Cattle killed by drought in Ethiopia. Photo: Oxfam International.
There are ever more indicators that climatic change is influencing the frequency and intensity of natural catastrophes. If scientific global climate models are accurate, the present problems will be magnified in the near future.
Already scientists observe that more than three-quarters of recent economic losses caused by natural hazards can be attributed to wind storms, floods, droughts and other climate related hazards, which appear to be increasing at a greater rate than geophysical disasters (i.e., earthquakes or tsunamis etc.).
In recent rounds of negotiations, United Nations Framework Convention on Climate Change (UNFCCC) delegates have recognized the need for the international community to address the cost and damages from weather-related extremes.
“Consequent to rising exposure and vulnerability to weather-related extreme events, comprehensive and holistic risk and vulnerability reduction strategies should be a core part of adaptation to extreme weather events.”
Dr. Joern Birkmann, UNU-EHS
The urgency for such action was further underscored by a new joint report from the World Bank and the United Nations that says annual global losses from natural disasters could triple to US$185 billion by the end of this century, with climate change potentially bumping that up by $28-$68 billion each year from tropical cyclones alone.
This trend is mainly due to changes in land use and the increasing concentration of people and capital in vulnerable areas like coastal regions that are prone to windstorms or fertile river basins exposed to floods. And its toll needs to be addressed.
“Consequent to rising exposure and vulnerability to weather-related extreme events, comprehensive and holistic risk and vulnerability reduction strategies should be a core part of adaptation to extreme weather events,” says Dr. Joern Birkmann, a chief expert on the topic at the United Nations University Institute for Environment and Human Security (UNU-EHS).
In the past quarter-century, over 95% of deaths from natural disasters occurred in developing countries and direct economic losses (averaging US$100 billion per annum in the last decade) in relation to national income were more than twice as high in low-income as opposed to high-income countries.
Not only are there considerable differences in the human and economic burden of disasters in developed versus developing countries, but also in relation to insurance coverage. In the richest countries about 30% of losses in the period 1980-2004 (totalling about 3.7% of Gross National Product — GNP) were insured. Alternatively, in low-income countries, only about 1% of losses (amounting to 12.9% of GNP) were insured.
Due to the lack of insurance, combined with high levels of indebtedness and limited donor assistance, many highly exposed developing countries cannot raise sufficient capital to replace or repair damaged assets and restore livelihoods following major disasters. In particular, this exacerbates the impacts of disasters on poverty and development.
It thus becomes ever clearer that there is a need to reduce and transfer risk (to another party, — i.e., the insurer — by means of an insurance policy) in ways conducive to climate change adaptation and sustainable development. Further, this could be complementary to achieving poverty reduction.
“Major catastrophes not only cost many lives and a significant share of gross domestic product, they can also set back development by decades. Adaptation, including better risk management, will help countries prevent and cope better with such catastrophes. Working in parallel to those measures, insurance solutions can help the people and economies affected get back on their feet more quickly,” Lord Nicholas Stern responded when asked for his comment on a policy brief we published in advance of this month’s UNFCCC Conference of the Parties (COP16) in Mexico. The brief (see the ‘Download this paper’ sidebar) addresses key practical questions posed by climate negotiators about how to move from text to on-the-ground action.
Acting ahead of an event and preparing for a potential loss through disaster risk reduction (DRR) measures or insurance — as opposed to dealing with such losses by responding to the impact after it has happened — is beneficial for both governments and communities.
Governments face the dilemma of not having funds available when they need them to help their country recover from a disastrous event and instead have to divert resources that were earmarked for different uses (such as education, public health, development, etc.) to pay for costly disaster response activities.
Households and communities also benefit from risk reduction and insurance because they therefore need not keep relatively large amounts of assets in reserve “for a rainy day”. Productive assets are freed for development-savvy choices and investments — e.g., education of children, purchasing farm inputs and seeds and entrepreneurial activities that can improve living standards.
“With the HARITA scheme, farmers can engage in activities to reduce the risk of suffering from a lack of rainfall by building irrigation channels and cisterns, or by planting more drought resistant crops.”
Linking in DRR strategies would foster climate change adaptation. Countries would set their own risk reduction priorities, and realize those goals with international support. Following the principle of “common but differentiated responsibilities”, a first step is for affected countries to identify and make plans for reducing weather-related risks. Risk reduction activities might include:
In some countries, pilot approaches that include these preventative measures on a smaller scale are already working today. Horn of Africa Risk Transfer for Adaptation (HARITA) is one example where farmers can engage in activities to reduce the risk of suffering from a lack of rainfall by building irrigation channels and cisterns, or by planting more drought resistant crops.
For example, in Malawi, the provision of an index-insurance (a crop insurance that makes a payout when the amount of rain during the growing season is not sufficient to ensure proper crop growth and will likely lead to a loss in yield) enables farmers to have access to micro-credit. This additional financial backup can be of particular benefit to farmers because they themselves may now engage in activities (like investing in fertilizers or building irrigation channels) that can boost their productivity. Without these additional financial means, people can be stuck in a poverty cycle with extreme weather events slowly but constantly eroding their ability to restore lost assets crucial to their livelihood.
On a larger scale, the Caribbean Catastrophe Risk Insurance Facility (CCRIF) provides Caribbean governments with insurance coverage against monetary losses from hurricanes and earthquakes. This type of scheme has two major advantages: first, it makes countries more independent of international aid, which normally takes months to arrive in the affected region and; second, it ensures that countries hit by catastrophic events are able to maintain stability and pay their employees, so that recovery as well as reconstruction efforts can be put in place more quickly.
In order to be able to install those kinds of mechanisms to help developing countries adapt to climate change, the following key points have to be considered by the international community:
The application of a risk management module — insurance mechanisms in a wider risk management portfolio that includes other approaches, such as DRR — within a UNFCCC adaptation framework has the potential to help vulnerable countries and people better manage climate-related risks. This would complement efforts to reach the Millennium Development Goals.
The costs of investing in risk management can pay off many times over in avoided loss and damage, and in tangible improvements in the welfare of vulnerable people worldwide. The ultimate aim of such efforts is to catalyse resilience among vulnerable countries and people.
Growing experience worldwide suggests that insurance for low-, medium-, and high-level weather-related risks is feasible. Some of the manageable challenges include working with imperfect data, designing institutions that can deliver on adaptation, and shaping the respective roles of industrialized and developing countries, as well as the public and private sector in implementing risk reduction and risk transfer approaches.
Satellite imagery and improved modelling of the impact of catastrophes can help in shoring-up the data needed to address weather-related extremes — as shown by the Index-Based Livestock Insurance in Kenya, where satellite images assessing the vegetation cover are used in determining whether the lives of herders’ animals are threatened by food shortages. If the forage availability is low and therefore livestock mortality rates increase above a certain percentage, an insurance payout is triggered to compensate herders for livestock loss.
Examples of flexible, light institutional arrangements can be observed worldwide. These practical examples can help guide design and implementation in a UNFCCC adaptation framework. Furthermore, experience involving both the public and private sector can offer guidance on how decision-makers shape the roles and responsibilities amongst the sectors.
One example is the Turkish Catastrophe Insurance Pool, where the public sector set up the pool’s regulatory framework and is responsible for raising awareness and giving input to the institutional design of the pool. The private sector, on the other hand, takes care of the pool’s reinsurance, conducts studies to collect information relevant to risk management activities, drafts operational guidelines for the pool’s implementation, and of course, sells the insurance policies to home-owners.
We can conclude that the necessary tools are in place to start. Now, political will within the UNFCCC process, and particularly at the regional level, is essential for moving forward with risk reduction and insurance. These measures hold the potential to substantially reduce the longer-term costs of adaptation, and help vulnerable countries and people manage some of the impacts of climate change today and in the future.
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This article is based on a Munich Climate Insurance Initiative policy paper written by Koko Warner, Michael Zissener, Soenke Kreft, Peter Hoeppe, Christoph Bals, Joanne Linnerooth-Bayer, Armin Haas, Eugene Gurenko, Ian Burton. You may download it from the sidebar on the upper right of this page.
The Munich Climate Insurance Initiative (MCII) was launched in April 2005 in response to the growing realization that insurance-related solutions can play a role in adaptation to climate change, as advocated in the Framework Convention and the Kyoto Protocol. This initiative brings together insurers, experts on climate change and adaptation, NGOs, and policy researchers intend on finding solutions to the risks posed by climate change. MCII is hosted at the United Nations University Institute for Environment and Human Security (UNU-EHS) in Bonn, Germany.
This article was originally published on Our World 2.0.