(Re)insurers reveal new solutions to rising climate GDP risks

The world’s smallest and most vulnerable countries risk losing over 100% of their GDP from extreme climate shocks next year experts have warned.

As the world leaders prepare for the UN’s COP28 summit in Dubai next week, new research from the University of Cambridge Institute for Sustainability Leadership (CISL), with risk analysis from global insurance group Howden has found Small Island Developing States (SIDS) and other vulnerable countries bear these overwhelming threats of climate impact almost alone.

However, the report, which models Loss and Damage (L&D) implementation, reveals these risks are insurable and proposes a solution using the power of (re)insurance and capital markets to dramatically scale up the impact of L&D funding. The modelling shows that the intolerable financial risks faced by this group of countries could be reduced to just 10% of GDP.

The study outlines an action plan for L&D implementation across 100 less developed, climate vulnerable countries. It proposes leveraging donor funding to unlock vast sums from (re)insurance and capital markets to provide guaranteed financial protection to exposed communities now, and through to at least 2050.

It added regardless of where negotiated outcomes on L&D settle at COP28, private sector innovation will be needed to apply donor funds in the most efficient, effective way to enable vulnerable nations to prepare financially for the future.

The research quantified the losses faced by small, climate vulnerable countries across the Pacific, Caribbean and Indian Ocean.

“Today, these countries face foreseeable losses of between 50% and over 100% of annual GDP from extreme climate events, such as severe droughts, tropical cyclones and floods. By 2050 losses are set to grow between 10-15% due to climate change alone, approximately 0.5% per year,” it added.

Despite the growing risks, modelling by the researchers revealed that these economies remain insurable. Under the proposed plan, an estimated $1 billion of donor-supported annual pure premium could protect all 30 of the world’s smallest and most climate vulnerable countries with a population of less than one million from losing more than 10% of their GDP from climate shocks; through a risk sharing mechanism known as “Umbrella Stop-Loss Protection”.

Despite growing risks from extreme climate events, the study reveals that this protection could be maintained through to 2050 and beyond, providing these countries with the necessary financial security to plan with confidence, attract investment, and make more informed decisions around resilient development and climate change adaptation.

Dr Mahmoud Mohieldin, UN Climate Change high-level champion, said: “This innovative initiative has the potential to protect vulnerable countries from climate-related losses with pre-arranged financing at a large scale, unlocking the risk capital markets to multiply the impact of donor funds. Mobilising private finance alongside the new loss and damage fund is crucial in addressing these impacts, and more such initiatives are needed.”

Rowan Douglas CEO, Climate, Risk and Resilience, at Howden, and chair, Operating Committee, Insurance Development Forum, who co-authored the report said financial security was vital at a time when climate risks were increasing significantly.

“The pure maths and dispassionate economics in this analysis are clear,” he explained. “Risk sharing systems empower hard won Loss and Damage funds to provide structural financial security to the widest range of vulnerable countries.

“We can mobilise existing expertise, institutions and partnerships to put this essential protection in place quickly. With this groundbreaking research by CISL, world leaders are guided by an action plan based on a bedrock of open science, rigorous analysis, shared alignment, and collective purpose.”