‘Sustainable insurance’: Seven takeaways from the first-ever summit of insurers and city leaders
BONN, Germany — For the insurance industry, the global trend toward urbanization means a lot of new business.
The growth of bigger, wealthier cities hints at a lot of new property that could be insured. Urbanization is also an opportunity for investment managers at insurance companies, as profits will be found in financing the energy, transport, water and other infrastructure of growing cities.
City leaders should have a keen interest in the insurance industry, as well. As cities face growing threats from natural disasters and severe weather made worse by climate change, insurance can absorb some of the risk. Cities and insurers agree on the need to build urban resilience. Preventive measures such as strengthening building standards not only can save lives — they also can save insurers money on paying claims.
Representatives from cities and the insurance industry got together for a daylong summit last week in Bonn during the annual Resilient Cities conference hosted by ICLEI - Local Governments for Sustainability. Both sides agreed they had much to discuss. But as it turns out, they still have much to learn about one another, too.
Butch Bacani, who organized the gathering, likened the summit to “a first date”. Bacani leads something called the Principles for Sustainable Insurance Initiative at the United Nations Environment Programme. It’s a collaborative effort between the U. N. and the insurance industry that has become a framework for embedding four sustainability principles into the way insurers and reinsurers do business. About 100 companies are members.
The Bonn summit, co-organized by ICLEI and sponsored by the reinsurer Munich Re, aimed to bring city leaders into the dialogue. “This session is meant not only to show examples of what insurers can do and what cities can do,” Bacani said kicking off the day. “It’s also meant to shape what the global agenda looks like for cities and the insurance industry.”
Here are seven takeaways from the summit.
1. The ‘protection gap’ is vast — and growing.
“You can insure anything,” Bacani said. “The question is whether the price is affordable or not.” Apparently, the answer is no for many homeowners, businesses and governments around the world.
The result is an enormous and growing “protection gap” between insured and uninsured losses from catastrophes. While insurance penetration is lowest in developing countries, a recent report from Swiss Re says the protection gap is a big problem in developed countries, as well. Urbanization is playing a big role in this trend: The growing size and wealth of cities means there are more assets to lose when disaster strikes.
For the insurance industry, of course, this represents a big business opportunity. Yet in many parts of the world, there’s an ambivalent attitude about insurance. Andrew Mua, mayor of the Honiara in the Solomon Islands — where five islands already have been lost to sea-level rise and coastal erosion — guessed that 90 percent of residents there don’t carry property insurance. “For us local people, insurance is not an issue” we care much about, Mua said. “Even people who have big expensive homes — if you ask them, they’ll tell you insurance is a waste of money.”
2. Innovative tools can help close the protection gap.
A big push is underway to close this protection gap. Astrid Zwick, head of the Group of Seven (G7) industrialized countries’ InsuResilience Initiative, described the effort to enable access to insurance for an additional 400 million poor and vulnerable people by 2020. Zwick said the effort involves working with government leaders, development banks and the insurance industry to craft new coverage solutions.
Daniel Stadtmüller with Munich Re gave a tour of some of those new solutions. One is called “parametric” insurance. Essentially it means that a catastrophe within certain parameters — for example, an earthquake of a certain magnitude or a typhoon with a certain wind speed — triggers an immediate payout. Unlike with traditional insurance, there’s no need for claims inspectors to sort out actual damages. It’s a way for cities to get cash in hand quickly after a disaster to pay for relief and rebuilding, Stadtmüller said.
Stadtmüller also described catastrophe bonds. In this model, disaster risk is essentially securitized in the form of a bond sponsored by a government. Pension funds and other institutional investors put up capital that pays out if a disaster happens.
The public sector has some insurance tools of its own, Stadtmüller said. He cited the use of “wind pools” in the United States. Under this model, states have set up insurers of last resort for homeowners who can’t afford to buy insurance against wind damage in the private market.
3. Cities must better understand their risks.
Before cities talk about insurance products, however, they need to understand what risks they face. Robert Muir-Wood, chief research officer of Risk Management Solutions in London, said that can be more difficult than it sounds.
For example, he said, fewer than 10 people in Haiti died in earthquakes from 1900 to 2010. Then in one afternoon, an earthquake killed 200,000 people. “The record of the last few decades,” Muir-Wood said, “is not enough to tell you everything about what can potentially happen in terms of disasters.”
Cities around the world are deeply lacking in their capacities to model and plan around their own disaster risks, according to Muir-Wood. He cited Bogotá, Mexico City, Miami, New Orleans and San Francisco as some of the most sophisticated in this area. But he also noted that cities leading in this regard almost always became that way only because they’ve suffered a memorable disaster.
Muir-Wood said he expects cities to substantially increase their competencies in this area as they begin to wrestle with the impacts of climate change. “Five years ago, if you asked how many PhD modelers and climatologists were working for cities, it probably would have been none,” he said. “Today, there’s probably several tens. In five years’ time, it will be hundreds. Cities need expertise to get on top of their risks.”
4. Cities can work with insurers to reduce risks.
A good example of how cities and the insurance industry can team up on common interests came from Oslo. Guro Sørnes Kjerschow, the city’s adviser on climate change adaptation, described how Oslo collaborated with insurers to update its stormwater management plan.
Insurers, Kjerschow noted, possess important data that cities don’t usually have access to. “If your basement floods,” she said, “you don’t call the municipality — you call the insurance company.” City officials convinced insurers that there was mutual interest in sharing granular data on water-damage claims. The city then used the data to help draw new flood maps to guide future planning.
“The industry didn’t share the numbers immediately,” Kjerschow said. “But after a while building trust, they shared the information. There’s mutual benefits for the insurance companies: If the city knows better where the vulnerable areas are, the city can do more preventive measures, so there’s less damage in those areas and fewer payments for the industry.”
Kobie Brand, ICLEI’s regional director in Africa, agreed that there could be big upsides for cities in cooperating with insurance companies in this manner. “There’s a rich amount of data the insurance industry holds, and it’s sometimes much better data and more downscaled than local authorities will have access to,” she said. “In Africa, this lack of data is a huge problem in planning and shaping our cities. There could be a model where cities and the industry could come together to make better decisions.”
5. Insurers can help close the finance gap in cities.
One of the more staggering data points of the day was this: Globally, the insurance industry has more than USD 30 trillion in assets under management. By contrast, Bacani noted that USD 5 trillion to 7 trillion will be needed to achieve the Sustainable Development Goals, or SDGs. “Public finance is not enough,” Bacani said. “We need to find ways that capital could be deployed for the benefit of cities.”
Verena Treber of Allianz, which manages €1.8 trillion in assets, agreed this is a good goal. However, she cautioned that insurers face a number of constraints. “It’s not all our money,” she said. A lot of it is managed for other institutional investors. Most of the rest goes into safe long-term investments like government bonds to ensure that money will be there to pay claims.
When Allianz is able to make investments in infrastructure, for example, there are three criteria, Treber said. First, it has to be a big investment — preferably at least €100 million. It has to be a long-term investment that pays returns for decades. And it has to be safe. She cited a sewage tunnel under construction in London as a recent project that met all three criteria.
But many urban projects are a harder sell. As speakers tossed out hypothetical urban investment opportunities at her — buying buses, building a seawall, even moving an entire town — Treber had little trouble poking holes in the pitches. “For the big money”, she said, “you have to be realistic.”
6. Cities and the insurance industry need to build understanding.
Despite their mutual interests, it was clear that the conversation between city leaders and insurance companies is just beginning. Insurance executives cited numerous examples of working with national governments and even supranational organizations such as African Risk Capacity. There weren’t many local-level examples.
Several speakers cited an earlier meeting in Dar es Salaam. There, representatives of several insurers and reinsurers met with Tanzanian officials at the city, regional and national levels for a two-day get-to-know-you session brokered by ICLEI’s Africa office. The insurers wanted to find out more about how cities in the developing world think about risk. And the government officials wanted to learn more about what the industry could do for a fast-growing coastal city such as Dar es Salaam.
“It was an eye-opener,” ICLEI’s Brand said. The group workshopped around the city’s new bus-rapid-transit system to look at how reducing risks involved in big infrastructure projects might make these projects more insurable. Brand said city officials and industry people alike “got a lot out of it.”
In Bonn, both sides expressed an eagerness to continue the dialogue. However, Bacani noted that insurance executives have a long way to go in understanding how decision-making at the city level works. He also called on city leaders to increase their “financial literacy”.
“We saw it in Dar talking with city officials,” Bacani said. “They didn’t understand the basics of insurance. Reinsurance — what’s that? Retrocession, same thing. Bonds, same thing.”
7. The conversation will continue.
Bacani ended the day by getting a panel of city and industry leaders to agree to a set of three next steps, which he called the “Bonn ambition”.
The first step, Bacani said, would build on a recent commitment from the Moroccan government, which announced an effort to develop a national “sustainable insurance roadmap”. Bacani called on cities to aspire to have similar roadmaps at the local level.
The second step would mirror an ongoing effort between the United Nations and the insurance industry. At the behest of former U. N. secretary-general Ban Ki-moon, industry leaders are breaking down the 17 SDGs into components that insurance can make some impact on — the effort is called the “Insurance Development Goals”. Bacani suggested city leaders could join the effort, particularly when it comes to defining how the industry can help achieve SDG 11, the goal aimed at building cities that are “inclusive, safe, resilient and sustainable”.
The third step would happen at ICLEI’s next World Congress, set to take place in June 2018 in Montréal. Bacani suggested putting together a first-ever roundtable of mayors and insurance company CEOs, “to bring this agenda to the highest level”. Jed Patrick Mabilog, mayor of the Iloilo in the Philippines, called this “not only a good idea but a great idea.”
“There is an interest in cities and insurers to work together,” Bacani said. “The ultimate aim is having resilient and sustainable cities — and working with the insurance industry is a tool to make that happen.”