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What Does the Paris Climate Agreement Mean for the Insurance Industry?

by Steven Butler, National Sales Executive

March 23, 2016

parisIn the wake of the Paris Agreement, the world waits with baited breath in anticipation of its wide-reaching effects. Can we expect a reaction from the insurance industry?

Back in December, 195 countries agreed to the widest-reaching greenhouse gas-reducing emissions regulations the world has ever seen at COP21 in Paris, according to the New York Times. The Paris

Agreement, as it has since been christened, is the first universal, legally binding global climate deal in history, as the European Commission explains. The accord was nine years in the making, finally coming to fruition after false starts and watered-down compromises over the past few decades.  

While the regulations imposed by the agreement won’t go into effect until 2020, commentators the world round have been wondering exactly what its implementation might mean beyond the intended purpose of lowering greenhouse gas emissions.

Such wide-reaching legislation would conceivably have an impact on every market in the world, and therefore, every industry in the world. With that in mind, it’s best to be ready for this agreement’s inevitable ripple effects.

New Opportunities 

For the insurance industry, the Paris Agreement might bring new opportunities — but the future is unclear. Shortly after the details were released, the Geneva Association, an international think tank for insurance and risk management issues, issued a comprehensive report on the accord’s possible ramifications on the industry.

With its opening paragraph, the report paints a bright picture for the insurance industry’s prospects in the new market: 

It is clear from the explicit inclusion of insurance in the COP21 decisions and the Paris Agreement that both developed and developing countries recognise the importance of insurance as an integral part of national climate risk management strategies and the high potential for building financial resilience by expanding insurance.   

In an interview with Insurance Journal, Mayram Golnaraghi, the Geneva Association’s Director of Extreme Events and Climate Risks Programme and lead author of the report, expounded on what the Agreement might mean for the industry as a whole: “This opens up an unprecedented opportunity for the industry to start a very positive, open dialogue with the government towards development of sound, scalable, and sustainable insurance programs,” she argues, “as part of which significant amount of innovation can happen.”  

Sharing the Load

The major framework to drive policy in the future will be the Warsaw International Mechanism for Loss and Damage associated with Climate Change Impacts (the Loss and Damage Mechanism for short), as the United Nations explains. Established in 2013 at COP19, the Loss and Damage Mechanism will be essential “to address loss and damage associated with impacts of climate change, including extreme events and slow onset events, in developing countries that are particularly vulnerable to the adverse effects of climate change.” 

Basically, as a type of global reinsurance policy, the large economic powers of the world will be held (to some degree) responsible for loss and damage suffered by developing countries as a result of climate change, according to the UN.

Along with the inclusion of the Loss and Damage Mechanism, the Paris Accord will allow rich countries to subsidize risk or flood insurance beforehand for those in low-lying developing countries who face unaffordable premiums, according to New Security Beat

While the environmental risks will certainly intensify in the coming years, the obligations to assume responsibility in the aftermath of catastrophic events will be spread out to make recovery a more affordable prospect for everyone. In this way, innovative insurers can play a significant part in fighting the effects of climate change, ready to step in and provide new products for a world market that desperately needs it.

(Ed Gregory/Stokpic)

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