Promoting Climate Risk Reduction through Risk Insurance

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Risk insurance can provide an effective means of catastrophic risk reduction and climate change adaptation in the developing countries. The ongoing discussions by the Conference of Parties to the United Nations Framework Convention on Climate Change are putting substantial efforts to promote climate change adaptation through international cooperation in the form of providing additional finances and technologies including proposals to promote a global or regional climate risk insurance facility. Case studies from within and outside the Asia-Pacific region provide valuable lessons which could be used for promoting risk insurance by the future climate regime (post-Kyoto Protocol beyond 2012). The analysis of these risk insurance proposals to the Convention and comparison of what they intend to achieve with that of the existing issues within the risk insurance sector in the developing Asia-Pacific indicate that these proposals address some of the major issues that are limiting the spread of risk insurance. However, no single proposal is comprehensive enough to address all the issues and all the proposals lack details in terms of how they can achieve what they intend to achieve. There is a need for the proposals to the Convention to give more thought on how they address the issues such as high base risks, lack of historical data required for designing risk insurance systems, limited awareness in the utility of insurance instruments, keeping the premium prices within affordable levels, encouraging the role of private sector, enabling greater access to reinsurers, and instituting enabling policies to create a proactive risk mitigation environment with an eye on sustainability. A convergence approach wherein the proposals incorporate lessons from on-the-ground experiences from regional, national and local initiatives could provide an effective model for promoting the risk insurance.

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Promoting Climate Risk Reduction through Risk Insurance

  1. 1. Climate Risk Mitigation Through Risk Insurance<br />Framing Presentation<br />SVRK Prabhakar and Koji Fukuda<br />Institute for Global Environmental Strategies, Hayama, Japan<br />Presented at Asia-Pacific Policy Workshop on post-2012, IHC, New Delhi. 29-30 Aug 2011.<br />
  2. 2. Past Disaster Trends<br />Global: Number of disasters and economic damage (Prabhakar et al., 2009)<br />India: Number of disasters and economic <br />Damage (Prabhakar et al., 2009)<br />
  3. 3. Reasons behind increasing trends of natural disasters<br />Increasing population density in vulnerable areas<br />Increasing number of natural hazards (climate change?)<br />Increased reporting of natural disasters<br />A combination of all the above<br />Munich Re (2007): The frequency of hydro-meteorological hazards have increased between 1960 and 2005.<br />
  4. 4. CARE Hotspots<br />Human, social, natural, and financial vulnerabilities projected to 2030 are overlaid in a GIS system.<br />Provides an overview of most dangerous locations in terms of humanitarian crisis for preventive planning and planned response.<br />Care International, 2008<br />Currently available at the global scale. <br />Need to be developed for smaller decision making level scales.<br />
  5. 5. Differential Impacts of Disasters on Developed and Developing Countries<br />Source: Mechler, 2004<br />
  6. 6. DRR and Climate Change Adaptation<br />Development<br />Complexity<br />How much to mainstream?<br />Catastrophic risk reduction<br />Adaptation<br />Short term<br />Long term<br />Climate change ‘additionality’<br />Source: Klein, 2002<br />
  7. 7. A Two-Pronged Approach for Climate Risk Reduction<br />Non-catastrophic risks: Risks from change of mean state of climate<br />Within the capacity of national systems<br />Local knowledge is useful E.g. Community based adaptation, weather based crop insurance schemes etc.<br />Catastrophic risks: Risks from changes in extremes<br />Need external assistance in terms of finances and experiences<br />Local knowledge often fall short<br />E.g. Global and regional catastrophic risk insurance schemes, adaptation networks<br />
  8. 8. What is Risk Insurance?<br />Transfer the risk for a payment to a company that can hedge the risks<br />Insurance Premium <br />Policy<br />Insurer<br />Insured (population)<br />Indemnify<br />
  9. 9. Risk Insurance<br />Emphasis on risk mitigation compared to response<br />Provides a cost-effective way of coping financial impacts<br />Covers the residual risks uncovered by the other risk reduction mechanisms.<br />Stabilizes rural incomes: reduce the adverse effects on income fluctuation and socio-economic development.<br />Provides opportunities for public-private partnerships.<br />Reduced burden on government resources for post-disaster relief and reconstruction.<br />Helps communities and individuals to quickly renew and restore the livelihood activity.<br />Depending on the way the insurance is designed, the insurance mechanism can address a wide variety of risks emanating from climatic and non-climatic sources.<br />Arnold, 2008; Siamwalla and Valdes, 1986; Swiss Re, 2010<br />
  10. 10. Non-life Insurance Premiums<br />USD Billion<br />
  11. 11. Few examples of Risk Insurance<br />Prabhakar and Fukuda, 2010<br />
  12. 12. Issues with Current Insurance Systems<br />High insurance costs<br />High residual risks<br />Urban areas: Poorly developed risk mitigation options such as structural standards, land use/urban planning etc.<br />Rural/agriculture: Only 35-40% of Indian agriculture is irrigated.<br />Poorly developed re-insurance industry<br />Poor availability of data to assess risks for designing risk insurance systems (e.g. weather data and data on crop loss)<br />Cultural and perceptional issues with both people at risk and policy makers<br />
  13. 13. Comparison of various proposals under UNFCCC<br />Prabhakar and Fukuda, 2010<br />
  14. 14. Questions to be Answered in This Session<br />How these challenges can be overcome with the processes and provisions under UNFCCC through the future climate regime?<br />To what extent are the current risk insurance approaches able to reduce risks they are designed to address?<br />What are the challenges faced and to what extent solutions are implemented?<br />What national level policy provisions are necessary for creating enabling environment for greater penetration of risk insurance?<br />
  15. 15. Thank you!<br />

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