Insurance for assisting adaptation to climate change in developing countries: a proposed strategy

Insurance for assisting adaptation to climate change in developing countries: a proposed strategy

Adaptation to climate change, including support for insurance instruments, has emerged on the climate agenda alongside the reduction of atmospheric greenhouse gas concentrations as an essential part of the response to climate change risks. It is generally accepted that industrialized countries bear a certain responsibility for adaptation to climate change in developing countries, and should bear part of the costs. Although a diversity of mechanisms, approaches and rules for funding adaptation in developing countries has been adopted by implementing agencies and

governments in the context of the United Nations Framework Convention on Climate Change (UNFCCC), adaptation is generally considered to be an underdeveloped part of the climate regime. Early efforts to address adaptation under the UNFCCC have focused on capacity building and information exchange with respect to vulnerability to climate change and possible adaptation strategies. There is an increasing appreciation that minimizing vulnerability to the economic and physical impacts of climate-related extreme weather events, including floods, droughts, typhoons and other weather hazards, can cost-effectively contribute to reduced vulnerability. Moreover, many in the climate community are advocating that climate risk reduction be mainstreamed into the development process to simultaneously contribute to eradicating poverty, furthering development, and achieving the Millennium Development Goals. Efforts have aimed at funding strictly climate-change-related activities, but there are increasing calls that adaptation should be driven by vulnerability and poverty, and that it should be mainstreamed into the development process (Kartha et al., 2006).

The reduction of the escalating losses from floods, droughts, typhoons and other climate-related disasters is viewed as essential to eradicating poverty and achieving the Millennium Development Goals (Arnold and Kreimer, 2004). In the past quarter-century, over 95% of disaster deaths occurred in developing countries, and direct economic losses (averaging US$54 billion per annum) as a share of national income were more than double in low-income than in high-income countries (Arnold and Kreimer, 2004). Although the increase in disaster losses today is largely driven by socio-economic factors, there is mounting evidence of a significant climate-change signal in disaster events, for example, increasing extreme precipitation at mid- and high latitudes (Schönwiese et al., 2003), extreme floods and droughts in temperate and tropical Asia, severe dry events in the Sahel and southern Africa (IPCC, 2001), and increases in tropical cyclone activity in the Atlantic and the Pacific region (Emanuel, 2005). Scientists, however, cannot accurately assess the contribution of climate change to current risks. Nevertheless, many in the climate community are calling for a ‘no-regrets’ adaptation strategy that integrates adaptation to climate change with adaptation to ‘normal’ climate variability. Improving the capacity of communities, governments or regions to deal with climate variability will be likely to improve their resilience to deal with future climatic changes. This means that increasing attention must be paid to disaster risk management.

An important cornerstone for risk management, and a possible no-regrets adaptation strategy, is insurance and alternative risk-transfer instruments that provide disaster safety nets for the most vulnerable (Linnerooth-Bayer et al., 2005). Without donor support, however, insurance is hardly affordable in highly exposed developing countries, which helps to explain why only 1% of households and businesses in low-income countries, and only 3% in middle-income countries, have catastrophe coverage, compared with 30% in high-income countries (Munich Re, 2005). Instead of insurance, they rely on support from family and governments, which is not always forthcoming for catastrophes that affect whole regions or countries. Disasters exacerbate poverty as victims take out high-interest loans, sell assets and livestock, or engage in low-risk, low-yield farming to lessen their exposure to extreme events. Moreover, without a post-disaster infusion of capital for reconstruction, disasters can have long-term adverse effects on economic development. As a case in point, 4 years after the devastation of Hurricane Mitch in 1998, the GDP of Honduras was 6% below pre-disaster projections (Mechler, 2004), and the disaster increased the number of the poor by 165,000 people (Government of Honduras, 2001).

Climate risk management, including proactive support for insurance instruments, is emerging on the climate change adaptation agenda. Article 4.8 of the UNFCCC calls upon Convention Parties to consider actions, including insurance, to meet the specific needs and concerns of

developing countries arising from the adverse impacts of climate change (United Nations, 1992), and Article 3.14 of the Kyoto Protocol explicitly calls for consideration of the establishment of insurance (United Nations, 1997). In an early proposal for an ‘international insurance pool’ within the UNFCCC context, the Alliance of Small Island States (AOSIS) put forth the idea of a global compensation fund fully financed by industrialized countries for the purpose of compensating low-lying states for sea-level rise damages. The AOSIS proposal addressed what is arguably an uninsurable risk (since sea-level rise is gradual and its occurrence predictable) for which the victims have little responsibility.

This article addresses a different risk context, that of stochastic sudden- and slow-onset weatherrelated disasters, and suggests a two-tiered climate insurance strategy. The first tier, and the core of this strategy, is the establishment of a climate insurance programme that would offer capacity building and financial support to nascent (weather) disaster insurance systems in highly exposed developing countries. This support could be offered independently or in partnership with other donor organizations by creating a climate insurance facility or other mechanism. Alternatively, it could be ‘mainstreamed’ into the operations of a multi-purpose disaster risk management facility. A main purpose of the climate insurance programme is to enable the establishment of public/ private safety nets for stochastic climate-related shocks by assisting the development of insurancerelated instruments that are affordable to the poor, coupled with actions and incentives for proactive preventive (adaptation) measures. As a second tier of support, adaptation funding could be apportioned to post-event relief for weather-related disaster risks that are otherwise uninsured because of data or institutional limitations.

The intent of this discussion is not to provide a concrete proposal for negotiation, but rather to suggest a broadly conceived climate insurance strategy as a basis for further discussion and deliberation. We begin in the next section by briefly reviewing the AOSIS and other recent climate insurance proposals that provide the background for our suggested strategy. We continue in Section 3 by outlining the workings of the first-tier climate insurance programme, which builds on developing country initiatives and thus avoids the expense and obstacles of operating an independent system. Based on experience in India, Malawi, Turkey and Mexico, we give concrete examples of the types of insurance initiatives that the programme might support. In Section 4, we offer preliminary thoughts on a possible second tier, which would provide disaster relief contingent on credible risk management policies or actions. Section 5 discusses challenges and opportunities for financing and implementing this two-tiered strategy. Section 6 concludes by briefly reviewing the advantages of this proposal, including its feasibility and potential for linking with other donor initiatives, providing incentives for loss reduction (adaptation) and targeting the most vulnerable. The unresolved issues are discussed, including the necessary institutional design, possible limits on support (for instance that funds be commensurate with the incremental risk of climate change), and sources for the requisite resources.