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Colombia’s city of Eternal Spring plants the seed for a new way to view climate resilience

Climate Quantified|Environmental|Willis Research Network
Climate Risk and Resilience

By Paula Pagniez | June 24, 2021

Once mired in drug-fuelled violence, Medellín has become a city of transformation, embracing innovative insurance models to build resilience to climate and disaster risks.

Medellín is a city of transformation that is well documented. Well within living memory, the city has rapidly turned from one mired in drug-fuelled violence, to one with a thriving economy that is blooming with inspired ideas from entrepreneurs and public servants alike. Nestled within two lush Andean mountain ridges, the renaissance of the so-called City of Eternal Spring is a success story worth protecting.

But the very thing that makes it so beautiful, its climate, also threatens that hard-won peace and stability.”

Paula Pagniez | Director, Climate & Resilience Hub Americas

Issue

But the very thing that makes it so beautiful, its climate, also threatens that hard-won peace and stability. Heavy rainfall following extended drought already threatens homes, lives and livelihoods of those living on the steep valley slopes around the city and climate change is set to make that worse. In addition, the risk of earthquakes is ever present across Colombia. According to MunichRe, worldwide natural disasters resulted in losses of US$210bn in 2020, with insured losses of US$ 82bn, and Colombia is no exception.

According to MunichRe, worldwide natural disasters resulted in losses of US$210bn in 2020, with insured losses of US$82bn, and Colombia is no exception.

Once again, the City of Medellín is a step ahead and is already writing the next chapter in securing this hard-earned transformation. Working with the public and private sectors, the city will develop innovative insurance protections to support their resilience plans in response to climate and disaster risks. Willis Towers Watson, in partnership with Global Communities and Hannover Re, will collaborate closely with the city’s government to create the first of its kind parametric flood insurance product in the country, while also developing parametric solutions for earthquakes and other protection for landslides. What this means for those living in the shadow of natural catastrophe is the opportunity to rebuild their lives more quickly after natural disasters, as the city brings basic infrastructure back into service and implements emergency response measures – such as food and cash disbursements – all according to the municipality’s emergency response and recovery plans.

For several decades, natural catastrophe modelling has helped the insurance industry understand risk events and quantify their financial impacts. But now, the industry is ready to go a level deeper, with analytical capabilities that help us understand climate-related financial risks and the systemic approach required for resilience in the face of climate change.

Transitioning economies away from fossil fuels

In Medellín and other cities, the financial risks of climate change go beyond floods and landslides. Deeper assessments of the financial risks of climate change also require us to understand the impact of market changes, policy interventions and emerging technology. All these relate to a low carbon economy and how these affect today’s asset prices based on how future cashflows would increase or decrease in response to these changes. We call these impacts transition risk.

So far, we have been looking at how transition risk affects the balance sheets for companies, investors and countries. But our transition risk methodology is also being considered as an application to land use in Colombia – to our knowledge, this is a world first.

Integration of both physical and transition risks helps us assess resilience strategies in a more holistic way.”

Paula Pagniez | Director, Climate & Resilience Hub Americas

Integration of both physical and transition risks helps us assess resilience strategies in a more holistic way, covering everything from asset valuations, business interruption and upside opportunities.

That approach gives us a clear picture of the risks that cannot be mitigated, before we look at ways these risks can be shared globally through the reinsurance and capital markets. Parametric solutions like the ones we are creating for Medellín are just one example. Once we access capital and invest in resilience, then those insurance-protected investments will be reflected in public sector credit ratings, and the overall availability of capital.

While in Colombia we are working with a sub-national government, resilience strategies can be applied to national governments, corporates and investors. As we transition to a Net Zero carbon emission and climate resilient economy, the traditional risk-reward model can be redefined: resilience is the reward for taking steps to mitigate climate change, and while the result might be higher returns, or lower costs, resilience offers additional value that transcends both.

Systemic climate resilience & rewards

Just as regulators, governments and capital markets are starting to understand that there are benefits to managing climate change risks beyond the direct impacts to corporate and public finances, so too are we beginning to glimpse how a similar systemic approach to resilience strategies can have an impact that goes well beyond the beneficiaries of a transaction.

For households, for example, when we take out a mortgage, many countries require by law that we take out insurance, for instance to cover the cost of reconstruction. We might not think of insurance coverage as a reward, but homeownership brings all sorts of intangible benefits and improvements to quality of life that would be hard to quantify on a balance sheet. That private value in the home extends to the public realm as society relies on the stability and well-being of the people who generate its wealth.

In a corporate context, we have already seen the introduction of incentives to encourage companies to pivot away from fossil fuels by offering access to lower costs of capital or insurance premiums. Systemic resilience would go a step further by helping businesses understand the costs of disruption to services, revenues or supply, and either manage these costs directly or share them, such as through insurance products.

Meanwhile, both public and private finance have a central role to play in the allocation of capital to meet the challenges of physical and transition risks in a world that by the end of this century will be at least 1.5 C warmer than preindustrial levels – even if we were to stop carbon emissions today.

Natural capital benefits

One set of assets deserve special attention: natural or ecosystem infrastructure. Since they frequently provide significant resilience benefit and can generate jobs and income, they should be included on balance sheets, be they public or private, and included in risk management frameworks.

Just like grey infrastructure such as roads and bridges, it is imperative that natural assets, like reefs, mangroves, and terrestrial forests, are treated as valuable infrastructure assets, given the role they play in absorbing carbon, decreasing storm impacts, and flooding. But a coastal community doesn’t need to own or even price the value of the coral reef to manage the hurricane damage or bleaching, they just need to understand the impacts to them. Such comprehensive understanding opens the door to a structured risk sharing discussion between the public and private sectors and the communities they serve.

Like the opportunity that parametric insurance policies offer to rebuild more quickly after natural disasters, the insurance industry can play an essential role by injecting liquidity right after the event to restore ecosystems, speeding the recovery of natural assets and the benefits they offer to economic activity and protection of infrastructure. In Medellín, we will develop insurance products that will provide a timely flow of funds to carry out immediate, post-event responses so that the communities can get back on their feet as quickly as possible.

While we are working on the ideas that can be implemented today, our role in the financial sector must be to dream the art of the possible with governments, investors and businesses, to develop the innovations required to cover not just the widening of the protection gap as the effects of climate change are more keenly manifested, but to build the resilience required to prepare for the future.

These solutions in Colombia are just a start.

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