Every year, as thousands of business and political leaders prepare to descend on the mountain resort of Davos in Switzerland to attempt to solve some of the world’s biggest problems, the World Economic Forum publishes its Global Risks Report. The annual report highlights the most significant threats to the world’s economy and society, and how they could evolve and interact with each other over the next decade. In the 2016 Report, almost 750 experts assessed 29 separate risks in terms of both their impact and likelihood. These experts deemed failure to tackle climate change through mitigation and adaptation as the single biggest risk in terms of its potential impact over the next decade. This is the first time since the report was published 10 years ago that an environmental risk has topped the ranking.   One of the reasons for this huge potential impact is the multiple and profound interlinkages between climate change and other risks, such as water crises, food insecurity, the spread of infectious diseases, mass forced migration, unemployment, and even fundamental economic, social and political instability.

Commenting on the Global Risks Report, Cecilia Reyes, Chief Risk Officer of Zurich Insurance Group, said: “Climate change is exacerbating more risks than ever before in terms of water crises, food shortages, constrained economic growth, weaker societal cohesion and increased security risks. Meanwhile… political conflicts are in turn making the challenge of climate change all the more insurmountable – reducing the potential for political co-operation, as well as diverting resource, innovation and time away from climate change resilience and prevention.” It’s little wonder that insurance companies are taking a keen interest in combatting the growing threat of climate change.

As highlighted by the Governor of the Bank of England, Mark Carney, the insurance industry is heavily exposed to climate risks, facing an estimated £33 billion per year in extreme weather-related losses. He warned that climate change will lead to financial crises and falling living standards unless the world’s leading countries take much more action. In the run-up to the Paris Climate Summit, voices from the insurance industry were among those calling for the need for a strong agreement in Paris to limit global temperature rise to well below 2 degrees. At the same time, insurance can provide one key solution for building communities build their resilience to climate shocks, including amongst the poorest people across the developing world – a point made in a second major report launched this week, Too Important to Fail by the UN High Level Panel on Humanitarian Financing

Drought in Ethiopia; Photo: UNICEF[/caption] In 2014, 53,000 people per day were forced from their homes by natural disasters, 90% of which were due to weather-related events. The world today spends around $25 billion per year on humanitarian assistance, including to help people affected by natural disasters and extreme weather. This amount is an astounding 12 times higher than it was in 2000, and yet never before has there been such a large remaining unmet need, estimated at $15 billion. According to UN Secretary General Ban Ki-moon, we are living in an age of “mega crises”. And so the High Level Panel’s report could not be clearer: the current global humanitarian system is “over-stretched and unable to respond adequately”. By 2030, climate change, among other factors, is predicted to continue to drive up the costs of humanitarian response to well over $50 billion a year. We do not only need more money in the humanitarian system to plug that gap, we need to change how we do things – moving from reactive response to preemptive preparedness and resilience-building; integrating our humanitarian and sustainable development interventions more coherently; and bringing in new actors – including the private sector – through new financing models and innovative partnerships. Initiatives like the G7’s ‘InsuResilience’, which promote the use of climate risk insurance to protect vulnerable people, could help tick all three boxes.

 Destruction caused by Typhoon Haiyan in the Philippines; Photo: European Commission[/caption] As highlighted in the High Level Panel’s report, “The insurance industry is waking up to the opportunities for bringing its risk financing products to least developed countries. Demand is growing rapidly…” The report argues that in the event of natural disasters, sovereign risk financing can help governments develop financial resilience, agricultural insurance can help to protect the livelihoods of farmers and pastoralists, and social protection programmes should be adaptable. It points out that, if they are well-designed, insurance programmes can act as an incentive of risk awareness, prevention and mitigation, as well as just risk transfer. Drawing attention to regional initiatives such as the African Risk Capacity and the Caribbean Catastrophe Risk Insurance Facility, the report recommends that risk financing mechanisms such as insurance be replicated across disaster-prone countries, to avoid relying so heavily on relief efforts that only kick in well after disasters happen. Taken together, these two reports tell a compelling story: climate change is the biggest risk to the world today and we need to get smarter about building resilience to extreme weather and natural disasters. Climate-related insurance and other innovative types of risk financing are far from a silver bullet but they can offer one important tool for the global humanitarian community as it comes to terms with this challenge.