Insurers have a unique role to play in helping the world to adapt to climate change, according to Mark Carney, Governor of the Bank of England.

Britain’s top financial regulator said the industry’s expertise and capital would be essential in “smoothing the transition” to a world in which temperatures are 1.5 degrees Celsius higher than in preindustrial times.

Addressing the United Nations Climate Summit in New York on Monday, Mr Carney said: “The world needs much more investment in infrastructure, and greater risk sharing of climate risks. Insurers have a unique ability to meet both needs.”

Mr Carney spoke of the need to close the “protection gap”, or underinsurance, which affects many poverty-stricken countries vulnerable to the effects of global warming. Collaboration between the insurance industry and public-sector organisations was key to addressing it, he said.

Insurers were well aware that the physical risks of climate change were being felt across the globe “with a plague of extreme weather events” leading to higher-than-normal insured losses in recent years, Mr Carney said.

“But protection gaps in low and middle-income countries mean that even greater costs are being borne by the uninsured,” he added.

“In 2017, the record $140 billion of insured losses were eclipsed by an additional $200 billion of uninsured ones.

“In some of the countries most exposed to climate change — Bangladesh, India, Vietnam, Philippines, Indonesia, Egypt and Nigeria — insurance penetration is under 1 per cent.

“The potential economic benefits of closing the insurance gap are striking. Lloyd’s of London estimates that a 1 per cent rise in insurance penetration can translate to a 13 per cent reduction in uninsured losses and over 20 per cent reduction in disaster-recovery burden on taxpayers.”

Despite the potential benefits, progress had been slow, with the protection gap closing from 78 per cent to 70 per cent over the past 30 years, he said.

Mr Carney went on to spell out what could be done, saying that both sides of insurers’ balance sheets needed to respond.

“On the liability side, the focus must be reducing the protection gap and supporting the resilience of households and companies to growing climate risks,” he said.

Citing the work of the Insurance Development Forum, a public-private partnership led by the insurance industry and international organisations, Mr Carney said a better understanding of past losses would help.

“Projects like the open-source Oasis Loss Modelling Framework of the IDF are leveraging the expertise of the private sector, the public sector and academia to improve the data available for risk analysis in low and middle-income countries,” he said.

“New products, such as insurance-linked securities based on parametric triggers, are vital to help reduce macro protection gaps and increase resilience.

“These are generally cheaper to structure and administer and more efficient to blend with commercial finance if required.

“Of course, increasingly climate-related tail risks could prove uneconomic for private sector insurers to cover. That is where development agencies and Multilateral Development Banks can step in.

“Disaster reinsurance could be one of the most effective uses of development financing.”

Mr Carney said massive investment would be needed in sustainable energy and resilient infrastructure — and insurers could help to make this happen by allocating some of their huge investment portfolios to this area.

“It’s imperative to act now to create practical tools and frameworks to support climate-resilient infrastructure investments — ranging from broader use of catastrophe bonds to greater risk pooling for the most vulnerable countries. “Climate-resilient infrastructure assets are well suited to life insurers that need reliable returns over long-term investment horizons.

“This is even more compelling in a low-for-long interest rate world. However, as the IDF has flagged at present only 2.5 per cent of insurance assets managed are allocated to infrastructure.”

• To view a transcript of Mr Carney’s entire speech, see the online version of this article at www.royalgazette.com