Insuring the uninsurable: design options for a climate change funding mechanism


Insuring the uninsurable: design options for a climate change funding mechanism



Interest is growing regarding the potential role that insurance can play in the implementation of climate change adaptation, particularly for the areas most affected and least able to absorb negative effects. Sufficient climate adaptation efforts require mobilizing funding at the scale required, particularly given that the available funding is currently two or three orders of magnitude smaller than the levels needed (Loster, 2004). Insurance is considered as a possible way to increase the scale of funding (Indaba, 2006). Research further suggests that appropriately designed and implemented insurance mechanisms can bolster sustainable development and reduce poverty (Besley, 1995; Martin et al., 1999). Insurance can help anchor vital aspects of life quality – such as the ability to earn a livelihood and securing material assets (Dercon, 2004). Appropriately designed insurance can provide incentives for both public and private risk reduction, and contributes to a positive cycle of security and stability for those participating in the scheme(s) (Morduch, 1994; Holzmann and Jørgensen, 2000). Yet, so far, most people in developing countries have no access to affordable insurance coverage.
This article suggests that insurance-related instruments can be a tool to help adapt to and ameliorate the negative impacts of climate change for those countries likely to be most negatively affected by climate change. The article outlines one possible practical approach to indemnifying countries that are liable to suffer most from the global climate change. The idea of an international insurance pool covering climate change-related damage was raised for the first time by the Alliance of Small Island States (AOSIS) in 1991. In May 2003, critical issues and questions were raised at a United Nations Framework Convention on Climate Change (UNFCCC) workshop. Since then, however, the idea has not received much development. The proposed Climate Change Funding Mechanism (CCFM) aims to provide financial support for countries which suffer catastrophic economic damage due to climate change impacts and which cannot recover on their own due to a lack of financial resources. The challenge is to construct a financial compensation mechanism which would not only enable even the poorest countries to recover from damages caused by natural hazards, relying on the help of international community, but would also reduce their vulnerability to future natural disasters. The proposed scheme should also be politically acceptable for all parties involved and provide incentives for environmentally responsible behaviour by all countries, both in terms of adaptation/local prevention measures and in terms of emissions of greenhouse gases. It is not seen as a replacement for, but as one important tool in, an adaptation strategy

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