Bo Li, deputy chief executive officer of the International Monetary Fund, delivered the keynote speech at the 59th biannual meeting of Caricom Central Bank governors in Nassau, Bahamas, on Nov. 3. His speech was entitled “Risks in the financial sector and oversight in the face of climate change”. .
On September 12, 2021, I wrote Clear and Present Danger of Climate Change for Jamaica, Insurers. 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 meeting of Caricom Central Bank Governors followed an international conference on inclusive insurance, held October 24-28 at The Jamaica Pegasus hotel in Kingston. According to the October 30 Sunday Observer, the keynote speaker at the closing ceremony was Mr Everton Walker, Executive Director of the Financial Services Commission. The Observer headline, “Climate Crisis: FSC Says Risks to the Vulnerable Have Increased,” caught my attention.
The IMF sits at the top of the global financial system. For these reasons, Mr. Li’s knowledge and views on the climate threats facing the Caribbean’s financial sector are important. Below are seven of the key points he made:
• In the past three years, shock after shock has hit the global economy – and each has hit the shores of the Caribbean. The pandemic devastated tourism and caused a double-digit drop in GDP in 2020. The war in Ukraine fueled food and fuel price spikes, which have escalated into stubborn inflation. At the same time, natural disasters have become more frequent and severe due to climate change – an existential threat to this region and our planet. The spillover effects of Hurricane Ian lurk in the background.
• The Bahamas marked the third anniversary of Hurricane Dorian’s total devastation and the recovery continues. This single storm caused damage equivalent to a quarter of annual production (gross domestic product). And across the region, damage from disasters over the past decade has been three times what it was in the 1990s.
• The region’s financial systems have (so far) been resilient to climate-related shocks. This reflects the rapid recovery in tourism and other activities following shocks, insurance payouts and banks’ limited lending to the agriculture and tourism sectors. And, importantly, it reflects the work of the bank officials – the swift financial assistance that governments and central banks provided to affected businesses and households.
• The role of the financial system is to help people recover – to meet claims after major storms – and underscores its importance in improving resilience to climate change.
• Insurance penetration in the Caribbean for climate-related claims is generally lower than in Latin America due to the high upfront cost of insurance products, concerns that significant claims may not trigger payouts (a euphemism for public distrust in the insurance industry), and competing development needs .
• Governments are often required to provide financial assistance to repair damaged public infrastructure and help uninsured households. This increases government debt and the risks for domestic financial institutions that hold it.
• These risks will continue to increase as climate change intensifies. Back-to-back storms can delay economic recovery for longer and even discourage private investment.
I resonated with Mr. Li’s description of the mission of the financial system, particularly as it relates to the insurance industry. The IMF official’s comments reminded me of Treasury Secretary Dr. September 2021 Nigel Clarke on managing the fiscal risk of natural disasters and Jamaica’s catastrophe bond. It focused on the nuts and bolts of the island’s “layered strategy” for managing financial risks and natural disasters. The aim of the strategy is to strengthen the island’s ability to recover from what Mr. Li called “shock after shock after shock,” or build resilience at the macro and micro levels.
According to the Observer report, Dirk Reinhard, deputy chairman of the German Munich Re Foundation, “illustrated how risk management, including insurance, plays a key role in achieving sustainable development goals. The SDGs are a collection of 17 interrelated global goals designed to serve as a common blueprint for peace and prosperity for people and the planet now and in the future.” The SDGs were set by the United Nations General Assembly in 2015 and are to be achieved by 2030 .
Insurance, says Katharine Pulvermacher, executive director of the Microinsurance Network, has the potential to make a significant and lasting contribution to public policy goals and to fill the global gap in personal protection. Only a tiny fraction of the world’s emerging customers and small producers have any type of insurance, even for smaller, more common risks that can wreak havoc on their well-being. As with Mr. Reinhard, her focus was on people and their livelihoods.
SDGs are people-centric.
According to the report, the Executive Director of the FSC views insurance in a transactional manner. For example, he is quoted as saying, “About 35 percent of the workforce has individual life insurance, 27 percent has health insurance, 30 percent of households are insured, and 80 percent of motor vehicles are insured. At a time when we are facing an increasing frequency of health emergencies, including pandemics, the level of penetration is suboptimal.”
The President of the Insurance Association of Jamaica put a humane face on the matter, 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 photo of their Wednesday article, “Rich and Wily: New Watchdog Agency for Fat-Cat Insurance Companies,” appear to have seen through the illusions created by the industry’s public relations machinery .
Hosting the International Conference on Inclusive Insurance reported last Sunday was a failure. Such a shame. It is also unfortunate that the FSC did not see through fog and mirrors. Full Disclosure: The ideas, facts and opinions in last Wednesday’s Observer came from that newspaper’s editors, reporters, policyholders, claimants and myself.