national policies to limit the global rise in temperatures to two degrees. 20 countries, which account for 17 % of global gdp, have already committed to or legislated for a net - zero emissions goal, with the uk becoming the first in the g7 to do so. all speeches are available online at www. bankofengland. co. uk / news / speeches insurance, risk financing and development event, 22 september 2019 i would like to speak briefly about the role of insurance in smoothing the transition to a 1. 5 degree world. this sector brings three things : expertise, money and perspective and those are all crucial in helping society adjust to the reality of that transition. my message is, whether it ’ s reducing the protection gap, financing resilient infrastructure or improving reporting, risk management and return optimisation across the financial sector, your contributions could be decisive. the insurance industry has a unique contribution of large capital ( over $ 30 trillion ), deep risk management expertise and long - term perspective. insurers are well aware that the physical risks of climate change are being felt across the globe with a plague of extreme weather events. the human costs are immeasurable. the financial losses however can be measured and they are significant. insured losses in 2018 were $ 80 billion, double the inflation - adjusted average for the past 30 years. 10 but protection gaps in low and middle income countries mean that even greater costs are being borne by the uninsured. in 2017, the record $ 140 billion of insured losses were eclipsed by an additional $ 200 billion of uninsured ones. 11 in some of the countries most exposed to climate change - bangladesh, india, vietnam, philippines, indonesia, egypt and nigeria - insurance penetration is under 1 %. 12 the potential economic benefits of closing the insurance gap are striking. lloyd ’ s of london estimates that a 1 % rise in insurance penetration can translate to a 13 % reduction in uninsured losses and over 20 % reduction in disaster recover burden on taxpayers. substantial macroeconomic benefits include increased investment, higher output ( potentially up to 2 % of gdp ) and greater climate resilience. 13 despite this prize, progress is proving stubbornly slow – over the past 30 years the gap has narrowed by only from 78 % to 70 % globally, underscoring the importance of the idf ’ s work. 14 the role of insurance for adaptation and resilience so what should be done? munich re ( 2019 ), the

##e ( 2012 ) ). if so, this is a recipe for super - charged risk - shifting – and was in the run - up to the crisis. leverage among global banks rose at real pace in the pre - crisis period, in a quest for everhigher banking returns on equity ( chart 7 ). and this quest for shareholder returns was in turn aided and abetted by creditors who, far from pricing this rising risk, charged a low and falling interest rate to the banks, further fuelling risk - taking incentives. this risk - shifting crystallised as the crisis broke. at that point, yields on bank borrowing shot up and risk - taking was crushed. creditors bore large losses, which would have been larger still without government support. this experience makes clear that risk - shifting is not a theoretical phenomenon ; it is very much real, with large costs for creditors and for the wider economy. indeed, the welfare implications of risk - shifting are doubly troubling. not only does it generate excessive risk - taking and credit creation during upswings. as importantly, it also contributes to excessive caution and a credit crunch during the downswing. risk - shifting results in twosided deadweight costs, for creditors and for the macro - economy. 19 both have been much in evidence over recent years. ( b ) risk - alignment a related, but distinct, micro - economic risk friction concerns how rights are allocated to different stakeholders in a company. standard corporate finance theory sets out, on the face of it, a coherent allocation of control rights and risks. shareholders have a junior claim on the profits of a company, in that they are paid out after employees, creditors and the taxwoman. theirs is the riskiest piece of the profits pie. this means “ ownership ” is really a misnomer when applied to shareholders. what defines shareholders is not that they own most or all of the company. rather they “ own ” least, as residual claimants. associating “ shareholding ” with “ ownership ” thus makes little substantive sense, despite its widespread use in popular discourse. indeed, it is precisely because shareholders own least, not most, that justifies granting them control rights over management in the first place. by vesting control rights in the stakeholder whose claim is riskiest, the firm is immunised against taking too much risk in the first place. the shareholder model is thus, in principle, incentive - compatible, as it properly aligns risks