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MICRO INSURANCE TO ADDRESS CLIMATE CHANGE RISKS AND GLOBAL REVIEW OF INSURANCE INDUSTRY RESPONSES “CLIMATE LITERACY FOR BANKING SECTOR” From 11.02.2013-13.02.2013 MCR-HRD IAP, HYDERABAD Dr. N. Sai Bhaskar Reddy12st February2013 firstname.lastname@example.org
Insurance Insurance is the equitable transfer of the risk of a loss, from one entity to another in exchange for payment. Individual entities can also self-insurethrough saving money for possible future losses
Imaginable Surprise Some events are not truly unexpected. It is possible to imagine the conditions necessary to produce extreme “surprises.” Integrated assessment models are less reliable with increased probability and number of surprises.
VulnerabilityVulnerability to climate change is the risk of adverse things happeningVulnerability is a function of three factors: Exposure Sensitivity Adaptive capacity
Adaptation“adjustment in natural or human systems in response to actual or expected climatic stimuli or their effects, which moderates harm of exploits beneficial opportunities”(Third Assessment Report, Working Group II)Includes “actual” (realized) or “expected” (future) changes in climate
Adaptation (continued)Two types of adaptationAutonomous adaptation or reactive adaptation tends to bewhat people and systems do as impacts of climate changebecome apparentAnticipatory or proactive adaptation are measures taken toreduce potential risks of future climate change
Climate Changes in India Increase in surface temperature by 0.4 degree C over the past century. Warming trend along the west coast, in central India, the interior peninsula, and northeastern India.
Climate Changes in India Cooling trend in northwest India and parts of South India. Regional monsoon variations: increased monsoon seasonal rainfall along the west coast, northern Andhra Pradesh and North-western India, decreased monsoon seasonal rainfall over eastern Madhya Pradesh, North- eastern India, and parts of Gujrat and Kerala.
Climate Changes in India Observed trends of multi- decadal periods of more frequent droughts, followed by less severe droughts. Studies have shown a rising trend in the frequency of heavy rain events and decrease in frequency of moderate events over central India from 1951 to 2000. 16
Climate Changes in India Records of coastal tide gauges in the north Indian ocean for the last 40 years has revealed an estimated sea level rise between 1.06-1.75 mm per year. The available monitoring data on Himalayan glaciers indicates recession of 17
Per-capita Carbon –dioxide emission (Metric Tons)25 20.012015 11.71 9.4 9.87105 3.6 4.25 1.020 USA Europe Japan China Russia India World average
What questions do we now need to consider? Do you know what impact climate change could have on your area? Do your current policies, strategies and plans include provision for the impacts of climate change? Can you identify and assess the risks from climate change to your services? Are developments with a lifetime of more than 20 years required to factor in climate change? Are you addressing climate change in your local Community Strategy?
July 2005 – Mumbai Flood On 26th July 2005 the meteorological station at Santacruz in North Mumbai (India) recorded 944 mm of rainfall within 24 hours, the highest ever in the history of precipitation recordings in India.
Heat wave of 2003, with more than 70,000 fatalities the largest humanitarian natural catastrophe in Europe for centuries Perceived Temperature on 8 August 2003 and excess mortality Heat stress extreme 300 high 2.300 moderate 9.400 light comfortable light moderate 19.500 high extreme 1.000 800 20.100 Cold stress2.700 15.000 Sources: Robine et al., 2007; German Weather Service, 2004
August 2005 – Hurricane Katrina6th strongest hurricane, largest losses of a single event source: AP 25.-30.8 Hurricane Katrina, USA (1.322 fatalities) Economic losses (US$ m): 125.000 Insured losses (US$ m): 61.000 (NFIP included)
Climate change probably has a significant impact on increases of nat cat losses, especially in North America and Asia/Australia.Annual growth rates of nat cat losses and climate component Global North Europe Asia/ America Australia 1980 Nat cat loss trend (% p.a.) 11 11 8 15 – 2007 Climate component (% p.a.) 4 5 1 6Comments These data are indicative only – a more precise determination of the regional loss drivers related to climate change is needed (e.g. via LSE cooperation) Nat cat loss trend: growth rates of original/nominal values and not adjusted for inflation Climate component: actually “Climate plus X” because influencing factors include anthropogenic climate change, natural climate variability, changes in vulnerability and changes in population distribution
Climate Change and Extreme Weather Events(IPCC, 2007) very likely > 90% likely >66% more likely than not > 50%
Trends of heavy precipitation events duringsummer monsoon in India Source: Goswami, B. N. et al. (2006), Science 314
Integrating the Uncertainty and Surprises of ClimateChange Intergovernmental Panel on Climate Change (IPCC) established in 1988. Assesses the scientific, technical and socio-economic information relevant to understanding the risk of human- induced climate change, its potential impacts, and options for adaptation and mitigation.
What‟s the Policy on ClimateChange? Earth Summit (1992) Kyoto Protocol (2001) World Summit on Sustainable Development (2002)
The Insurance Industry Insurance Group Agency Company Agents
The Insurance Industry Reinsurer Insurance Investment Insurance Group Companies Companies
What is risk management? A central part of our strategic management. It is a continuous cyclical process whereby the council: identifies, assesses/evaluates, controls: and monitors potential opportunities and adverse effects that challenge the assets, reputation and objectives of the Council. It enables the Council to effectively manage strategic decision making, service planning and delivery to safeguard the well being of its stakeholders
What is Risk Management? Risk Management Cycle Assess
Drawing on accumulated savings of liquid assets (e.g. cash, bank account balances etc.). Selling other assets (e.g. jewelry, land, livestock etc.). Borrowing from moneylenders, microfinance institutions (MFIs), banks or other financial institutions. Informal risk-sharing arrangements with neighbors, friends, family etc. (For example, if the household suffers an adverse shock, there may be an increase in remittance income sent by family members living abroad, or financial assistance provided by other households living in the same village, at least to the extent that those households are not also affected by the same shock). Government assistance (e.g. government work programs, drought assistance programs etc.). Formal insurance arrangements
Climate Change Risks and OpportunitiesFinance: Implications for investments, insurance & stakeholder reputationRisks: Failure to climate proof creates difficulties in securing investment and/or insurance cover Potential liabilities if climate change is not factored into long term decisions about the futurePossible impacts: Insurance Policies: Check Insurers stance on undefended flood risks and impact on premiums Future Developments: improved specification that takes account of future climate is likely to be cost effective in most casesOpportunities/Controls/Mitigation Evidence of climate proofing enhances reputation with all stakeholders, provides security for investments and an opportunity to reduced insurance premiums
What types of claims are we now seeing?Long term dry conditions: Drought affects trees- roots cause subsidence to properties and can create heave in pavements creating slips trips and fallsWet conditions: Flooding Drainage issuesIncrease in wind speeds: Structural damage to buildingsExtreme cold conditions: Frozen pipes - escape of water
Understanding Natural catastrophes, especially weather related events, are increasing in number and magnitude especially in Asia. Global warming is real. There is more and more scientific evidence for causal links between climate change and increasing frequencies and intensities of natural catastrophes. We have to mitigate global warming and adapt to the changing risks in respect to the regionally specific risk patterns. In Copenhagen ambitious CO2-reduction targets should be fixed to avoid dangerous, unmanageable climate change. The Copenhagen outcome should provide adaptation funds for developing and emerging countries, including new insurance solutions. The insurance industry supports climate change mitigation and adaptation measures by sharing its knowledge with the public and providing custom made covers for innovative technologies.
To date, there is little understanding of or agreement within the climate change community on the role that insurance-related mechanisms can play in assisting developing countries adapt to climate change.
India is considered to be the second most disaster- prone country in the world. With a large and growing population, densely populated and low-lying coastline and an economy that is closely tied to its natural resource base, India is highly vulnerable to climate change. Disaster insurance cover, however, is low compared to international standards and plays only a complementary role. Disaster risk management, including financing relief and reconstruction, is primarily the responsibility of governments, which provide actual assistance, or communities through informal risk sharing.
Frequently governments and communities do not have sufficient resources, and households lacking insurance typically turn to moneylenders, selling assets, reducing inputs in farming, or diversifying their activities. Another strategy is to send family members to work elsewhere and remit payments. However, such traditional risk management strategies, while reducing vulnerability in the short term, can increase vulnerability over the longer term by promoting sub-optimal asset allocation. For instance, small farmers may opt for multiple cropping to reduce income variability rather than planting the most profitable crops. Traditional risk sharing strategies also break down in case of disasters
Low insurance penetration in India can be traced to a number of demand and supply side factors. On the demand side, the foremost difficulty is the unaffordability of insurance for low-income high- risk regions. Other hurdles include public myopia and low awareness among the public about insurance and risk management.
The experience of major insurance companies shows that following a major catastrophe there is a rush for insurance cover, particularly for life and assets. But this interest is short lived, and in a majority of cases these policies are not renewed. Finally, large sections of the Indian economy operate outside the formal economy – not just small businesses, but also housing.
On the supply side, easy access to insurance products is still an issue. The problem of scaling up small-scale schemes to encompass large rural areas is the biggest hurdle in enhancing overall penetration rates. The poor in many rural areas have higher disaster risk exposure and also suffer more vis-à- vis their urban counterparts (World Bank, 2003). More specifically, their vulnerability to climate- change risks is increased on two counts: their inability and/or unwillingness to involve in high- risk activities (for instance growing cash crops) that promise higher returns, and their inability to reside in disaster safe locations.
The entry of the private sector has metamorphosed insurance in India by greatly improving penetration levels. Companies have innovated with their product offerings and marketing strategies. For example, index-based weather risk micro-insurance programs have been pioneered in India as an alternative to traditional crop insurance. These instruments are linked to the underlying weather risk defined as an index (based on historical data, e.g. for rainfall, temperature, snow, etc) rather than the extent of loss (e.g. crop yield loss). It is estimated that currently about 150,000 farmers have purchased such cover in India. More capital will also encourage a greater involvement of global partners, and thereby, enhance product innovation, service quality and technology standards.
Communities at risk, governments, international organizations, industry, and NGOs worldwide are seeking solutions for preventing and adapting to the rapidly multiplying impacts of climate change and weather-related disasters.Article 4.8 of the United Nations Framework Convention on Climate Change (UNFCCC) and the supporting Article 3.14 of the Kyoto Protocol call upon developed countries to consider actions, including insurance, to meet the specific needs and concerns of developing countries in adapting to climate change.
The Munich Climate Insurance Initiative (MCII) was formed in 2005 by NGOs insurers and reinsurers, climate-change experts and policy researchers to provide a forum for examining insurance- related options that assist with adaptation to the risks posed by climate change. The full MCII report on Insurance Related Options for Adaptation to Climate Change will be posted on the following websites after COP 11:www.slf.ch/drf and www.iiasa.ac.at/Research/RMS.This summary outlines concrete options for climate negotiators to support insurance mechanisms for climate-related disasters in disaster-prone developing countries. It discusses the scientific and economic rationale of a climate “insurance” system, options for such schemes, funding opportunities, associated
Climate disasters include such events as heat waves, droughts, bush fires, tropical and extra tropical cyclones, tornadoes, hailstorms, floods and storm surges. The losses from natural disasters are increasing, a trend that is attributed mainly to the increasing concentration of people and economic values in urban areas and the migration of populations and industries into areas, such as coastal regions, that are particularly exposed to natural hazards.Considering weather-related disasters, a large proportion of the increase in economic losses from 1980 to 2004 has occurred in high-income countries that have experienced large increases in capital (lower middle-income countries have also
Highly exposed developing countries rely extensively on external concessional borrowings from international development banks (such as World Bank, IDB and the IMF) and international donor aid to deal with the devastating consequences of natural disasters. A concern to donors and multi-lateral financial institutions, among others, is the increasing share of aid spent on emergency relief and reconstruction, which crowds out spending for social, health and infrastructure investments. The World Bank estimates that it has provided grants and loans for disaster relief and recovery of more than US$ 38 billion to developing countries over the last two decades (Gurenko, 2004; Gilbert and Kreimer, 1999), and the Asian Development Bank also reports large loans for this purpose (Arriens and Benson,1999). This means that disasters will continue to profoundly impact the lives, health, and property of millions of people, and will be acutely felt among the world‟s poorest people. To date, these vulnerable groups
Weather shocks often affect all households in a local geographic area, making some forms of risk- coping, such as seeking help from nearby family, friends and neighbors, relatively less effective. Globally, household exposure to extreme weather events is likely to increase over future decades, due to climate change as well as population growth in risk-sensitive areas
The Indian rainfall index insurance market. “Index insurance” refers to Efforts have been made in India a contract whose payouts areand other countries in recent years linked to a publicly observable to develop formal insurance index; in this case, the index is markets to improve diversification cumulative rainfall recorded on aof weather-related income shocks. local rain gauge during different phases of the monsoon season. This form of insurance is now available at a retail level in many parts of India, although these markets are still in their relative infancy in terms of product design and distribution.
Lloyd‟s (2009) estimates that around 135 million lowincome individuals around the world already make use of micro-insurance in some form, and estimates apotential final market size of 1.5bn to 3bn households.
Growth in these markets reflects a broadening of efforts towards greaterfinancial access for the poor to include insurance andsavings products in addition to micro-credit.