Guy Carpenter re-envisions marriage of project finance and climate insurance

Global reinsurance broker  Guy Carpenter is teaming with academics from Queen Mary University of London for a fresh outline of how climate resilience investment financing could be pared with risk transfer to capital markets.

“We propose a solution that combines community-based insurance, stacked investment and advanced funding for loss-prevention measures in an enhanced insurance-linked security structure,” authors of the rough and ready plan argued.

In the model put forward, a municipality would buy coverage on a community-wide basis while additionally plotting a resilience investment to guard against the specified climate-related risk.

The carrier simultaneously reinsures the risk and finances the mitigation project through an SPV issuing securities to markets, what authors name a Climate Resilient Development Bond (CRD Bond). Three investor types - market investors, ESG-investors and philanthropic investors - each contribute differing allocations to purely risk-bearing loads or project-finance, with varying payoffs.

Coupon payments will be skewed towards market investors first and ESG investors second while passing by philanthropic investors altogether. But the waterfall scheme for collateral releases will then go the other way, putting money back to philanthropists first, ESG funds second and commercial investors only last, matching the ranking of risk-bearing allocations.

Project funding need not cover full project costs, only bridge the feasibility gap for municipalities, authors noted.

The move into a community-based insurance purchase should help provide the scale that has been lacking in prior attempts to tie insurance to project funding, authors believe. Previously encountered problems stemming from the time lag between project completion and insurance coverage periods were acknowledged, and are seemingly addressed by the multi-year nature of the programme.

Commenting on the solution, Julian Enoizi (pictured), global head of public sector, Guy Carpenter, said: “We need to see a paradigm shift in how the (re)insurance industry addresses climate-related risks. The CRD Bond provides a new type of structure that moves beyond the traditional post-disaster response cover to a truly integrated climate risk approach that combines financial protection against the impact of these perils and proactive support for loss-prevention measures.”

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