With the launch of a new joint initiative to support the countries most vulnerable to climate change, the global insurance industry is evolving in ways that could carry important implications for business in emerging markets. The initiative, the Global Shield against Climate Risks (GSCR), was announced by the ministers of finance of the Vulnerable Twenty (V20) Group – which comprises economies susceptible to climate change – and the G7 after the COP27 UN Conference on Climate Change in Sharm El Sheikh, Egypt, in November 2022. It seeks to address the existing weaknesses in financial protection structures in climate-vulnerable economies through prearranged financing that is distributed before or immediately after a natural disaster. Initial contributions for the GSCR included €170m from Germany and more than €40m from other countries, with the first recipients of GSCR packages comprising Bangladesh, Costa Rica, Fiji, Ghana, Pakistan, the Philippines and Senegal. By end-2023 GSCR had raised €300m.
Other initiatives are in the works to support countries vulnerable to climate change, such as the Global Shield Financing Facility to help developing countries access financing for recovery from natural disasters and climate shocks. Countries are also taking their own steps to mitigate the potential consequences of climate change, as evidenced by the Qatar National Environment and Climate Change Strategy unveiled in October 2021. The initiative aims to reduce Qatar’s greenhouse gas emissions by 25% by 2030, limiting the carbon generated by the country’s natural gas production and growing population.
The urgency of the climate crisis became especially apparent during the summer of 2023, when the warmest June on record was followed by 10 of the hottest days on record in early July. In January 2024 the US National Aeronautics and Space Administration reported that the planet’s average surface temperature during 2023 was the hottest to date.
Legacy Issues
The failure of developed economies to deliver on the annual $100bn in climate finance promised at COP15 in Copenhagen in 2009 has had dire effects on the implementation of mitigation and adaptation measures. According to the V20, the group collectively incurred more than $525bn in climate impact from 2000-22. Additionally, the problem for V20 countries may be deeper than previously understood: the group’s research found that around 98% of the nearly 1.5bn people in their countries are uninsured against climate risks. As the damage brought upon by natural disasters continues to grow, the cost of capital and debt is rising to unsustainable levels, especially across climate-vulnerable economies, where workforces are mainly employed by small and medium-sized enterprises.
Reimagining Risk
The GSCR offers the insurance sector a chance to expand its offerings to V20 countries, which could help shape a more effective global response to climate change. The industry has begun to leverage collaborative platforms, including the Insurance Development Forum (IDF) and the InsuResilience Global Partnership (IGP), to develop mechanisms through which to enact the GSCR.
At the IGP’s annual forum held in June 2023 in Bonn, Germany, the V20 and the G7 launched the Global Shield Solutions Platform, a multi-donor grant facility to support Global Shield countries. In September 2023 the taskforce for nature-related financial disclosures, itself launched at COP27, published a set of recommendations providing a risk management and disclosure framework for companies to assess and address issues pertaining to the potential longterm effects of climate change.
Insurers have already evolved in recent years from a model of concentrating on a specific industry and its operational risks to a more holistic approach, which best applies for modelling climate risk and embracing clean energy technologies. One takaful (Islamic insurance) company that has taken steps towards addressing the potential impact of climate change is Kuwait Finance House (KFH). In September 2023 KFH Takaful hosted the first Takaful Alliance Roundtable with the UN Development Programme in Kuwait City on how international initiatives can protect vulnerable communities.
Elsewhere, in July 2023 government and local stakeholders in Accra, Ghana held their first consultation with international organisations about how to determine strategies and priorities related to climate disaster risk finance and insurance, and how to leverage support from both the GSCR and the Global Risk Modelling Alliance (GRMA), the latter established in 2021 after COP26 in partnership with the IDF. Ghana is serving as the chair of the V20 through to the end of 2024, having taken over the position from Bangladesh in 2022.
By modelling the risks and potential impact of climate-induced catastrophic events, insurers can develop appropriate policies for clients and investors. The GRMA, a key resource for the GSCR, aims to use open-source technology and standards optimised for public sector use cases; a public good fund to help countries fill model and data gaps; and a technical assistance team of public and private sector practitioners to work with V20 countries on projects.
Insuring Green Energy & Finance
With the UAE having hosted COP28 in 2023, there is significant potential to build on the progress the local insurance sector has made in recent years. For example, the country has introduced solutions that address climate risk for the financial services sector. It has also made a concerted effort to implement the recommendations laid out by the Task Force on Climate-Related Financial Disclosures, a private sector framework that ran from 2017-23 and had the objective of developing common global standards for corporate climate-related disclosures. In March 2023 the Abu Dhabi Global Market’s Financial Services Regulatory Authority and other members of the UAE’s Sustainable Finance Working Group launched a public consultation on a new set of draft principles for UAE-based firms in the financial services sector.
Insurance companies can capitalise on the emergence of ambitious national-level policies to enable the energy transition and include new public-private partnerships, as well as the commercialisation of clean energy technologies in their efforts to develop innovative risk-management and financing solutions.
With the use of renewable energy accelerating in the Middle East – for example, in January 2024 Kuwait announced a tender for 1.1 GW worth of solar projects as part of its efforts to have renewables account for 15% of its energy mix by 2030 – insurance companies have an opportunity to provide insight into risk reduction. For instance, by analysing the issues related to certain solar panels, or to the construction of solar fields and power stations, insurance companies can apply their knowledge to assist in building out vital projects as quickly as possible to meet the climate-related goals of customers.
Linking Net Zero to Insurance
Another major opportunity for insurance companies to help businesses mitigate climate risk is to harness the global momentum for setting net-zero targets with a robust energy transition plan, with many insurance and reinsurance companies already setting goals. In January 2023 the UN-convened Net-Zero Insurance Alliance (NZIA) launched its first target-setting protocol, enabling NZIA members to independently set science-based, intermediate targets for their respective insurance and reinsurance underwriting portfolios in line with a net-zero transition pathway. However, in July 2023 the alliance dropped the requirement that all members set such targets as a result of pressure in the US, which is expected to slow the initiative.
Nonetheless, insurers looking to expand their client base have plenty of opportunities to underwrite and invest in green energy infrastructure systems, carbon markets and nature-based systems in Africa, where a number of new net-zero-target-based schemes have been deployed in recent years. The voluntary Africa Carbon Markets Initiative aims to produce 300m carbon credits annually by 2030 and 1.5bn credits annually by 2050 through the commercialisation of natural assets, while the Alliance for Green Infrastructure in Africa, an initiative launched by the African Union, the African Development Bank Group and investment platform Africa50, aims to raise $500m for early-stage project development.
The voluntary carbon market – spanning carbon credits as well as nature-based carbon offset projects such as planting new forests – could lead to an estimated $1.3bn in demand globally for new specialist insurance policies and services by 2030, according to a 2021 report published by carbon credit ratings agency BeZero Carbon and insurance brokers Howden and Blackford Insurance. Under more optimistic scenarios, this figure could increase to $2bn-4bn.
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