The risk landscape for public sector entities is changing rapidly: extreme weather, climate change, mass migration and unfunded social liabilities are set to become the risks of our age. Guy Carpenter explores these interlinked issues and how they will dominate both governmental and commercial agendas for decades to come in a new report, Protecting our Planet and the Public Purse.
• Climate change and demographic challenges have put societies and nation states on the cusp of one of the most significant periods of change in recent times. As these dynamics play out, governments and their constituents are confronted with multiple challenges. Interest rates remain at historic lows while many countries around the world are navigating challenges associated with aging populations. Both public and private pension systems are coming under increasing strain: a one percent decline in interest rates increases calculated pension liabilities by almost 20 percent while reducing plan funding rates by 10 percent (1). The implications of this, coupled with rising elderly care, have enormous implications for governments around the globe.
• Climate change dynamics are only going to accentuate the challenges associated with shifting demographics and strained government finances. Natural catastrophes are becoming more frequent, and the intensity for certain perils is also likely to increase. Put simply, weather extremes will become more extreme. This bodes ill for the future: the cost of natural catastrophes is increasingly being assumed by governments as insurance penetration for climate-related risks falls behind rising loss trends.
• Some of the most pessimistic scenarios associated with climate change point to major economic and societal upheaval. Rising sea levels, more extreme precipitation and wildfire events are three of the more prominent risks associated with climate change. Beyond the more obvious threat to properties and infrastructure in areas of the highest population growth (i.e. urban centers and coastal regions), millions of people could be displaced from these high-risk areas. The scale of change will vary significantly by location: some regions are likely to see minimal effects while others will experience disproportional impacts. Effective risk transfer and mitigation strategies within the public sector will play a crucial role in offsetting wide ranging financial and socio-economic impacts.
Governments therefore need to rethink how to fund catastrophic events that go largely unbudgeted and create a strain on public resources when they occur. A culture of reliance on government assistance surrounding disaster relief has emerged, which puts pressure on governments to provide assistance after catastrophes occur and prompts a perception of moral obligation. These macroeconomic costs are projected to increase significantly.
However, there are signs that governmental entities are beginning to take proactive steps to understand and manage the risks that they hold and implement processes designed to improve their financial resilience. They have a willing and able partner in the reinsurance industry. The sector remains well capitalized and the level of sophistication and expertise developed over decades in dealing with market-changing catastrophe events puts it in an unrivalled position to withstand most conceivable loss scenarios. By working closely with reinsurance carriers and intermediaries, governments can also make important progress in quantifying the impact of climate change.
This report touches on several risks confronting public sector entities and outlines six case studies that demonstrate how governments are turning to the reinsurance market for innovative risk mitigation solutions. The arguments are clear: countries need to move more quickly if they are to address the reality of climate change and its attendant financial challenges. To enhance the financial resilience of our communities, effective risk management practices must be brought to bear.
Footnotes:
1. Bloomberg Opinion. December 17, 2019. “Negative Rates and QE Are Destroying Our Pensions” by Mark Gilbert