Good morning, ladies and gentlemen. On behalf of the World Bank Group, I would like to thank the IAIS for recognizing the role of insurers in supporting sustainable development at this year’s Annual Conference—and how the prudential mandate of insurance supervisors can dovetail with this objective.
Insurers play a critical role in supporting resilient societies and sustainable growth when they act as either entrepreneurial risk-takers or long-term investors. Insurers are unique in their capacity to absorb individual shocks that could often push people back into poverty or hardship. They are also set to play a growing role in addressing climate change. Environmental shocks associated with climate change are already present in many of the World Bank Group’s client countries, sometimes setting back years of investment in development policies.
But resilience, and the role of insurers, goes beyond that. Insurance also creates important price signals, which the IAIS and the Sustainable Insurance Forum highlighted in their recent Issues Paper on Climate Change Risks to the Insurance Sector. Policies that foster greater disclosure and enhanced reporting will be crucial for markets to price externalities and reward long-term benefits from sustainability (rather than short-term gains)—and would do so more quickly and efficiently if climate actions are credible. I am convinced that more transparency and more data provide the right signals and help shed light on the non-linear impact of sustainability shocks affecting insurance business models. Regulators are recognizing this.
And this is why some of them have teamed up to create the Network for Greening the Financial System (NGFS), which the World Bank Group joined in June. We need to integrate, in a rigorous way, the implications of climate change in prudential frameworks to safeguard long-term financial stability and sustainability, particularly for insurers. This is also the core message of the high-level event on Scaling Up Green Finance that I hosted at the World Bank-IMF Annual Meetings in Bali last month, after the NGFS had published its first Progress Report, which acknowledges climate-related risks as a source of financial risks. Authorities and financial institutions need to develop new analytical and supervisory approaches to address these challenges, which will inform actionable policy measures.
Insurers can also be instrumental as investors. Reserves must be invested safely and profitably, to protect customers’ claims and strengthen solvency. And such investment would ideally integrate sustainability considerations on the asset side of the balance sheet. In this context, climate-friendly quality infrastructure projects play a key role for this investment objective. Infrastructure can provide long-term, stable and low-correlation income flows, while reducing global risks. If done adequately, it will not only enhance resilience but also help reduce the carbon footprint of economic progress. It will be critical in achieving the SDGs by 2030, opening new markets while supporting productivity gains and consumer power.
Financial regulations in most countries do not differentiate infrastructure investment, let alone climate-friendly, quality infrastructure, mostly because of a lack of evidence on risk profiles. Most G20 countries, and other countries with important insurance sectors, only have partial treatment, or no special treatment, for infrastructure. The World Bank has, however, conducted some studies using large samples of infrastructure debt, and the findings suggest that infrastructure risk, especially in developing countries, may be lower than is usually perceived. In fact, if current regulations were calibrated to reflect the low default risk and higher recovery rates in infrastructure debt over the last 30 years, a significant amount of regulatory capital could be freed. This favorable credit performance is even more pronounced for projects in green sectors (as defined in the ICMA Green Bond Principles).
So, we think that there is sufficient evidence to support a case for exploring lower capital charges for this asset class. This view resonates very well with two recent reports: (1) the Financial Stability Board’s evaluation of the impact of regulatory reforms on infrastructure finance, which will be submitted to the G20 Leaders at the Buenos Aires Summit at the end of the month, and (2) the just-published Report of the G20 Eminent Persons Group (EPG) on Global Financial Governance, which recommends reviewing the regulatory treatment of infrastructure finance for long-term institutional investors. Speaking of the G20, let me also take the opportunity to give credit to one of the panelists today, Mr. Juan Pazo, Superintendent for Insurance of Argentina, for engaging the insurance community on these discussions by convening the first G20 Insurance Forum in Bariloche two months ago.
To conclude, we are very encouraged by the inclusion of a separate assessment of infrastructure finance in this year’s field-testing of the Insurance Capital Standard (ICS). I hope this exercise—taken together with the findings I just mentioned and other emerging data—provides a solid empirical basis for discussing the possibility of a differentiated capital assessment of infrastructure investment in the final field-testing next year. We, of course, recognize that insurers have limited risk tolerance, and that their willingness to assume the management of assets is low.
In sum, the insurance industry will be ever more critical in protecting households and businesses against a widening range of risks, including those resulting from climate change. And both supervisors and regulators are naturally at the heart of such a discussion. Based on hard evidence, the prudential recognition of the favorable features of infrastructure debt, notably of climate-friendly quality infrastructure in rapidly growing but very vulnerable developing countries, would be a very relevant contribution to this purpose.