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Up to $1.5tn of pension capital available to tackle climate risk: Howden

Up to $1.5tn of pension fund capital could be deployed in the (re)insurance space to tackle the protection gaps thrown up by climate change, according to a report from Howden.

The broker said climate change was driving the frequency and intensity of certain perils beyond historical norms, and that the last 50 years showed an “exponential” increase in severe weather events.

The broker noted there was considerable capacity potential in capital markets, and the pool of supply provided by the ILS market for non-insurance market sponsors had the potential to grow significantly.

Howden said the pace of climate change was causing the market to reassess perils, impacting supply-and-demand dynamics in property catastrophe cover.

In the rapidly changing environment, it is likely to take some time before (re)insurers can be confident about catastrophe budgets and pricing levels. Howden pointed out that, by confronting challenges early, the sector had an opportunity to facilitate change in a managed way.

“Throughout this adjustment, the sector must live up to its responsibility of offering coverage that meets clients’ changing needs, as well as ensuring costs are appropriate for the level of risk assumed,” the report explained.

“Blanket exclusions cannot be the answer.”

The broker argued that any moves to compel corporations to retain more risk or pass it on to governments would lead to lost premiums and degrade the value of the insurance industry, calling its relevance into question.

“Whilst the underwriting environment will inevitably change to reflect the new operating landscape, this is a well-functioning market, where differentiated risk profiles and risk management strategies and advice can still unlock access to capacity and secure favourable terms,” the report said.

With a trend towards heightened risk awareness, Howden predicted the need for insurance would increase over time, and investment in research and modelling was essential to offer forward-thinking opportunities for buyers.

protection gap for weather related risks october 21 2021.PNG

The report flagged the gulf between economic and insured costs as an opportunity for the sector to increase coverage, but added that insurers had been slow to address the issue.

Figures from the broker showed insurance has only covered a third of all weather-related losses since 1990.

Group CEO David Howden said: “The power of insurance both in removing barriers to the transition to a lower-carbon future and in picking up the pieces when disaster strikes is immense. However, we cannot continue with a model that only protects those who can afford it.

“The need to deconstruct and rebuild insurance models in response to climate change is an opportunity to build back a more balanced approach, one which supports the long-term resilience of the world’s most vulnerable populations.”

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