The Role of the Insurance Sector in a Climate Change Agreement

Joint Geneva Association and OECD Conference on Climate Change and the Insurance Sector, Opening address by Gabriela Ramos OECD Chief of Staff, G20 Sherpa and Special Counsellor to the Secretary-General

This special session of the OECD Insurance and Private Pensions Committee was organised at a critical juncture—as negotiators at COP 21 worked towards achieving an agreement to get us on a 2 degree pathway. The financial sector is coming to the forefront of managing the uncertainty of, transition to, and adaptation to climate change.

The insurance and reinsurance sector plays a critical role in managing the financial impacts of disasters by absorbing some of the losses and providing relatively quick access to funding for recovery. Countries with mature insurance markets recover much faster and more efficiently when struck by a disaster. Insurance can also play a critical role in incentivising the reduction of risks. However, these important market functions are significantly underutilised. Between 2005 and 2014, insurance covered only 51 per cent of all losses from meteorological and hydrological disasters in high-income countries, and less than 10 per cent of losses in developing countries. Closing this “financial protection” gap will only become more challenging in the context of a changing climate. In this context, policymakers and regulators have a critical role to play in ensuring that insurance sector policy supports the capacity of insurance and capital markets to absorb increasing disaster losses and addresses the market failure that occurs where insurance premiums are beyond the ability of large parts of the population to pay.

Insurance companies also have a key role to play through their investment decisions. Insurance companies alone represent over USD 28 trillion in assets under management. The transition to a low carbon economy will require trillions in investment into infrastructure—much of which will need to come from private sources. A number of insurance companies have made significant commitments to support this transition to a low carbon economy, through investments in green bonds, renewable energy projects, and energy efficiency. These investments can be viewed as a “climate hedge” given the potential of assets dependent on fossil fuel extraction and consumption becoming stranded assets, and will likely increase going forward. Government policies can play a central role in influencing how this private capital is mobilised and shifted, for example by improving the scope and consistency of disclosure on climate change risks and providing further guidance on how institutional investors can best take into consideration the impact of climate change on their investments, as part of their broader fiduciary duties.

The Insurance and Private Pensions Committee brings together officials from OECD members and key partners, enabling discussions on the implications of climate change in such important and relevant areas. I hope that this will be the beginning of active discussions on climate change in this Committee.

December 3, 2015

 

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