Climate insurance

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Climate insurance is a catchphrase for the use of insurance solutions as adaptation measures against climate change in developing countries. As a term contained in the United Nations Framework Convention on Climate Change and the Kyoto Protocol , the concept has received increased political attention since the UN Climate Change Conference in Bali in 2007 . Insurance against natural hazards such as storms and heavy rain is already being used in many industrialized countries and increasingly also in emerging markets to protect against natural hazards. State actors also ask for insurance products, e.g. B. in the form of so-called cat bonds . For developing countries, it is discussed whether insurance solutions can offer an alternative for generating aid money for natural disasters. A problem with the current form of international aid in the event of a disaster is that food aid, for example, does not provide incentives for risk reduction. In order to overcome specific market barriers, pilot projects are currently focusing primarily on microinsurance products.

Extreme events and climate change

Due to global warming , the frequency and / or intensity of extreme weather events will most likely increase, but the effects will differ from region to region. The small island states are among the countries that will be particularly affected. According to the IPCC's Fourth Assessment Report , it is very likely that both maxima and minima of temperatures will rise, the number of hot days will increase and, depending on the region, there will be a change in the precipitation patterns, generally leading to more heavy rainfalls and droughts. It is also estimated that the intensity of tropical cyclones will increase in some areas. Due to the lower existing adaptive capacity and higher (human) vulnerability , the pressure to act is particularly high in developing countries.

Market barriers for insurance solutions in developing countries

Insurance, which is a collective risk-taking for statistically incalculable dangers and damage situations for a long time are a tool to adapt to weather variability and climatic hazards (including natural hazard insurance , crop insurance). In developing countries, they have so far only been used rarely. The reasons for this are:

Low economic performance of users / non-existent insurance market

Many insurers have no incentive to invest in traditional insurance in developing countries, as traditional insurance products are simply unaffordable for many users. Reasons for this are, in addition to the low economic efficiency, high transaction costs (e.g. costs for claims processing ; these are similar for each insurance policy, so the proportion of transaction costs is much higher for small insured amounts), surcharges for insecure data and costs for Reinsurance to compensate for disbursements in the first few years.

Bad data

Climate and risk data are a fundamental element of risk management and adaptation. In many developing countries, especially in the poorest such as the LDCs , there is a lack of reliable weather data and sources of weather data such as weather stations . This fact poses two challenges: Firstly, it is not easy to control the current situation ( temperature , precipitation , wind ) in a certain area. This is a hurdle for weather and climate insurance in developing countries, especially for innovative index insurance, which cannot be implemented without adequate data. Second, long-term series of relevant weather data are often not available. Wherever they are, they are often inconsistent in terms of time span and methodology. In many cases only short-term series are available. The second problem poses a challenge for the statistical assessability of hazards.

There are two important measures to make insurance viable and affordable in developing countries: make the data available (weather, exposure and data on vulnerability) and reduce the uncertainties about the data. This can also reduce the premiums. In order to improve data availability, national meteorological services can be expanded. In recent years, satellite data has brought about significant technological advances and can often bridge gaps in the data.

Adverse selection and "moral hazard"

Adverse selection describes an information asymmetry that leads to excessive users with a high risk exposure requesting an insurance product. In order to counter this asymmetry, insurers have to spend considerable costs. This problem has been shown to be particularly relevant in agricultural insurance.

" Moral Hazard " describes a possible change in behavior of the insurance users after purchasing the insurance cover, which ultimately leads to miscalculated risks and increased costs. Agricultural insurance is also vulnerable to this.

Bad regulatory environment

For their implementation, insurance companies need the rule of law and a suitable and reliable regulatory environment. Index insurance in particular is sometimes viewed as a game of chance (with corresponding tax deductions). A lack of human capital in developing countries to develop appropriate products is often critical .

Solution: index-based insurance

Many of the problems that have been addressed can be countered with new forms of insurance. Index-based or parametric insurance, for example, does not pay the insurance premium based on the damage determined, but on the basis that a threshold value that correlates with the damage is exceeded (e.g. falling below a certain amount of rain in the area). This enables a risk-reducing incentive structure (since the payout is not linked to the damage) and counteracts “ moral hazard ”. Information asymmetries also occur less frequently, since the level of knowledge about the index is the same for the user and the insurer. Since the costly damage assessment is no longer necessary, the transaction costs also decrease. However, there is a risk of the basic risk , i.e. H. Users sometimes receive no compensation despite losses suffered because the index was not triggered.

Existing insurance solutions against extreme events in developing countries

Micro level

An example of a micro-level insurance program is the index-based insurance program for peanut smallholders in Malawi. The farmers are affected by droughts about every 8-10 years, which lead to crop failures. Credit providers fear defaults and are therefore reluctant to offer smallholders loans. An index-based insurance covers this insolvency, thereby increasing the farmers' access to credit. The amount of rain recorded by the local weather station is used as an index. A payment is made if critical threshold values ​​are not reached during the growth period. Farmers who have prepared for risk and suffer less damage receive the same payout.

Macro level

An example of a macro-level insurance mechanism is the Caribbean Catastrophe Risk Insurance Facility (CCRIF) . The CCRIF was developed to provide CARICOM governments with urgently needed liquidity immediately after a hurricane or earthquake. A parametric mechanism is used that triggers a payout when a predefined damage level is reached. The implementing institutions are the CARICOM governments, the World Bank and a multilateral donor group.

The CCRIF is a not-for-profit insurance mechanism owned by a foundation that benefits those CARICOM governments that participate in the pooling scheme. The pool's operational functions and risk management are carried out by private risk management companies. By spreading the risks among the members, the CCRIF serves as a risk taker and can therefore provide insurance coverage at a relatively low additional cost. CCRIF member countries can decide on the level of coverage for each of their insurance risks. The CCRIF paid out US $ 7.75 million to Haiti after the devastating earthquake disaster in 2010 . Payments to the governments of Anguilla, Barbados, St. Lucia and St. Vincent also followed after Hurricanes Earl and Thomas . The payout to Haiti represented more than half of the available liquidity through international aid in the first 10 weeks. The CCRIF is also developing additional products for heavy rain events after it has been shown that much of the hurricane damage is caused by rain rather than wind become.

Insurance in the UN climate negotiations

The Bali Action Plan explicitly calls for “consideration of risk-sharing mechanisms and transfers such as insurance” as a means of addressing loss and damage in developing countries particularly hard hit by climate change. This supports the mandate laid down in Article 4.8 of the United Nations Framework Convention on Climate Change (UNFCCC) and Article 3.14 of the Kyoto Protocol to give special consideration to insurance instruments. At the climate conference in Cancún, the signatory states to the framework convention decided that insurance approaches and other preventive strategies against extreme events should be understood and promoted as measures to adapt to climate change. In addition, a work program has been drawn up which contains further recommendations on various approaches, including an international insurance facility.

Considerations for an International Insurance Mechanism

The proposal of the Alliance of Small Island States (AOSIS)

From the point of view of the Alliance of Small Island States , an important part of the post-2012 agreement should be a “multi-window mechanism” tailored to the damage and loss caused by climate change. This multi-window mechanism should consist of three interrelated components. Firstly an insurance component, secondly a rehabilitation or compensation component and thirdly a risk management component.

These three components play different as well as complementary roles and include the necessary components of an integrated approach to risk reduction, risk transfer and risk management. All three components together are intended to improve the adaptive capacities overall. The insurance component is intended to help the small island states cope with the financial risks caused by increasingly frequent and severe extreme weather events. The rehabilitation or compensation component will become necessary due to increasing damage and losses. The risk management component is intended to support and disseminate risk assessment and risk management mechanisms, and to provide information for the other two components.

Are there guidelines state responsibility, the principle 13 of the Rio Declaration (compensation to victims of environmental degradation), the polluter pays principle , the principle of common but differentiated responsibilities (Article 3 of the UNFCCC ), principles of justice as the principle of justice between generations and not ultimately be international solidarity. The overarching goal is to establish a mechanism that reduces the vulnerability of the small island states and the Least Developed Countries (LDCs) and strengthens their capacity to adapt to climate risks. External support is seen as necessary for the financing. In accordance with the polluter pays principle, the funds should come from the industrialized countries (the Annex I countries of the Framework Convention on Climate Change) and are preferably implemented through mechanisms under the umbrella of the Framework Convention on Climate Change.

The proposal of the Munich Climate Insurance Initiative (MCII)

The Munich Climate Insurance Initiative was founded in April 2005 by insurers, climate change and climate adaptation experts, non-governmental organizations and academics. This was preceded by the realization that insurance solutions can play an important role in adapting to climate change. The initiative proposes an insurance module with the two pillars of prevention and insurance as part of a broad-based adjustment fund. The prevention strategy regards a reduction in humanitarian and economic losses as its main task. In contrast, the insurance strategy has two stages. The first stage consists of a climate-related insurance pool, which would cover a specified proportion of the high risk of loss in vulnerable developing countries. The second stage would provide technical and other forms of support to enable coupled public-private insurance systems to cover medium-level risks in these countries. This two-part insurance system would firstly comply with the principles established by the Framework Convention on Climate Change for the financing and disbursement of adaptation funds, secondly ensure support for those most at risk, and thirdly involve the private sector.

criticism

The non-governmental organization Christian Aid criticizes the fact that the previous models of climate insurance are designed according to a "top-down" approach. As a result, the decision about bonus payments is made far away from the vulnerable. This can make civil society participation very difficult. In addition, catastrophe insurance can only cover part of the damage; additional measures are necessary.

A disadvantage of the Caribbean Catastrophe Risk Insurance Facility (CCRIF) is that it measures the damage to the state infrastructure. However, if this was not developed much beforehand, the damage is classified as low. In general, CCRIF disbursements are primarily used to guarantee public services, to restore infrastructure, and to help governments rebuild. So it's less about offering direct help to the most vulnerable. Another problem is that the CCRIF only pays for damage caused directly by storms and not for other damage indirectly caused by storms, such as floods. There is a lack of knowledge about the CCRIF on the part of governments and non-governmental organizations. Local communities also have little interest in and awareness of the CCRIF.

literature

  • Bals, C., Warner, K. , Butzengeiger, S .: Insuring the Uninsurable: Design options for a climate change funding mechanism . In: Climate Policy . tape 6 , no. 6 , 2006, p. 637-647 , doi : 10.1080 / 14693062.2006.9685629 .
  • Warner, Koko, et al. (2010): Solutions for Vulnerable Countries and People. Designing and Implementing DRR & Insurance for a COP 16 Outcome on Adaptation.
  • Koko Warner et al. a .: Insurance solutions in the context of climate change-related loss and damage . In: Policy Brief (=  UNU-EHS Publication Series ). No. 6 . Bonn 2012, ISBN 978-3-939923-90-9 ( unu.edu [PDF; 3.6 MB ]).

Web links

  • climate-insurance.org website of the Munich Climate Insurance Initiative (MCII)
  • ccrif.org Website of the Caribbean Catastrophe Risk Insurance Facility

Individual evidence

  1. ↑ CCRIF: Application of Risk Analysis and Modeling in the Insurance Sector. Technical Cooperation Workshop for Development of the Caribbean Regional Cooperation Program in Multi-Hazard Early Warning System, Bridgetown, Barbados. Caribbean Risk Managers, Facility Supervisor, November 2, 2010, accessed January 16, 2017 .
  2. ↑ Bals, C., Warner, K. , Butzengeiger, S. 2006. Insuring the Uninsurable: Design options for a climate change funding mechanism. Climate Policy, special journal edition. Gurekno, G. (ed.). Volume 6, Number 6, 2006. pp. 637-647.
  3. ^ Proposal to the AGW-LCA by the Alliance of Small Island States
  4. ^ Submission by the Munich Climate Insurance Initiative (MCII) (2008)
  5. ↑ Christian Aid, UK (Ed.): The potential role of the Caribbean Catastrophe Risk Insurance Facility (CCRIF) as a tool for Social Protection, Disaster Risk Reduction and Climate Change Adaptation: A civil society perspective . July 2009.