Once impacted by natural disasters, cities are relying on insurance companies to rebuild and recover, which is driving up premiums. Constructive partnerships between cities and insurance companies can lay the foundation for a more proactive planning model, where cities and insurance companies plan together before a disaster strikes. As it is, rebuilding after a shock nearly always costs more than preparing for it effectively in the first place.
As risk managers, insurance companies have the ability to understand and quantify risk. They could become cities’ allies after natural disasters to prevent shocks, reduce losses and transfer risk.
Last year, at Resilient Cities 2017, the first-ever Insurance Industry and Cities Summit was organized by the UN Environment Principles for Sustainable Insurance and ICLEI. The discussions, which connected the insurance industry, development agencies and local leaders, looked at how the insurance industry can help cities build resilience, and what cities need to do to seize the opportunity.
This year, the conversation highlighted innovations in the insurance industry – and obstacles that prevent successful partnerships between local governments and private insurance.
Thomas Arnoldt, Senior Manager Structuring at Munich Re, explained that insurance companies are developing divisions that deal with non-life insurance projects in the financial sector. The innovative – and rather new – instruments available to cities are:
- Index based insurance where insurance payouts are immediately provided as they are pegged to previously measured environmental conditions, or indexes.
- Impact bonds, special investments that provide capital aimed at generating a measurable, beneficial impact – such as pollution reduction or health – together with a financial return. Through these bonds, donors are transformed into outcome funders by transferring the risk associated with impact risk to investors.
- Resilient bonds, derivative of cat-bonds – or catastrophe bonds – that link insurance and resilience projects. With these bonds, the expected impact of some environmental conditions that made a planned investment necessary are taken into account, and lower the premium the city has to pay.
So why are these instruments only at the early stages of implementation? There are a number of obstacles
First and foremost, local governments never really approached the insurance world until recently. They saw insurance as a task for the state.
Second, data collection has never a public sector specialty.
One way to overcome this is to let insurance companies gather, systemize and share the data they have on hand. That is what Finance Norway is doing, collaborating with multiple municipalities to pilot new systems for sharing data. By sharing insurance loss data, insurance companies enable cities to really understand the risks and vulnerabilities, and to shape land use planning accordingly.
Third, in developing countries in particular, insurance is often viewed as a luxury – and insurance companies offer packages that do not cater to the context. They are often called only at the end of the risk management chain, and they are not well equipped to deal with the social impacts of shocks.
Many of tools presented are still being discussed rather than implemented. But one key lesson of effective collaboration between insurance and cities is find ways to prevent damages and build back smartly, rather than exactly as things were before. Insurance companies’ innovative and inclusive instruments might very well fund projects and strategies that make cities less vulnerable to begin.
This post is based on the Bringing the insurance industry and cities together session at Resilient Cities 2018.