Protecting Our Future: Why Public Pensions Should Invest in Public Climate Insurance Risk Pools
In this guest blog, Steve Brandt, Chief Development Officer at InnSure explores how public pension investment in climate insurance risk pools can protect retirement security, close the protection gap, and strengthen community resilience in the face of growing climate risks.
The financial landscape is shifting, and one of the most significant forces driving this transformation is climate change. As extreme weather events become more frequent and severe, the economic toll on communities, industries, and even national budgets is skyrocketing. Public pension funds, entrusted with securing the retirement of millions of workers, have a duty to address these growing risks. A powerful and often overlooked solution lies in investing in public climate insurance risk pools.
For too long, climate risk has been viewed as an abstract or distant threat. However, recent reports highlight the tangible and immediate financial danger it poses to pension portfolios. From devastating hurricanes to wildfires that decimate entire regions, climate-driven disasters are already costing billions. These events don't just impact property; they disrupt supply chains, depress economic activity, and can lead to significant drops in asset values, directly jeopardizing the returns retirees depend on.
This is where insurance risk pools come in. These mechanisms are designed to aggregate and diversify risk across a broader base, effectively spreading the financial burden of catastrophic events. By investing in these pools, public pension funds can achieve several critical objectives:
Promoting Resilience and Adaptation
Pension funds are not just passive investors; they have immense power to drive positive change and are currently major contributors to resilience investments. By channeling capital into insurance risk pools, they directly support the development of more robust and innovative climate risk transfer mechanisms to complement and protect their resilience investments. This, in turn, will incentivize communities and businesses to invest in more resilience measures and adaptation strategies, ultimately reducing overall climate vulnerability and fostering a more stable economic environment. This also aligns with the growing desire of pension beneficiaries to see their money invested in a sustainable future for their local communities.
Addressing the "Protection Gap"
The widening gap between the economic losses and insured losses from disasters — also known as the “protection gap” — leaves many communities, businesses and individuals (including pension beneficiaries) vulnerable to the financial and physical aftermath of extreme weather. Investing in a public pension can help close this gap by ensuring that more capital is available for recovery and reconstruction. The result is more stable regional economies and increased protection of the broader financial system that pension funds operate within.
Diversifying and De-risking Portfolios
Just as a balanced investment portfolio diversifies across different asset classes, investing in climate insurance risk pools may allow pensions to diversify their exposure to other types of economic shocks represented in their portfolios.
Generating Stable, Long-Term Returns
Insurance risk pools are often seen as attractive, stable investments that provide consistent returns. Because they’re tied to the premiums collected and the actuarial assessment of risk, their predictability complements traditional investments. For long-term investors like pension funds, this stability is invaluable in an increasingly volatile world. Climate-focused insurance risk pools can build on insurance risk pools’ established legacy of providing a resilient, long-term investment while also offering the added benefit of strengthening local communities.
The time for half-measures is over. Public pension funds have a unique opportunity – and a growing imperative – to leverage their considerable capital to address the systemic financial risks posed by climate change. By investing in insurance risk pools, they can not only protect their portfolios but also contribute to building a more resilient and sustainable future for everyone. It's a win-win strategy that aligns financial prudence with commitment to a livable planet.
For more information on what public pension investment in climate insurance risk pools could look like, please visit innsure.org or email steve@innsure.org.
