Understanding the role of insurance in climate risks

Extreme weather events have become more common than ever due to climate change. In addition to working together to slow down climate change and building infrastructure to enhance our climate resilience, more individuals, small businesses, or even countries have opted for various insurance-related solutions to mitigate the damage caused by climate risks.

On Wednesday, 29 March 2023, DLA Piper and Marsh co-organized a webinar that introduced the role that insurance can play when facing climate risks. This webinar also presented new ideas to the insurance and ESG sectors when it comes to building climate resilience in Hong Kong and APAC.

Below are the key highlights from the discussion:

• Unprecedented climate conditions in recent years mean that past climate records are no longer fit for purpose. This poses a problem for the traditional insurance industry, which uses historical data for risk pricing and modelling. There is a need for new and different insurance products to share such risks (such as parametric insurance).
• Parametric solutions are risk transfer solutions structured around a transparent third-party index and pre-agreed payout formulas. It should be noted that payout depends only on the index value and not on actual physical losses. Compared to traditional insurance, parametric insurance allows for reduced costs and quick payment as payout is set in advance. There is higher transparency in the process and the solution (including the parameter, trigger and payout) is tailor-made for each client.
• Parametric insurance can help cover traditionally uninsurable assets. Example: Client that was worried that business interruption could be caused by future typhoons to their transmission and distribution (T&D) systems. Marsh designed a customized parametric typhoon solution, with claim payouts being calculated as a function of the typhoon's sustained windspeed in the indemnification zone.
• Traditional insurance is heavily reliant on the concept of indemnity. Policyholders would need to prove and quantify the loss they have suffered and engage in loss adjustment processes to ensure that payout is not more than the loss quantified.
• Parametric insurance is not intended to replace traditional insurance policies – they are complementary tools. The prevalence of parametric insurance will likely continue to rise in coming years due to its coverage of risks that have traditionally been uninsurable or difficult to insure.

Thank you to the following speakers for sharing your insights:

• Si Si He (Head of Alternative Risk Transfer, Marsh Asia; Head of Parametric Solutions, Marsh Asia & India)
• Graeme Riddell (Climate & Sustainability Consulting Leader, Marsh Advisory, Asia)
• Heng Loong Cheong (Co-head of Asia Insurance Sector, DLA Piper Hong Kong)
• Tommy Lam (Associate, DLA Piper Hong Kong)