After the Cancun climate summit: Will global action follow?

At the recent United Nations’ climate conference in Cancun, nations came together to discuss environmental plans. David Bresch explains what happened in Cancun and what the new consensus means for the insurance industry.

The year 2010 was never likely to go down as a watershed year for action on climate change. With climate science under siege and after the fallout from Copenhagen, expectations were low when the United Nations' climate conference opened in Cancun last December. But to the surprise of many participants, negotiators announced a breakthrough in the last hours of the talks. So what difference will the outcome in Cancun really make? And what does it mean for the insurance industry?

Arguably the most important achievement reached at the climate summit was a renewed confidence in the UN process of negotiation and its ability to deliver a long-term commitment and short-term actions. In Cancun, countries were able to put aside their differences and reach a compromise that signalled their willingness to work together on tackling climate change. This collective call for action has paved the way for realising a progressive climate agenda supported by governments and businesses alike.

Widest consensus
The Cancun agreement constitutes the widest consensus yet on key issues of the climate work programme. The accord includes - for the first time - an international commitment to limit global warming to no more than two degrees Celsius, set up a new climate green fund for developing countries, support the UN's deforestation scheme and establish a framework that will help countries adapt to a changing climate. The Cancun text also explicitly mentions risk management and insurance as paramount to the development of new climate solutions.

But further impulses are badly needed to move things forward. Even after Cancun, pledges made by countries to cut carbon emissions are not legally mandatory. Government promises to raise $100bn in climate aid by 2020 amount to no more than political aspirations. And the decision on the future of the Kyoto protocol has been deferred to the next climate summit in South Africa.

Transforming energy supplies
Yet putting off action on climate change is not an option if the world is to make any significant progress on transforming the global energy supply from fossil fuels to renewables. In addition helping communities cope with the unavoidable consequences of climate change is critical to protect development gains already made and secure future growth. These efforts will require significant funding from both public and private actors.

The biggest obstacle that investors face is the sheer scale and long-term nature of capital commitments to the renewable energy sector, which they have to make under a large degree of uncertainty. According to the International Energy Agency, worldwide investments of around $6trn are needed to triple global electricity generation from renewable sources over the next 25 years and match the scale of coal-fired generation by 2035.

Wider availability
Without additional funding and insurance for low-carbon technologies and infrastructure, the requisite investments will not take place. And without offloading some of the risk from climate impacts to insurance and capital markets, investment-driven growth is unlikely to be resilient to future shocks such as natural disasters and extreme weather. For these reasons insurance is central to the implementation of the global climate agenda. Making insurance options available to a wider community of stakeholders, including governments, municipalities, firms, households and individuals, is vital to drive key climate initiatives.

Time is of the essence. The sooner communities start to invest in adaptation measures, the better prepared they will be for the future. The statistics are telling. Over the last three decades, the economic cost of natural catastrophes has risen.

While inflation-adjusted costs were on average about $25bn in the 1980s, they rose to $95bn in the 1990s. In the last ten years, the damage from natural disasters reached an annual average of $130bn. Climate change, economic development, population growth and a higher concentration of assets in exposed areas have all contributed to this increase.

Vulnerable regions
According to studies by the Economics of Climate Adaptation Working Group more severe storms, floods, droughts and other natural hazards could cost some locations up to 19% of annual income by 2030. A large part of these losses are not insured, on average only 20 to 40% worldwide. Low levels of insurance coverage further compound the growing risks, particularly in the most vulnerable regions of the developing world. Measured in premiums as a percentage of gross domestic product, average insurance penetration rates in emerging markets reach only 2.9%, which is far below the 8.6% levels seen in industrialised countries. This means that developing countries face the largest gap between insured and economic losses. Without improving their disaster preparedness, they could become uninsurable.

With its long-standing experience in modelling and pricing climate risks, the insurance industry has a proven track record of designing custom solutions that strengthen local responses to climate change and promote investments in green technologies. Insurers have also found unconventional ways of pooling risk, often acting in partnership with governments. Such innovative insurance schemes cover risks that would otherwise not have been insurable. These solutions can be redeployed and tailored to the specific risk exposure of different regions and industries around the world.

Watershed moment
Whether Cancun can be judged a watershed moment in climate history remains to be seen. It has certainly sent some encouraging signs that could give further momentum to a global low-carbon economy and put development on a climate-resilient path. Insurers are poised to play a major role. If they succeed in mobilising the requisite resources, there is a good chance that - after the climate summit in Cancun - global action will follow.

David Bresch is head of sustainability and political risk at Swiss Re