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Reverse paradigm re/insurance penetration in emerging markets for scaling adaptation finance and resilience

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By Sarah Argoubi

· 9 min read

The summer of 2023 was the hottest on record. Heat waves broke records and disrupted life across much of the world. However, according to the Intergovernmental Panel on Climate Change, the Global South is highly vulnerable to climate systemic threats and represents half of the world’s population. Therefore, climate change will exacerbate inequalities and increase societal and geopolitical tensions because of the interdependence of climate impacts and the disorder of adaptation measures on a global scale. Therefore, reaching the Paris Agreement goal of reducing carbon emissions to limit global warming is solely addressing half of the climate equation. Finance for adaptation is also crucial to combating the climate systemic threat.

Consequently, the COP 28 President highlighted the need to enhance adaptation finance in the short term to support vulnerable countries. He urged, “doubling adaptation finance by 2025 is a critical first step but we need to look at directing a solid proportion of all climate finance toward adaptation responses.” 

As a result, to date, the milestone further is to boost Impact investing. How might one link and operationalize climate-proof objectives into a sound business strategy to address the urgency of scaling adaptation finance in emerging markets? The non-life insurance sector would be a valuable pathfinder to envision future climate adaptation and to pave the way for a resilient world for vulnerable countries.

The non-life insurance sector plays a crucial role in addressing both facets of the climate equation 

The climate equation encompasses the twin objectives of reducing carbon emissions to limit global warming to 1.5°C by 2030, transitioning towards net-zero greenhouse gas emissions by 2050 and allocating finance towards adaptation measures. Besides, the risk equation related to extreme weather events is becoming increasingly complex because climate risks are nonlinear. The complexity arises from the dynamic interconnection of physical and transition risks in the short and long term. Therefore, the non-life business is a pivotal instrument in scaling and facilitating finance for adaptation and resilience in emerging markets and developing countries to tackle the global climate systemic threat. Its uniqueness is that it holds dual leverage to increase adaptation finance by managing climate risks and developing innovative investor public-private partnerships. Indeed, this sector owns USD 36 trillion in assets under management.

Furthermore, at a global scale, the need for green infrastructure investment is about USD 90 trillion in the period up to 2030, more than the current stock today. The International Renewable Energy Agency estimates USD 4.4 trillion per year in low-carbon energy alone. Thus, the public sector requires private support to close the infrastructure spending gap. 

To meet the challenge of scaling finance for adaptation, integrate climate-proof objectives into a business strategy for scaling adaptation finance and resilience in emerging markets.

A future-climate-proof strategy for non-life businesses: reverse paradigm re/insurance penetration in emerging markets for scaling adaptation finance and resilience through green investing with the World Bank Group

The business case for climate adaptation operationalizes climate-proof objectives into a sound strategy to address the urgency of scaling adaptation finance in emerging markets. 

It offers a novel approach to reverse the paradigm of reinsurance penetration to promote impact investing and increase finance for adaptation and resilience, especially in Africa. According to the Intergovernmental Panel on Climate Change, temperatures across southern Africa increased at twice the world pace on average in the five years leading up to 2019.

It outlines how turning from business as usual to an alternative investment strategy would narrow the financing gap for sustainable infrastructure. The aim is to spur increased capital capacity for a dedicated green financing channel through a unique pool of capital with reinsurers as institutional investors and the World Bank Group. 

Besides, it also underscores the need for creating a comprehensive climate-proof strategy that encompasses both investment and underwriting to increase adaptation finance. It would enable addressing both sustainable non-life expansion and its growing liquidity needs. This is a groundbreaking approach because it reverses the traditional insurance market penetration through underwriting. 

The novel strategy of reversing the paradigm of reinsurance penetration in emerging markets to promote impact investing would enhance climate adaptation in vulnerable countries and unlock untapped expansion for the industry.

An opportunity to unlock untapped growth in both underwriting and investment activities in the non-life business in the most attractive markets in the world

The current level of reinsurance market penetration is low across the African continent because of affordability issues. Additionally, the growth outlook related to underwriting activities will remain low according to Swiss Re. Despite this, Africa is considered one of the most attractive untapped financial services market regions due to its growing and increasingly wealthy population.

However, the low level of penetration means a lack of big data collection. It also underlies the industry’s challenge in strengthening its grasp of climate risk from climate-based sources on the continent. Even if innovative solutions against extreme weather events, as well as private-private partnerships with giant reinsurers and governments, are currently in operation. 

In fact, according to the world’s biggest reinsurer, “investment in green infrastructure will help keep property risks insurable in the face of climate change.” The insurance actors will help de-risk projects and mitigate climate risks. Thus, the business road map outlines how turning from business as usual to an alternative investment strategy would increase finance for adaptation to support vulnerable countries coping with climate threats. This novel approach of reversing the reinsurance’s penetration paradigm in emerging markets would leverage growth in both underwriting and investment activities. It would also address the increasing need for liquidity in the re/insurance industry to ensure capital stock. As a result, it all comes in a full virtuous circle.

Furthermore, from an investment standpoint, the African landscape offers huge investment and pipeline opportunities to catalyse sustainable real economic growth, especially in green infrastructure. According to the IRENA, development in renewable energy is crucial for Africa's future. Consequently, it recently set an Africa Green Deal to foster capital investment attraction and create cross-border cooperation. However, investment opportunities in renewables are significant in Africa, from an industry standpoint, it seems riskier to invest there than in the advanced markets. It should be noted that, basically, re/insurers’ business model is managing risks while remaining solvent and profitable. So, they are highly risk-averse in their investment policies. Therefore, partnering with a robust development bank would be safer.

A unique pool of capital to scale adaptation finance through an innovative capital business model: a World Bank-reinsurers partnership 

A public-private partnership between the World Bank Group and non-life reinsurer actors would enable the structuring of the financing channel investment to increase the capital capacity. This unique capital pool structure offers a safer partnership business model. Considering the capital allocation needed is an average of USD 2.2 trillion annually in infrastructure to 2040 in emerging markets according to the Swiss Re Institute Research, “making up two-thirds of global spend”, the public sector needs support from the private sector to close the spending gap. Therefore, impact investing is an innovative way of boosting the private sector’s contribution to achieving the UN Sustainable Development Goals. This investment strategy seeks to earn financial returns while also creating a positive social or environmental outcome. Additionally, the World Bank Group set the operating principles to support its development. 

The World Bank Group-re/insurers capital pool offers mutual benefits based on a strategic growth collaboration, which is established on a safer structure model to enable finance for adaptation. Indeed, this innovative business model has merits:

  • Increasing the amount of capital investment allocation toward green infrastructure
  • Limit the risks by associating the knowledge of the World Bank Group in countries with de-risk projects expertise of re/insurers, in particular during the construction phase
  • In addition, reinsurers actors provide their prevention expertise related to climate extreme events
  • Benefit competitive rate of loans on the market 

At last, from the perspective of reinsurers, this business model provides a safe guarantee in case of losses.

Solvency 2 framework: foe or misperception for channelling money toward green infrastructure? 

The Solvency II framework governs the non-life insurance industry in the European Economic Area. The OECD reports that from a business perspective, the capital charge requirements could be perceived either as an incentive or a disincentive. The issue has been discussed by the United Nations Development Programme. However, it is still an open question. So, it is critical to determine whether the solvency regulation poses a barrier or perceived obstacle to directing funds toward green infrastructure, notably in emerging markets. 

Per the expert opinion of the European Insurance and Occupational Pensions Authority on capital charges for green infrastructure, the capital charges for green infrastructure investments can be reduced under certain conditions, despite not explicitly linking them to sustainability risk factors. EIOPA plans to explore a dedicated prudential treatment for exposures related to environmental and social objectives by 2023. Moreover, the EIOPA will explore by 2023 a dedicated prudential treatment for exposures related to environmental and social objectives.

Besides, the European Green Deal aims to channel the flow of money towards sustainable activities. In particular, the EU Taxonomy will classify which activities best contribute to reducing gas emissions and avoiding greenwashing. It could be considered by re/insurers as an incentive-supportive regulatory framework to foster capital channels toward green activities. 

In conclusion, the final outcome is the result of a virtuous circle to address with consistency both facets of the climate equation for scaling adaptation finance and resilience.

The non-life insurance industry is a key player in increasing finance for adaptation and resilience to support vulnerable countries. This is a future business climate-proof strategy for non-life insurance: shifting away from business as usual in emerging markets to scale impact investing by focusing on creating an innovative partnership with the World Bank Group. It aims to spur increased capital capacity for a dedicated green financing channel through a unique pool of capital to narrow the spending gap in Africa.

Moreover, it is an opportunity to unlock untapped growth in both core non-life businesses in the most attractive financial markets in the world. The climate adaptation business strategy underscores a comprehensive trajectory, encompassing underwriting and investment activities. The novel approach of reversing the paradigm of insurance market penetration from underwriting to an alternative investment strategy would unlock untapped business growth and also address the increasing need for liquidity to ensure capital stock.

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About the author

Sarah Argoubi embraces a rich and broad experience in sustainability with a passion for fostering positive cross-sector synergies. She is a seasoned practitioner in EU affairs advocacy for NGOs in sustainable finance. She also has a corporate track record in climate adaptation as a senior risk manager and lawyer at EDF Renewables and in insurance in emerging and advanced markets. She serves on the board jury for the HEC Paris MBA seminar and research project on AI and Ethics. She holds an Executive Master from HEC Paris and a Master of Law from the University of Paris X.

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