Associate Margaret Glass attended EVERLAB, a conference on the intersection of the economy and the environment, presented by Greater New Orleans, Inc., in June. Among the topics that were discussed were the economic forecast for the insurance industry, at-risk communities, the impact of weather risks on investment, and coastal resilience in Louisiana. Margaret shares highlights from the conference below.
Insurance Industry Economic Forecast
Alex Kaplan of Swiss Re presented an economic forecast with a focus on the insurance industry. His insights included the following:
- Economic losses as a result of natural disasters are increasing significantly and more damage is uninsured (70% in the last decade) and therefore often picked up by governments.
- FEMA natural disaster declarations have tripled since the 1970s, which shows strain on local governments and increased likelihood that local governments will receive less help from national governments.
- The impacts of natural distracters, including loss of infrastructure, business losses and lower bond ratings, lead to population loss and revenue loss.
- Consensus in the financial sector is growing that we must mitigate climate risk or face inability to obtain loans due to downgraded credit ratings.
- Governments are starting to act proactively on these issues. For example, Cancun has insurance on the coral reefs that protect its beaches; a claim on this insurance allows the insurer to pay people to collect coral and replant it within 48 hours. This is an additional, different layer of insurance on top of typical casualty and business interruption insurance on the hotels on the beaches.
A panel discussed preserving at-risk communities. Tony Simmons of Tabasco, located on Avery Island, discussed Tabasco’s response to Katrina, including building a private levee and pumping station, as well as preventative initiatives such as planting cord grass to encourage marsh regrowth.
He also discussed his membership in a coalition of many south Louisiana marshland owners who work as one body to facilitate coastal restoration in south Louisiana. He noted that private buy-in for conservation measures is essential because most land is privately owned. For example, even if Louisiana deploys the $50 billion for costal restoration set forth in the Coastal Master Plan, this would impact only 5% of Louisiana’s coastal lands.
Impact of Weather Risks on Investment
Other panels discussed the impact that weather risks have on investment opportunities:
Environmental Impact Bonds – Eric Letsinger of Qualified Ventures discussed a process for funding environmental projects for government entities by using “environmental impact bonds” to fund the work and then providing repayment to bondholders based on outcomes of projects. An evaluator is employed to make a “success payment” to the investor. The environmental impact bond uses the municipal bond model but bases its interest rates on the predicted performance of green infrastructure. The bond purchaser essentially takes on the risk that the green infrastructure will work properly, which protects the municipality against the project failing. For example, Washington, DC is using bonds for green infrastructure to absorb water into the sewer system rather than building another sewer tunnel.
Hedging Against Weather Risks – Matthew Coleman of Nephila Climate discussed how weather and climate risk limits access to capital due to credit downgrades, overly conservative assumptions regarding ability to repay debt and less ability to take risks to allow for growth. This makes the ability to protect against these risks valuable. His company allows companies to hedge against weather risks even when property is not damaged and would not lead to traditional insurance payouts. With his model, a premium is paid in exchange for an immediate cash payment to be paid out very quickly after a weather event, without proof of damage or business losses.
S&P Ratings – Lisa Schroeer of S&P Global discussed how S&P rates companies, financial institutions, insurance companies and government securities for credit risk across industries. She noted that extreme weather and incremental change due to climate change impact credit ratings because they impact factors such as stability of the institutional framework, economy, management, liquidity, budgetary performance and flexibility and debt and contingent liabilities. Credit ratings have not yet but could be reduced if there is poor planning for weather risk by local governments.
Coastal Resilience in Louisiana
In a breakout session, various speakers discussed investment in coastal resilience in Louisiana.
Louisiana’s Coastal Master Plan – Chip Cline discussed Louisiana’s Coastal Master Plan, an approximately 50-year $50 billion plan for coastal restoration and hurricane protection. Experts estimate that if the 124-project plan is fully implemented, flood damage will be reduced by $150 billion, tripling the value of the initial investment. Within the next three years, $2.4 billion in work on barrier islands, hydrology projects and construction of sediment diversions is planned for Louisiana. A banking program is also proposed, where the private sector can build a project which functions as a “mitigation bank” such that, if there is a spill or disaster, then the responsible party can buy credits from that bank to address the problem.
Funding for Environmental Projects – Steve Cochran of the Environmental Defense Fund discussed funding for environmental projects, which provide an estimated 10,000 jobs per year just related to coastal restoration. In 2032, money from the BP oil spill will run out, and alternative measurers are needed. Other funding will likely come from a combination of sources potentially including efficiency with existing money, monetized risk reduction (catastrophe bonds), carbon credits, oil and gas settlements, federal funding, taxes and environmental impact bonds.