Access to private capital is vital for governments’ ability to improve climate resilience, according to Guy Carpenter & Company, a global risk and reinsurance specialist and a subsidiary of Marsh & McLennan Companies.
Severe weather events and demographic challenges are straining government finances, making public-private partnerships more important in managing risk, according to Guy Carpenter’s Protecting our Planet and the Public Purse report. According to the report, the risk landscape for public-sector entities is changing at a rate never before seen – with governments being faced with extreme weather, mass migration and unfunded social liabilities.
Natural catastrophes are becoming more frequent, and the intensity for some perils is likely to increase, Guy Carpenter said. “Some of the most pessimistic scenarios associated with climate change point to major economic and societal upheaval,” the company said. “Sea level rise, for example, brings wide-ranging consequences to coastal properties across the globe while a warming climate will inevitably result in more frequent and severe wildfires.”
“The spectre of climate change points to a future that will see more frequent and severe weather events, bringing obvious threats to properties and infrastructures in high-risk areas,” said Rob Bentley, CEO of Global Strategic Advisory at Guy Carpenter. “The dynamics of climate change need to be understood and managed. The scale of change will vary significantly by location; some regions are likely to see minimal effects, while others will experience disproportional impacts. Effective risk transfer and mitigation strategies will play a crucial role in offsetting wide-ranging financial and socioeconomic impacts.”
As insurance penetration for climate risk falls behind rising loss trends, the cost burden of natural catastrophes is being increasingly assumed by governments, Guy Carpenter said.
“A culture of reliance on government assistance for disaster relief has emerged as a result, which puts pressure on governments to provide assistance after catastrophes occur and prompts a perception of moral obligation,” Guy Carpenter said. “Governments therefore need to rethink how they fund catastrophic events that go largely unbudgeted and place a strain on public resources.”
“A growing number of governments are now stepping up to the plate, and are taking proactive steps to manage risks by turning to the private sector for innovative risk mitigation solutions,” said Jonathan Clark, head of public sector at Guy Carpenter. “As our report demonstrates, the financial resilience of our communities is already benefitting from the innovative risk mitigation solutions being offered by the reinsurance market. The sector remains well-capitalized and the level of sophistication and expertise developed over decades of addressing previous market-changing events puts it in a strong position to help public entities confront the prospect of more frequent and severe weather events in the future.”
The report references six public-private partnerships that have been put in place to mitigate the financial burden on governments. These include the National Flood Insurance Program, the California Wildfire Fund, Flood Re in the UK, the Philippines Catastrophe Bond for Earthquake and Typhoon, the Southeast Asia Disaster Risk Insurance Facility, and the Fund for Natural Disasters in Mexico.
“The argument is clear: countries need to move more quickly to address the reality of climate change and its financial challenges,” Clark said. “Putting the capital and capabilities of the reinsurance sector to work to create new coverages and meet evolving demands from public-sector entities is a crucial component for increasing community resilience and reducing disaster suffering. At a time when governments worldwide are being forced to bear a growing share of natural catastrophe losses, and face multiple challenges in funding increasing costs associated with aging populations and higher debt, the reinsurance market has established itself as a capable private partner for the public sector.”