1. Integrated Financial Risk Transfer Mechanisms for Urban Resilience
S. S. Schuster1
, M. Range2
1
Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH, Financial Systems Development and
Insurance, Economic and Social Development, Employment, Eschborn, Germany. E-mail: sandra.schuster@giz.de
2
Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH, Financial Systems Development and
Insurance, Economic and Social Development, Employment, Eschborn, Germany. E-mail: matthias.range@giz.de
ABSTRACT: Cities are encountering natural hazard, extreme weather and climate related impacts on a scale that they have
rarely, if ever, experienced in the past. Their population and infrastructure is affected in different ways and degrees. Events are
likely to become more frequent and severe with climate change, which increases the risk of disasters and associated losses and
damage to people and assets. Insurance plays a role in spreading or sharing the risk across communities and all sectors of the
economy, over large geographical areas and time. The sharing and transfer of risk therefore enhances the resilience of society, but
does not necessarily reduce its risk in the long-term.
Many governments are challenged to provide a timely disaster response and longer-term resilient recovery due to financial
constraints. Assistance can be provided through a more integrated approach, including risk analysis, prevention, preparedness
and disaster and climate risk transfer solutions. By integrating risk transfer solutions, such as insurance, into disaster risk
management and climate adaptation efforts, governments and individuals are able to (1) soften the financial impact through
timely access to finance after a disaster, (2) increase the effectiveness of the implementation of contingency plans, and (3) plan
preventive measures that mitigate disaster-induced poverty traps and long-term development setbacks. The insurance industry is
uniquely placed to play a strong role in providing risk management and enhancing the resilience of communities. Internationally,
policy makers are increasingly recognising this approach as highlighted by the G7 “InsuResilience” initiative and reference to
risk transfer and insurance as part of a comprehensive climate risk management approach in the Paris Agreement (UNFCCC
COP21).
Integrated climate risk management concepts are currently being developed for four themes across sectors such as agriculture,
energy and tourism as well as urban areas. The project Agriculture and Climate Risk Insurance Plus (ACRIplus) in the overall
programme Promoting Integrated Climate Risk Management is funded through the International Climate Initiative (ICI) of the
German Ministry of Environment (BMUB) and implemented by GIZ (Deutsche Gesellschaft für Internationale Zusammenarbeit
GmbH) and the Munich Climate Insurance Initiative e. V. (MCII). This presentation will outline integrated approaches for
climate risk management and transfer and will highlight the project’s urban resilience work in the People's Republic of China
(PRC), where an Integrated Climate Risk Management (ICRM) concept is currently being developed.
Keywords: Urban resilience, risk transfer, integrative risk management.
1. INTRODUCTION
Cities have a long history of managing the risk of sudden and extreme climatic hazards and threats. Many city governments and
communities are familiar with the hazards they have faced in the past, due to their location in costal zones, at river banks, close to
volcanos and the likes and are designed to function in the face of these challenges. Urban resilience refers to the ability of an
urban system – and all its constituent socio-ecological and socio-technical networks across temporal and spatial scales – to
maintain or rapidly return to desired functions in the face of a disturbance, to adapt to change, and to quickly transform systems
that limit current or future adaptive capacity (Meerow et al., 2016). As the impacts of natural hazards and extreme weather events
are becoming more severe and more frequent worldwide (Munich RE, 2016) cities may begin to encounter hazards that they have
rarely, if ever experienced before. Highlighted for the first time in the Special Report on Managing the Risks of Extreme Events
and Disasters to Advance Climate Change Adaptation (SREX) (IPCC, 2012) and integrated as a fundamental part in the Sendai
Framework for Disaster Risk Reduction (UNISDR, 2015), the impacts of climate change pose a fundamental direct and indirect
risk to social and economic development. Tropical cyclones, floods, and droughts cause significant mortality and economic
losses and vulnerable communities in low-income and least developed countries are most affected, facing the risk of eroding their
livelihoods and undermining their resilience. Over the last 20 years, 6,457 weather-related disasters were recorded, which
claimed a total of 606,000 lives and affected more than 4 billion people with recorded losses totalling US$ 1,891 billion,
equivalent to 71% of all losses attributed to natural hazards (UNISDR and CRED, 2015). Economies in many parts of the world
are currently susceptible to significant disruption from today’s climate, and continued economic growth could put even more
value at risk. Cities in particular are becoming more vulnerable to the impacts of climate change due to their high population

2. density, associated extensive infrastructure development and complex inter-dependent systems (Revi et al., 2014). Much of the
existing infrastructure is not well adapted to current climate risks; and poorly placed to deal with anticipated future climate risks
(Arent et al., 2014). Urban areas also provide opportunities, since cities are centres of social and cultural change and innovation.
Many tools and practices developed for sustainable resource management or disaster risk reduction are co-beneficial for climate
change adaptation, and vice versa, and can be integrated with mitigation objectives, if social, cultural, institutional, and economic
factors do not constrain their implementation (Reisinger et al., 2014).
Asia had more frequent events and a greater number of people killed and affected than any other continent due to weather-related
disasters which affected 3.7 billion people and killed a further 332,000 individuals over the last 20 years. It’s large and varied
landmass, including multiple river basins, flood plains and other zones at high risk from natural hazards, plus high population
densities in disaster-prone regions contributed to these losses (UNISDR and CRED, 2015). Most climate models (General
Circulation Models, GCMs) project warmer, wetter conditions for East Asia by 2050 (except south-eastern PRC) and a rise in the
mean annual precipitation for almost the entire region by 2100 (Westphal et al., 2013). Cities and urban areas in East Asia are
exposed to a variety of climate-related natural disasters (particularly impacts associated with sea level rise, tropical cyclones and
flooding) due to their size and location. The PRC dwarfs other countries in East Asia, given its land area (more than 9.6 million
km2) and population (1.34 billion). Three cities in East Asia, Guangzhou and Shanghai in the PRC and Osaka/Kobe in Japan are
in the top 10 globally in terms of current exposed population, thus managing the risks of climate-related natural disasters is
already a major concern and will become even more important in future (Westphal et al., 2013). The variability in weather
patterns and intensity, often combined with pre-existing vulnerable conditions that resulted from prior disasters or associated with
climate change impacts related to slow onset events is increasing tropical cyclone and flood damage to infrastructure, livelihoods
and settlements in a cascading manner (disaster chains), such as exacerbating the issue of drought-related water and food
shortages, or cholera epidemics (Nadin et al., 2015). Economic growth, rapid urbanization and considerable levels of inequality
are major contributors to increased exposure and vulnerability to natural hazards in this region (UNDP, 2015). The PRC is facing
a higher frequency and increasing damage from extreme weather events in recent years. Even if rainfall shows no increase on the
national level, on the regional level one can observe significant shifts with strong impacts. For example, Beijing experienced
significant floods (a 1-in-500 years rain event on a city wide scale) in 2012, that submerged roads and the subway, damaged
infrastructure and lead to loss of lives. Other cities in the south of the country have also experienced heavy floods due to extreme
rainfall events, often “preconditioned” by severe droughts, degraded soils and lack of maintenance of drainage systems (Hongjian
et al., 2016).
2. INTEGRATED CLIMATE RISK MANAGEMENT AND TRANSFER
2.1 Insurance
Insurance can be used as a tool to improve post-disaster damage and loss situations through the provision of timely financial
resources. It can provide a buffering capacity and prevent knock on effects after an event to stop further losses; provide a space
for certainty under uncertain conditions and a safe operating space for development; and support and enable risk assessments and
incentivize risk reduction on all levels (community- /provincial- / national-) (Warner et al, 2012). At the same time, insurance is
not a stand-alone remedy to manage climate risks, but requires combinations with other risk management approaches. For
example, an insurance coverage in absence of any relief and rehabilitation programmes after a major cyclone would enable the
insured to access quick payouts but no assets (e.g. productive means) to buy. Insurance is also not feasible as an adaptation option
for slow onset events such as sea level rise, ocean acidification and glacial retreat for which other risk management approaches
are much more cost-effective, including changes in agricultural production, contingency funds, and relocation programmes
(Warner et al, 2013).
2.2 Disaster Risk Management
Disaster Risk Management (DRM) can improve the resilience of society and also promote sustainable development, if
implemented correctly (Figure 1). Overall, resilience is improved through a cycle of risk analysis, prevention and mitigation,
preparedness, and transfer of risk (e.g. insurance), although not necessarily implemented in this order in practice where they can
overlap and merge. Resilient recovery draws on the lessons from a disaster to include DRM measures in post disaster
reconstruction. Disaster response and recovery must link humanitarian aid as a rapid response measure in crisis situations and
more medium and long-term development actions, to ensure that the immediate and short term measures contribute to sustainable
development (BMZ, 2015b).

3. Fig. 1: Disaster risk management as a pillar of sustainable development (BMZ, 2015b).
2.3 Approaches in the context of the UNFCCC process
Internationally, policy makers are increasingly recognizing the important step in changing the paradigm from response towards
risk reduction and in on how society deals with climate risks. Insurance has been recognised in the international policy debate
since 1992 in the UNFCCC (Article 4) as well as in the Kyoto Protocol (Article 3). In 2007, the Bali Action Plan highlighted risk
management and insurance as an instrument to advance climate change adaptation and to manage risks of extreme weather events
in international climate change negotiations. In 2013, the Warsaw International Mechanism (WIM) for Loss and Damage put
comprehensive climate risk management on the international agenda, since Parties to the UNFCCC increasingly expressed their
desire for more knowledge, practical examples and capacity support to address some elements of the work programme such as
risk management and risk transfer. The year 2015 provided a political momentum with regards to climate risk insurance. G7
leaders cooperated with the private sector to launch “InsuResilience”, a climate risk insurance initiative to support developing
countries in their efforts to build climate resilience (BMZ, 2015a). This will be achieved by providing 400 million people in the
most vulnerable developing countries with access to direct and indirect insurance coverage against climate related impacts by
2020. The Sendai Framework for Disaster Risk Reduction includes “financial risk-sharing mechanisms” in its priorities for action
(Priority 3: Investing in disaster risk reduction for resilience) (UNISDR, 2015). The Conference of the Parties (COP 21) with the
Paris Agreement referred to risk transfer and insurance being part of a comprehensive (climate) risk management approach for
Loss and Damage (UNFCCC, 2015). The Executive Committee of the WIM has been tasked to establish a clearinghouse for risk
transfer. Decisions under the UNFCCC will outline the roadmap for work in international climate policy in the coming years on
comprehensive (climate) risk management. These debates have highlighted the importance of insurance related approaches in
managing and transferring risks within and across countries, institutions and stakeholders.
2.4 Integrated Climate Risk Management and Transfer (ICRM)
Governments, especially but not only in developing countries, are often challenged by a timely disaster response and longer-term
resilient recovery due to financial constraints, adding further uncertainties to national budgets and long-term planning. This calls
for a more integrated approach, where insurance can play a central role to reduce the economic and financial burden after a
disaster and can help to increase a society’s resilience. However, a disaster insurance scheme should be integrated in all parts of
DRM, from risk analysis (including the development of probabilistic risk models), to risk transfer (insurance), rehabilitation and
reconstruction in order to fully benefit from its synergies (BMUB, 2015). By integrating risk transfer solutions, such as insurance,
into DRM and climate adaptation efforts starting with physical planning which includes a risk reduction and climate adaption
approach as well as the consistent implementation of the plan and by-laws, governments and individuals are able to (1) soften the
financial impact through timely access to finance after a disaster, (2) increase the effectiveness of the implementation of
contingency plans, and (3) plan preventive measures that mitigate disaster-induced poverty traps and long-term development
setbacks. The use of insurance-related climate solutions to manage and carry climate risk effectively requires the technical know-
how of the private sector and a business case in order to develop innovative insurance products.
Worldwide applications of financial transfer solutions as part of risk management have been focusing on agriculture climate risk
insurance, given the major dependence of many countries on the export sector and agendas such as food security and
employment. The role of risk transfer solutions is also relevant for other sectors and environments, including cities. Risk
considerations are equally important to mitigation goals, since even with the most stringent implementation of mitigation
measures, climate change impacts over the next few decades cannot be entirely avoided. Without mitigation, impacts are likely to
be more severe and may overwhelm the adaptive capacity of some ecosystems. For example, the loss or reduction of ecosystem
services can lead to very high social and economic costs (e.g. insufficient quality and quantity of water for consumption in urban

4. areas, wastewater and industry can lead to fluctuations in food production, which in turn can increase prices for consumer in
cities and contribute to economic volatility). The development of Integrated Climate Risk Management (ICRM) concepts, which
combine risk reduction, risk transfer, preparedness and response measures, can create spill over effects and synergies which are
based on fundamental and comprehensive disaster risk assessments and analyses (hazard, vulnerability and exposure) (BMUB,
2015; IPCC, 2012; Warner et al., 2013).
China’s population recorded 1.361 billion in 2013 and 1.367 billion in 2014. As with other countries, urbanisation is increasing
and 70% of China’s population (or 1 billion people) is likely to be living in urban areas by 2030. The combined population
growth coupled with the desire to live in cities will challenge the abilities of municipal governments to provide adequate services
and infrastructure in line with a mandated transition to a low carbon economy. Failure to consider potential future climate risks
may seriously undermine urban resilience and functioning of urban systems, as evidenced by existing negative impacts occurring
during and after current climate hazards. In response, China’s Action Plan for Climate Change Adaptation in Cities was
announced in 2016. The action plan anticipates that by 2020, climate change adaptation related guidance will be generally
incorporated into urban planning systems, construction standards and industry development.
On behalf of the German Federal Ministry for the Environment, Nature Conservation, Building and Nuclear Safety, GIZ
(Deutsche Gesellschaft für Internationale Zusammenarbeit GmbH) and MCII (Munich Climate Insurance Initiative e. V.) support
the Chinese government to develop a roadmap on how to integrate risk transfer solutions into comprehensive DRM for critical
infrastructure in or closely connected to urban areas (transport / harbour) within the next two years. Comprehensive risk analyses
will be conducted in specific test sectors to provide a basis for the private sector to model the risk and to structure financial
instruments accordingly. Technical assistance will enhance local prevention capacities to reduce risks, invest into preparedness
measures, provide strategies for public subsidies and set incentives for the insured. It is expected that effective risk prevention
and reduction measures would in turn reduce the premiums of insurance solutions for public clients, including urban
communities.
3. ADDED VALUE FOR INTEGRATIVE RISK MANAGEMENT AND URBAN RESILIENCE
As mentioned earlier, the Sendai Framework for Disaster Risk Reduction includes “financial risk-sharing mechanisms” in its
priorities for action (Priority 3: Investing in disaster risk reduction for resilience). However, as a new or modified set of
instruments, integration into a comprehensive risk management approach for urban contexts needs to be the next step. The
expected benefits of insurance products (e.g. higher investment, innovation) when strategically combined with risk management
can produce synergies (e.g. incentive for risk adverse management but risk taking behaviour, faster response management
through direct payouts, and lower numbers of aid-dependent city dwellers to relax the pressure on government budgets in times
of increased fiscal stress) and spill-over effects (e.g. reduced premiums through risk reduction efforts), which will increase
insurance effectiveness. The expected added value would be even higher if financial risk transfer products in all their diversity
could be considered already in the planning phase (e.g. of infrastructure). Furthermore, insurance payouts can be conditioned to
incorporate “build back better” requirements (e.g. building codes, etc.) into response and reconstruction activities which would
favour the extension of insurance coverage, could reduce future premiums and motivate a culture of prevention in urban
settlements. Proof, meaningful and hard data on this hypothesis is not available to date. The project Agriculture and Climate Risk
Insurance Plus (ACRIplus) is a front runner to prove the concept and will feed its findings into the Sendai Framework for
Disaster Risk Reduction and UNFCCC process.
4. CONCLUSIONS
Climate risk-related insurance, as part of China’s overall and growing DRM and climate adaptation efforts, can play a significant
role in the near future to increase the resilience of its people against the risks of climate change. However, it must be structured as
part of a raft of adaptation options in order to discourage high risk behaviour. Different types of insurance mechanisms need to be
explored, considering different structures for various sectors, and phased subsidies and other forms of smart support for low-to-
middle income households in China’s urban areas. The provision of index-based insurance is often challenged by a high premium
price, data inadequacy, mistrust, short-term risk perception, restrictive regulatory frameworks, and a mismatch between product
design and people’s and government’s needs. Moving climate and risk-related insurance approaches forward in a meaningful way
will require the engagement of a variety of different stakeholders, including the public and private sector, international
organizations and local associations. Nevertheless, the current international political momentum around climate risk insurance
can help support a comprehensive and integrated climate risk management to provide technology for data collection and scaling-
up products at the national level. If done right, this could help change the paradigm of how we manage climate risks going
forward.
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