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Driving prosperity in low income countries by re-thinking climate risk

By Hector Ibarra, CEO, Global Parametrics

A profound lack of financial and physical infrastructure is stifling growth in low income countries across Africa, Asia and Latin America. For example, in Africa, over $16 billion has been brought into the region since 2011 by private equity funds with an appetite for gaining high returns from a high-risk environment. However, economic slowdowns combined with limited routes to channel capital and sluggish regulatory systems have taken the shine off the ‘Africa rising’ narrative and dampened optimism that investments will accelerate development.

But, what if the frustrations of underdeveloped financial frameworks could create an opportunity to apply new innovations to leapfrog the operational and regulatory ‘norms’ of the financial markets in more mature markets? And by doing so, what if we could unlock new opportunities to drive prosperity for everyone from institutional investors to individuals in vulnerable communities? Bear with me, this isn’t idealism, it’s a new commercial perspective on managing one of the most crippling aspects of investing in emerging markets – climate risk.

One of the greatest threats to the economic growth of low income countries is their common vulnerability to natural disasters. Mitigating the impact of this and building resilience hinges on the provision of new climate risk finance and insurance solutions. While it’s encouraging to see these rise-up international political and private agendas, for example, it’s focus at the G20 Summit in 2017, traditional ways of modelling risk and applying current financial instruments simply aren’t progressing change fast enough.

That’s why we need fresh thinking; new innovations to help investors see the reality of the potential for introducing new insurance models in these markets, to calculate the tangibility of returns and to empower companies to confidently disclose their risk strategies. I believe it starts with data and solid scientific knowledge.

 

Generating, aggregating and analysing a breadth of detailed weather and seismic-related data is informing the modelling and structuring of new risk transfer instruments as well as identifying triggers to release liquidity to improve the speed of payments when disasters hits. While most risk analysis is based on statistical scenario planning, we can advance this by using technology to create a more physical three-dimensional view of the world by combining empirical, statistical and physical data to create insight into remote regions that were previous blind spots.

 

The application of this is currently being tested through the specially developed Natural Disaster Fund to encourage private sector participation. Backed by the UK’s Department for International Development (DFID), it provides reassurance for private investors to venture into a new market where there are no solid track records or long-standing effective models.

 

The success of this kind of approach relies on companies thinking more laterally and shifting their traditional thinking around risk. It also needs investors to change mindsets, moving away from focusing on quick returns and factoring in the impact of their investment, particularly considering their SGD responsibilities. More broadly, creating markets for mitigating climate risk relies on multi-party collaboration between local governments, international organisations, the finance and insurance industry, as well as the beneficiaries themselves.

 

There isn’t a silver bullet, but there are innovations that can support transformational change. By seeing a lack of infrastructure and existing markets as opportunities to enable progress, rather than as insurmountable challenges, we can improve the financial inclusion of millions of people, whilst opening new revenue streams for enlightened insurance companies and investors.

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