions.

“The agreement is about as good as could have been hoped for, which is limited,” said Michael Gerrard, professor and director of the Sabin Center for Climate Change Law at Columbia Law School in New York. “They are voluntary and not enforceable, but there will be a stringent reporting system.”

A major success from the viewpoint of insurers was the explicit mention of the role of risk insurance facilities, climate risk pooling and other insurance solutions laid out in Article 8 of the Paris agreement, said Peter Hoeppe, head of Geo Risks Research/Corporate Climate Center for Munich Reinsurance Co. in Munich.

For Shaun Tarbuck, CEO of the International Cooperative and Mutual Insurance Federation, one of the highlights of COP21 — shorthand for the United Nations Framework Convention on Climate Change's 21st Conference of the Parties — was the recognition and acceptance of the insurance industry's role in the global climate solution.

“Our job is to manage resilience and risk so we are the actual bedfellows of governments in terms of trying to protect lives and livelihoods,” he said. “And I think that was beautifully reflected.”

That's not to say the agreement is without major flaws, notably the lack of specific commitments about who has to contribute to the previously established goal of providing $100 billion in climate finance per year by 2020 to developing countries, Mr. Hoeppe said.

Steve Waygood, chief responsible investment officer for Aviva Investors Holdings Ltd., said in an email that it was disappointing the agreement did not mention or include a carbon price, carbon tax, end to fossil fuel subsidies or a requirement to extend emissions trading to reduce greenhouse gases. But the talks and other elements of the agreement were positive, including welcome plans by the Organization for Economic Co-operation and Development to consider whether a new guideline for investors in relation to their fiduciary duties and climate change was necessary, he said.

“The agreement isn't perfect,” he said. “But it is very, very good.”

European insurers and reinsurers who have been sounding the alarm on climate change for many years were visible participants at COP21 and have taken concrete steps to contribute to a climate solution, said Cynthia McHale, director of the insurance program for Boston-based investor coalition Ceres, an advocate for sustainable business practices.

In November, Munich-based Allianz S.E. announced plans to divest from coal assets, which will apply to companies that derive more than 30% of revenue from coal mining or generate more than 30% of their energy from coal.

“That takes a lot of courage for Allianz to do that” because Germany is a major coal-producing country, Ms. McHale said.

By contrast, the U.S. insurance industry is “continuing to be very silent on this” and was noticeably absent during the Paris talks, she said.

Many of the individual climate plans, formally known as intended nationally determined contributions, include significant scaling of renewable energy generation, which presents a major demand opportunity for the insurance industry as these facilities will need to be insured, Mr. Gerrard said.

During a COP21 session, the insurance federation announced the launch of its 5-5-5 Mutual Microinsurance Strategy, which aims to protect 25 million people in the poorest areas of the world by 2020 by offering insurance coverage tailored to disasters in developing countries, starting with India and the Philippines, by scaling existing cooperative mutual insurance companies in these countries, Mr. Tarbuck said.

Insurers should also refuse to insure parts of cities not being developed with an eye toward mitigating the effect of natural disasters, which could encourage revised building codes and discourage risky development, he said.

Carriers also have a significant role to play as investors, namely intensifying their focus on smart-risk investing, Mr. Tarbuck said.

The federation and the International Insurance Society reached their goal of doubling investment in green finance to $84 billion by the end of 2015 and plan to raise this target to $420 billion by 2020.

The next phase entails providing a framework for all asset classes and changing the behavior of the asset managers in insurance.

“It is important that we utilize our investable assets in a more appropriate way than we have been doing,” Mr. Tarbuck said.

Analysis firm Bloomberg New Energy Finance, a unit of Bloomberg Finance L.P., pegged worldwide clean energy investment in 2014 at $340 billion, a 12% increase from the previous year.

“We know those investments will be increasing, and we really want to see the insurance industry engaged in that,” Ms. McHale said. “We really need the insurance industry to help finance the transition, just as today and in the past they've helped finance the fossil fuel industry.”

Munich Re, for one, had made infrastructure, renewable energies and new technologies investments totaling €1.5 billion ($1.6 billion) by the end of the 2013 fiscal year and seeks to raise that to €8 billion ($8.7 billion) over the next few years if it can find sufficient assets to invest in, Mr. Hoeppe said.

“The only solution in our eyes is there should be a quick switch from fossil fuels to clean energy,” he said. “This is the problem right now, but I'm optimistic that Paris COP21 will help us to find these investments.”