November 12, 2021: With V20 members suffering the increasing impacts of climate change together with persisting severe fiscal impacts of the Covid-19 pandemic, many see COP 26 as the last best chance to put humanity on a 1.5-degree path and avoid catastrophic consequences. Against the backdrop of these critical times, members of the governing body of the InsuResilience Global Partnership, the High-Level Consultative Group (HLCG) came together in their fifth meeting on October 27/28, 2021, to approve the Partnership’s efforts to establish the first international principles for premium and capital support (PCS) as an important part of strengthening the global climate and disaster risk finance and insurance (CDRFI) architecture.
Recognizing that the impacts of climate change are accelerating faster than earlier thought, with devastating fiscal and economic impacts on climate vulnerable low and lower middle income economies, the HLCG focused on enhancing the affordability of insurance instruments through a set of five SMART premium and capital support principles. Currently there is still a 98% financial protection gap in vulnerable countries, with financial protection against climate and disaster risks being almost non-existent. Other issues facing climate vulnerable countries were stressed to be at the center of considerations, specifically climate related increases of cost of capital and the looming public debt crises.
As highlighted in the Co-Chairs’ Conclusions published yesterday, the approval of the SMART principles followed the HLCG’s earlier discussions from June 2021, when they tasked the InsuResilience Secretariat to develop a proposal for decision-making. Drawing on the inputs from the V20 as also highlighted in the V20’s viewpoint on premium and capital support, these five core principles were further defined and developed by the V20, G20 and development partners of the InsuResilience Global Partnership.
During the October Meeting, Secretary Patrick Langrine who represented H.E. Finance Minister Brenson Wase from the Marshall Islands as the V20 HLCG Co Chair, emphasized that time-bound subsidization strategies through grants and concessional financing for climate and disaster risk financing products are key to gain sufficient market scale. Further, H.E. Mr. Carlos G. Dominguez, Secretary of Finance, Republic of the Philippines, member of the V20 group, emphasized that “CDRFI arrangements – including a premium support fund, pre-arranged, affordable and effective CDRFI instruments through micro and meso insurance and sovereign risk pools, and needs-responsive product offerings – need to support government-led responses and thus be tailored to the vulnerable countries’ specific needs and current fiscal circumstances.”
Towards this, V20 members of the HLCG also emphasized the need to spell out concretely who receives the PCS support, how much and for how long. Such decisions should be informed by important characteristics such as a country’s population, geography, economic and debt sustainability, and climate vulnerability. For example, most Small Island Developing States are still not eligible for concessional financing because they are classified as middle- or high-income countries. But they are more vulnerable than their income data might suggest.
For the first time, there is a global decision on the topic of premium and capital support. During the discussion, members of the HLCG also emphasized the need to move towards the operationalization of these principles as a necessary next step. Going forward, the Partnership will also address the operationalization of the principles to accelerate the access to disaster risk finance among low income and vulnerable population segments.
In the second part of the meeting, the HLCG addressed the needs for establishing the global Climate and Disaster Risk Finance and Insurance (CDRFI) architecture. The need for a global CDRFI architecture was based on the urgent reforms warranted in the global risk financing and insurance space. As already strongly highlighted in the V20 Climate Prosperity Recovery Agenda, and the V20 statement on opportunities for the resilience and sustainability trust, HLCG members from the V20 group emphasized that to mainstream climate risk analysis in public financial management, there is need for integrated risk management, including through investments in resilience, a risk-layered menu of financing instruments and reliable access to humanitarian funds for systemic risks.
While emphasizing the need for a global CDRFI architecture, H.E. Ms. Fatima Yasmin , Secretary of Economic Relations Division, Ministry of Finance, Bangladesh, the current presidency of V20 highlighted “the necessity for a better structure for the fragmented disaster risk financing institutions towards a more systematic delivery of ex-ante disaster risk and insurance finance is a key point of the V20 Climate Prosperity Recovery Agenda”. Moreover she also emphasized strengthening the institutional landscape at the macro, meso and micro levels for efficient delivery of ex-ante disaster risk finance to create the necessary institutional arrangements and improve access and affordability to safeguard global financial stability in the face of increasing climate-fueled shocks. Similarly H.E. Prof. Mr. Fekadu Beyene, Commissioner for the Environment, Forest, and Climate Change Commission of the Ethiopia, member of the HLCG singled out that the current global institutional global risk financing architecture is highly fragmented and specified that the future global CDRFI architecture has to be climate risk adjusted and fit to withstand increasingly concurrent and sequential shocks.
When highlighting the role of the IMF as a potential key institution within the global CDRFI architecture, Secretary Patrick Langrine from the Marshall Islands, reiterated that “Currently, we are missing the International Monetary Fund from the climate risk financing architecture. The current programs in the IMF focus on dealing with financial shocks while the physical shocks caused by climate change have inadequate support. The IMF’s new Resilience and Sustainability Trust Fund can complement efforts of InsuResilience to close the 98% financial protection gap in climate vulnerable countries, while together with Multilateral Development Banks, the IMF could also support V20 countries in incorporating fiscal buffers for climate-related risks in budget planning.” Similarly, the Co-chair of the HLCG, Dr. Maria Flachsbarth, Parliamentary State Secretary to the Federal Minister for Economic Cooperation and Development, Germany also highlighted that Germany would hold the G7 presidency in 2022 which will offer opportunities to build on progress made so far and rally G7 countries for enhancing the global CDRFI architecture.
After insightful deliberations, the HLCG approved to set the enhancement of the Global CDRFI Architecture as a core strategic topic for the InsuResilience Global Partnership in 2022 and tasked the InsuResilience Secretariat to summarize the discussion and provide guidance on potential next steps. In her closing remarks, Co-Chair Dr. Maria Flachsbarth from Germany announced her retreat from the HLCG and that once a new German government was formed, her successor would take over.
With important decisions on premium and capital support and the future of CDRFI reached during the 5th HLCH meeting, it is now high-time for further increased efforts from G7, G20 and V20 engagements in coming months towards a more need based and responsive ex-ante climate and disaster risk financing global architecture with higher PCS support. In this context, the V20-led Sustainable Insurance Facility (SIF) recently launched at the sidelines of COP26, is set to address an important gap: By focusing specifically on climate-smart insurance for micro, small and medium-sized enterprises, the V20’s SIF aims to provide protection complementary to solutions for households and governments and to facilitate the allocation of PCS to micro and meso insurance schemes.