When the governments of the world came together in Paris in 2015 for COP21, it was small island developing states (Sids), led by the Caribbean, which argued most vigorously that the world needs to limit its average temperature rise before 2100 to 1.5C and not 2C, as many had suggested.
The slogan was “1.5 to stay alive,” first advocated by the Caribbean delegation, led by Dr James Fletcher, at the time of COP21 St Lucia’s minister for sustainable development and energy, under which the voice of Sids successfully united and together got the world to agree on the 1.5C target in the Paris Agreement, used again as the rallying cry of the Caribbean at COP26 in Glasgow last year.
By 2022, it is clear that climate change is an understatement – it is a climate crisis. We have already reached close to 1.2C average temperature increase. The World Meteorological Organization has concluded we now have a 50 per cent chance that the world will experience a temperature of 1.5C above pre-industrial average within the next five years.
In 2015 there was zero per cent chance of that occurring.
But staying under 1.5C rise is not to be understood as a safe harbour. At 1.5, the islands of the Caribbean “are only guaranteed half a chance of a liveable future,” according to Michael Taylor, professor of climate science and dean of the Faculty of Science and Technology at the UWI, Mona campus, Jamaica.
There is a world of difference between 1.5C and 2C. The world will lose 70-90 per cent of corals at 1.5C; at 2C 99 per cent of corals will be lost. Fisheries will decline twice as much, three times as many insects will be lost at 2C, etc.
But here is the kicker: according to the national targets governments set up to last year, we are heading to 2.4C and if we base our estimates on the actual policies and actions governments are undertaking, then we can expect 2.7C or as high as 3.7C.
So, whichever way you look at this – it is a full-blown emergency. We need to do our utmost to avert damage, reduce impact, and protect people, communities and the nature that we are part of. We are already experiencing the effects – if you think that it is "hot these days" – well, Fletcher, now managing director of Soloricon St Lucia, aptly reminds us: this is the coolest it will be in your lifetime. It will get a lot worse fast if, or before, it will ever get better.
Risks facing the insurance industry
The climate emergency (and the other emergencies, such as the rate of biodiversity loss, pollution, inequality, health, etc) exposes insurance companies to three main categories of risks:
1. Physical risks – for example the effects of severe weather events –storms, flooding, droughts, etc on people, communities, and business. Physical risks are becoming so high that insurability and affordability of premiums will become even bigger problems than they already are. Even at current rates there is a huge insurance gap. Governments and the most vulnerable are not or cannot insure what they should.
2. Transition risks – there will be huge changes in the demand for insurance as a result of the different decarbonisation paths and speeds across sectors. Different lines of business, sectors, and geographic regions will experience things very differently.
A very important part of an insurance company’s business model is how it invests the premiums it collects for underwriting risks. At present, insurance companies in the Caribbean are not very climate-conscious investors, and they are thereby experiencing and are themselves contributing to huge risk exposures through investments in unsustainable companies. Most are caught in and contributing to a vicious cycle.
3. Litigations risks – insurance companies themselves and their customers are increasingly exposed to risks of being sued for the inadequacy of their ESG practices. However, most insurance companies are not yet tracking or preparing for these risks.
Insuring the transition
The 40th Annual Caribbean Insurance Conference took place from June 5-7 in the Bahamas. The biggest theme across the presentations and discussions was not only the risk that insurance companies are facing, but also the critical and urgent role the industry should play in the Caribbean – that of insuring the transition to a more sustainable future.
Insurance companies are often referred to as “societies’ risk managers.” The true purpose of insurance companies is, according to Christian Mumenthaler, CEO of SwissRe, “to make the world more resilient.” And it is resilience that people, communities, the financial system and companies, need in the face of the crises.
The insurance industry has a triple role in sustainable development, according to Butch Bacani, programme leader at the UN Environment Programme’s Principles for Sustainable Insurance Initiative (PSI), the largest collaboration between the UN and the global insurance industry:
• First, as risk managers through their expertise in catastrophe risk modelling and managing physical risks and preventing losses. This expertise is critical for businesses, cities and communities as they seek to understand, mitigate, and protect against, and manage the risks they are facing.
• Second, as insurers. As underwriters of risk, insurers protect households, businesses and governments by absorbing financial shocks, particularly those due to extreme weather events. Moreover, insurers are key enablers for the real economy and can engage with their clients on their decarbonisation pathways. Insurance solutions can de-risk the assets and activities that are driving decarbonisation —from renewable energy, zero-emission transport and electrification of industry, through to green buildings and nature-based solutions.
• Third, as investors. Caribbean insurance companies must, in accordance with legislative requirements, invest 70-80 per cent of their premiums in assets in local markets. That means that insurance companies hold significant shares in many local companies. Insurance companies should ensure the companies they invest in transition to net-zero and nature-positive governance and business models so that they reduce the risk, and are part of the solution and not the problem.
At the conference, Bacani suggested the insurance industry and its key stakeholders consider developing a sustainable insurance roadmap for the region.
“A Caribbean sustainable insurance roadmap is essentially a comprehensive regional strategy and action plan that would harness the insurance industry’s risk management services, insurance solutions and investments to accelerate the transition to resilient, net-zero, nature-positive and inclusive Caribbean communities and economies,” he said.
“Such a roadmap could also serve as the foundational framework for the Caribbean insurance industry to support the global agenda of cutting greenhouse-gas emissions in half, reversing nature loss, and achieving the UN Sustainable Development Goals during this UN Decade of Action.”
The governance of companies must be transformed, retooled, engaged in new ways with different actors to take a leadership role.
My own conference presentation showed how insurance companies can practically address these risks and opportunities through purpose-driven ESG programmes.
According to Musa Ibrahim, president of the Insurance Association of the Caribbean (IAC) and managing director of Tatil and Tatil Life, “The industry is committed to working with its members, regulators, policy-makers and stakeholders to make insurance cover and our investment practices relevant to the real risks of the climate crisis; and in so doing to take a leadership position in the financial sector.
"The looming climate crisis changes the dynamic of the industry. Reinsurance capacity may contract as reinsurers may withdraw capacity; this will create demand-and-supply pressures on pricing. Notwithstanding this, our primary objective is to the stop the accelerated rate of climate-crisis impacts. We must act swiftly and act now.”
Dr Axel Kravatzky is managing partner of Trinidad and Tobago-based Syntegra-ESG Ltd vice-chair of ISO/TC309 Governance of organizations, the co-convenor and editor of ISO 37000 Governance of organizations – Guidance. He is currently the project leader for ISO 37006 Indicators of effective governance.
Disclaimer: the views presented are those of the author and do not necessarily represent those of any of the organizations he is associated with.