South Africa’s National Treasury is deliberating on regulations to promote catastrophe bonds and parametric insurance to address climate change challenges. This approach follows recent climate disasters, including droughts and flooding, prompting the establishment of a climate-change response fund by March. Senior Treasury economist Kolisang Molukanele highlighted the need for investor confidence and municipal preparation for climate-resilient projects.
South Africa’s National Treasury is actively considering the establishment of regulations that would promote the utilization of financial mechanisms aimed at addressing the challenges posed by climate change. This exploration includes the potential adoption of catastrophe bonds and parametric insurance as viable tools. During a recent meeting held by the Presidential Climate Commission, Kolisang Molukanele, a senior economist at the Treasury, articulated the necessity of engaging investors effectively, stating, “We are looking at how best we can get investors into the room, how do we make investors more comfortable and confident.” The impetus for this initiative stems from a succession of climate-related disasters that have afflicted the nation, encompassing a drought spurred by El Niño this year and severe flooding in 2022 that resulted in over 400 fatalities and $2 billion in damages. In light of these events, South Africa has initiated plans to establish a climate-change response fund by March and is actively seeking private investment to support this endeavor. Mr. Molukanele noted that discussions have commenced with pension funds regarding the development of climate-focused financial products. Catastrophe bonds, known for their high yields, are specifically designed to provide payouts only in cases of natural disasters. Additionally, parametric insurance is characterized by its direct payout structure, triggered by the occurrence of predetermined events such as a failure to achieve a minimum level of annual rainfall. Mr. Molukanele further indicated that parametric insurance could enhance the speed of relief distribution to affected provinces. Furthermore, the government is contemplating the issuance of additional green bonds at both national and municipal levels. Mr. Molukanele emphasized the necessity for municipalities to prepare more viable and attractive projects to stimulate private investment in climate-adaptive infrastructure, including durable bridges and roads.
The pursuit of robust financial strategies to combat climate change has gained precedence globally, with nations increasingly recognizing the need for innovative funding mechanisms. Catastrophe bonds and parametric insurance serve as strategic instruments designed to mobilize capital for climate resilience. By integrating these tools, South Africa aims to shore up its fiscal preparedness against natural disasters while also attracting private investments to enhance infrastructure resilience.
In summary, South Africa is making significant strides towards leveraging financial instruments such as catastrophe bonds and parametric insurance to bolster its climate change response efforts. By fostering an environment conducive to private investment and developing a comprehensive climate-change response fund, the government seeks to enhance the nation’s resilience to climate-related calamities. The engagement of various stakeholders, including pension funds, will be crucial in this transformative initiative.
Original Source: www.insurancejournal.com
