Legal Issues for Protection Gap Entities and Catastrophic Risk

1. 15:15hrs-17:15hrs SATURDAY 13 OCTOBER 201818thMeeting of theAIDA Climate & Catastrophic Events Working Party Legal Issues for Protection Gap Entities and Catastrophic Risk Tim Hardy, London/UKChairman, AIDA Climate & Catastrophic Events WP

2. Legal Issues for Protection Gap Entities and Catastrophic Risk Original remit of our CCEWP: “… going beyond a mere description of initiatives taken by the insurance sector, to concentrate on their legal expression in clauses, general conditions or new types of policies, and on the new legal issues that have come up, or probably will in the foreseeable future, and how these evolve over time along with other catastrophic event responses.”

3. Legal Issues for Protection Gap Entities and Catastrophic Risk A question I would like briefly to pose today: As insurance lawyers do we – indeed are we able to - subject some of these new catastrophic event responses to the same level of critical scrutiny as we customarily apply to more traditional insurance products? Protection Gap (“The Void”) What it is – catastrophe economic losses remaining uninsured Where it is – all over, not just poorest countries What being done to bridge it – COP2015 Paris Agreement, frameworks, Insurance Development Forum

4. Legal Issues for Protection Gap Entities and Catastrophic Risk Can and should we be satisfied that efforts by insurers (among others) to “bridge” the Protection Gap at least reduce the threat it poses? Or are “bridging” initiatives actually closing or exacerbating the gap? cf. Climate Change responses : adaptation practices supposed to be complementary to mitigation efforts, but do they (also) deter or distract?

5. Legal Issues for Protection Gap Entities and Catastrophic Risk “Between State and Market: Protection Gap Entities and Catastrophic Risk” 26 June 2018 Report produced by Professor Paula Jarzabkowksi and colleagues (Cass Business School, University of London) Considering Protection Gap Entities (PGEs) : Marrying market solutions to social objectives. >>>><<<< “Flood Re Eligibility: Should the net be cast wider?” Rhys Llewelyn Jenkins, Cardiff University - winner of the BILA Journal Article Prize for 2017 Assessing eligibility criteria adopted for this UK-based PGE in the context of the purposes of insurance law.

6. Legal Issues for Protection Gap Entities and Catastrophic Risk “Between State and Market: Protection Gap Entities and Catastrophic Risk” PGEs – e.g. CCR/GAREAT (France); CCS (Spain); Flood Re/Pool Re (UK); ARPC (Australian Risk Pool Corporation); CEA (Californian Earthquake Authority); African Risk Capacity (ARC) Common purpose – Transform uninsured risk into insurance-based products allowing global financial markets to provide capital for disaster recovery Diverse immediate objectives resolve disruption in r/i supply mitigate threat of unaffordable insurance aid financial viability of countries with fragile economies Result from “uneasy truce” between governments and beleaguered insurance market providers – meeting local/specific “gap”, not a universal one.

7. Legal Issues for Protection Gap Entities and Catastrophic Risk “Between State and Market: Protection Gap Entities and Catastrophic Risk” Two issues/ challenges about the impact of PGEs: Do PGEs actually improve resilience? (2) Do they bridge/reduce the Protection Gap or merely provide a temporary “stop-gap” or does their existence even exacerbate a widening Protection Gap?

8. Legal Issues for Protection Gap Entities and Catastrophic Risk “Between State and Market: Protection Gap Entities and Catastrophic Risk” Do PGEs actually improve resilience? Risk identification + risk reduction + resilient reconstruction + financial protection + preparedness => better resilience. PGEs rarely directly influence measures Govts have legislative power (environmental policies, land-use planning, building codes/standards, defence/disaster relief) PGEs can improve risk identification (via insurance/technical input, data modelling/information transfer) which in theory should inform/incentivise risk reduction/more resilient reconstruction BUT often not resulting (e.g. post-flood reconstruction in UK; retrofit packages post-EQ (California)

9. Legal Issues for Protection Gap Entities and Catastrophic Risk “Between State and Market: Protection Gap Entities and Catastrophic Risk” Reasons why incentivised risk reduction/more resilient reconstruction does not result from creation of PGEs? Poor communication Poor distribution of grants Disruptive effect/inconvenience Disaster preparedness: weakest claim for PGEs Early warning systems + Contingency planning = furthest from PGEs control Contingency planning often targeted at one known predictable risk – often defied/rendered useless when novel combination of risks occur Recommendations: (1) PGE afforded more formal powers in assuring resilience; (2) to have improved links with Govt authorities; and (3) to be given evolving remit (cf. mission creep) to ensure continued relevance/value.

10. Legal Issues for Protection Gap Entities and Catastrophic Risk “Between State and Market: Protection Gap Entities and Catastrophic Risk” (2) Do PGEs reduce or even exacerbate the Protection Gap? Paradox: creation of PGE is often a short-term political solution to specific problem. Underlying causes of gap overlooked/ignored. Later different problems not solved/addressed unless PGE allowed to adapt/evolve. Resistance to expansion of remit - mismatch between expectations and scope – success of PGE not same as solving of problems Solving one problem can create another – e.g. suggestion that US National Flood Insurance Program increased moral hazard – more flood plain developments

11. Legal Issues for Protection Gap Entities and Catastrophic Risk “Between State and Market: Protection Gap Entities and Catastrophic Risk” (2) Do PGEs reduce or even exacerbate the Protection Gap? Recommendations: Better communication of remit/success + building of other forms of resilience Create closer ties between financial and physical resilience measures Evolve policy dialogue with regular review of finite lifespan of PGE e.g. Flood Re designed for just 25 years – Climate Change seems sure to bring ever-greater demands Rather than wait for major disaster to react with a new PGE better to create/extend as new challenges manifest

12. Legal Issues for Protection Gap Entities and Catastrophic Risk “Between State and Market: Protection Gap Entities and Catastrophic Risk” Conclusions: Greater awareness needed to compare/contrast different types of PGEs and strengths/suitability for local regional/country needs Need to study different sharing/distribution/reduction of risk positioning with private insurance markets and governments to avoid mismatches in expectations Identify how laws, liabilities and traditional insurance markets must evolve Consider: (i) is it mandatory or voluntary insurance that needs to be secured long-term? (ii) can “new” protection gaps be met by evolving remits of existing PGEs? (iii) is liquidity enough for emerging economies?

13. Legal Issues for Protection Gap Entities and Catastrophic Risk “Flood Re Eligibility: Should the net be cast wider?” Rhys Llewelyn Jenkins, Cardiff University - winner of the BILA Journal Article Prize for 2017 Assessing eligibility criteria adopted for this UK-based PGE in the context of the purposes of insurance law. >>>><<<< Particularly interesting consideration of role and relevance of consumer and commercial insurance law when eligibility for PGEs decided upon.

14. Legal Issues for Protection Gap Entities and Catastrophic Risk Purposes of Insurance Law? Promoting equitable relations Economic efficiency Fair distribution of risk (“distributive justice”) Test for remits and eligibility criteria of PGEs: Permit principal purposes of insurance law to be met? Are criteria enforceable and certain enough to be sufficiently free from dispute/unfairness? Is underlying liability and regulatory and other law in step with needs addressed?

15. 15:15hrs-17:15hrs SATURDAY 13 OCTOBER 201818thMeeting of theAIDA Climate & Catastrophic Events Working Party Legal Issues for Protection Gap Entities and Catastrophic Risk Tim Hardy, London/UKChairman, AIDA Climate & Catastrophic Events WP