Challenges and opportunities in adaptation to the impacts of climate change through insurance-related instruments

 Challenges and opportunities in adaptation to the impacts of climate change through insurance-related instruments.

Despite tangible benefits and novel prospects for supporting adaptation to the impacts of climate change through insurance-related instruments, there are many challenges and opportunities to negotiating financial resources for this purpose. A major stumbling block has been a call by the Organization of Petroleum Exporting Countries (OPEC) for parallel treatment (ECO, 2004). Just as AOSIS seeks financial assistance, insurance and the transfer of technologies under the UNFCCC to help small-island states and low-lying nations adapt to a changing climate, OPEC seeks compensation for lost revenues from the reduced use of fossil fuel. Although seemingly unrelated, negotiations on these two issues have long been intertwined and thus deadlocked. The linkage continues despite views that these two categories of impacts are different in kind, scope and temporal aspects, and different in the nature of the communities impacted (Barnett and Dessai, 2002). Vulnerable communities exposed to sea-level rise, threats to their water supplies or an increased intensity of hazards have played little role in creating these physical threats. In sharp contrast, the implementation of response measures can be expected to affect economies that have played a direct role in contributing to climate change (and that have benefited from this role), through fossil-fuel production or fossil-fuel consumption (for a detailed discussion, see Linnerooth-Bayer et al., 2006).

At the Seventh Conference of the Parties (COP-7) to the UNFCCC in Marrakech in 2001, it was agreed that predictable and adequate levels of funding shall be made available to developing

country Parties to meet Convention commitments. It was also agreed that developed countries should provide resources through three newly created funds (Special Climate Change Fund (SCCF), Least Developed Country Fund, and Adaptation Fund), the Global Environment Facility, and bilateral and multilateral sources (UNFCCC, 2001). The creation of the SCCF was important in signalling a degree of political will to implement Article 4.8 and its related Kyoto Protocol provisions for the broad group of developing countries. The SCCF provides support for specified adaptation measures, including capacity building and institutional capacity for preventive measures, planning, preparedness and management of disasters related to climate change (UNFCCC, 2001).

The Marrakech funds are financed from diverse sources, including voluntary payments usually taken from Official Development Assistance (ODA) and the proceeds from a levy on the Clean Development Mechanism (CDM). Contributions to these funds have been made since Marrakech (Mace, 2005; Verheyen, 2005), but substantial funding has yet to be committed. The sentiment, especially on the part of developing countries, is that the COP has not created sufficient resources to address adaptation, despite the ample evidence of climate impacts in progress (Kartha et al., 2006). Alternative sources have also been proposed; for example, an international air travel adaptation levy (Müller and Hepburn, 2006).

5.2. Opportunities

It seems evident that any more ambitious form of support for insurance-related instruments in developing countries could benefit by partnering with financial institutions and donor organizations with similar aims. A consortium could link the proactive disaster-support agendas of multiple institutions, including international financial institutions (such as the World Bank, the InterAmerican Development Bank), bilateral donors (such as the UK Department for International Development (DFID) and the German Ministry for Economic Cooperation and Development (BMZ)), international organizations (such as the Organization for Economic Development (OECD), the United Nations Development Programme (UNDP) and the DG Development of the European Commission), reinsurers (such as Munich Re), and non-governmental organizations (such as Red Cross/Red Crescent and OXFAM). Coupling with other initiatives raises the question of the scope of climate adaptation funds committed to climate risk reduction. If funds for a climate insurance programme are pooled with support for seismic and other non-climate risks, this would have the advantage of increasing the global diversification and global benefits of the envisaged

pool.

Two recent projects by the World Bank are especially promising as a potential link with the broad programme of support outlined in this proposal. As discussed above, the Global Fund for Disaster Reduction and Recovery (GFDRR) will provide technical assistance for mainstreaming disaster risk and serve as a stand-by facility to provide quick relief funding. A Global Insurance Index Facility (GIIF) sponsored by, among others, the European Commission, is in the planning stages. This facility, as envisaged, will provide backup capital for index-based insurance covering weather and disaster risks in developing countries to assure financial protection for small risktransfer transactions. By constructing a diversified portfolio of developing country risks, the facility would leverage risk transfer and thus jump-start the development of risk transfer markets in countries with underdeveloped insurance markets (World Bank, 2005c). It is anticipated that other donor and financial institutions will join the GIIF initiative.

Another opportunity and challenge is to link insurance instruments with risk-reduction measures, and thus contribute directly to ‘adaptation’ (note that reducing long-term losses through a timely infusion of post-disaster capital also contributes to adaptation). Cleverly designed insurance systems can explicitly reward risk reduction behaviour with reduced premiums. With important exceptions, however, experience with incentive-compatible insurance is disappointing; yet, this record might be improved by setting risk reduction as a prerequisite for offering support. It should be emphasized that substituting pre-disaster support for post-disaster relief inevitably draws attention to the risks and opportunities for their reduction, and coupling insurance with risk management may have great potential for mitigating the human and economic losses from disasters (Linnerooth-Bayer et al., 2005).