Cedric Stephens | Expect climate-based financial shocks to intensify
Bo Li, the deputy managing director of the International Monetary Fund, gave the main address at the 59th Bi-Annual Meeting of Caricom Central Bank Governors in Nassau, Bahamas, on November 3. His speech was titled Financial Sector Risks and Supervision amid Climate Change.
I wrote ‘Clear and Present Danger of Climate Change for Jamaica, Insurers’ on September 12, 2021. I expressed surprise in the article that an insurer’s anniversary supplement, which was published during the height of the hurricane season, omitted to discuss the impact that climate change would have on their operations. As I read Mr Li’s speech, I wondered what new insights it would offer about the nature of the threats that climate change poses to small island developing states like ours.
The Caricom Central Bank Governors meeting followed an International Conference on Inclusive Insurance that was held at The Jamaica Pegasus hotel in Kingston between October 24 and 28. According to the October 30 Sunday Observer, the keynote speaker during the closing event was Mr Everton Walker, executive director of the Financial Services Commission. The Observer’s headline, ‘Climate Crisis: FSC Says Risks for the Vulnerable Have Increased’, attracted my attention.
The IMF sits at the top of the global financial system. Mr Li’s knowledge and perspectives about the climate threats facing the Caribbean’s financial sector are important for these reasons. Below are seven of the key points that he made:
• Over the last three years, shock upon shock upon shock hit the global economy – and each has struck the shores of the Caribbean. The pandemic devastated tourism, causing double-digit declines in GDP in 2020. The war in Ukraine further stoked food and fuel price spikes that have broadened into stubborn inflation. And all the while, natural disasters have grown more frequent and severe due to climate change – an existential threat to this region and our planet. Lurking in the background are the spillover effects of Hurricane Ian.
• Bahamians have marked the third anniversary of the utter devastation of Hurricane Dorian, and the recovery continues. That single storm inflicted damage equivalent to one-quarter of annual output (gross domestic product). And across the region, disaster-related damage in the last decade has been three times what it was in the 1990s.
• The region’s financial systems have been resilient to climate-related shocks (thus far). This reflects the rapid rebound in tourism and other activity following shocks, insurance pay-outs, and banks’ limited credit exposures to the agriculture and tourism sectors. And importantly, it reflects the bank officials’ work – the rapid financial assistance governments and central banks provided to affected firms and households.
• The financial system’s role is to help people rebuild – in honouring claims after major storms –highlighting its importance in improving resilience to climate change.
• Insurance penetration in the Caribbean relative to climate-related damages is generally lower than in Latin America, due to the high upfront costs of insurance products, concerns that significant damages may not trigger pay-outs, (a euphemism for public distrust in the insurance industry), and competing developmental needs.
• Governments often need to provide financial support to repair damaged public infrastructure and assist uninsured households. This increases public debt and the risks to domestic financial institutions that hold it.
• These risks will only grow as climate change intensifies. Successive storms may delay economic recoveries for longer and may even deter private investment.
Mr Li’s description of the financial system’s mission, particularly in the context of the insurance industry, resonated with me. The IMF official’s comments reminded me of Finance Minister Dr Nigel Clarke’s September 2021 article on addressing the fiscal risk of natural disasters and Jamaica’s catastrophe bond. It focussed on the nuts and bolts of the island’s ‘multi-layered strategy’ for the management of financial risk and natural disasters. Strengthening the island’s capacity to recover from what Mr Li called “shock upon shock upon shock”, or building resilience at the macro and micro levels is the goal of the strategy.
Dirk Reinhard, vice chair of Germany’s Munich Re Foundation, according to the Observer report, “outlined how risk management, including insurance, plays a key role to achieve sustainable development goals. SDGs are a collection of 17 interlinked global goals designed to be a shared blueprint for peace and prosperity for people and the planet, now and into the future”. The SDGs were set up in 2015 by the United Nations General Assembly and are intended to be achieved by 2030.
Insurance, says Katharine Pulvermacher, executive director of the Microinsurance Network, has the potential to make significant and enduring contribution to publi= policy goals and clos the global people protection gap. Only a tiny fraction of emerging customers and small-scale producers around the world have insurance of any kind, even for smaller, more frequent risks that can have a devastating effect on their well-being. Her emphasis, like that of Mr Reinhard, was on people and their livelihoods.
SDGs are people centric.
The executive director of the FSC, according to the report, sees insurance in transactional terms. For example, he is quoted as saying: “About 35 per cent of the workforce has individual life insurance, 27 per cent have health insurance, 30 per cent of residencies are insured, and 80 per cent of motor vehicles are insured. At a time when we are confronted with increased frequency of health emergencies, including pandemics, the level of penetration is less than optimal”.
The Insurance Association of Jamaica president saw the matter in human terms, namely the death of a breadwinner, precarious traditional livelihoods, the closure of small businesses, and financial illiteracy.
The editors of the Observer, based on the headline and photograph accompanying their article, last Wednesday, ‘Rich and Wily: New Watchdog Agency Suggested for Fat-cat Insurance Companies’, appear to have seen through the illusions created by the industry’s PR machinery.
The hosting of the International Conference on Inclusive Insurance that was reported last Sunday was a bust. Such a shame. It is also regrettable that the FSC did not see through the smoke and mirrors. Full disclosure: The ideas, facts, and opinions in last Wednesday’s Observer emanated from that newspaper’s editors, reporters, insurance consumers, claimants, and me.