Insurance pools likely to prove cost-effective climate adaptation measure

by Laurie Goering | @lauriegoering | Thomson Reuters Foundation
Friday, 18 December 2009 12:20 GMT

COPENHAGEN (AlertNet) - In 2004, Hurricane Ivan blasted through the Caribbean island of Grenada, killing 39 people, flattening 85 percent of the islandÂ?s structures and trees and causing $815 million in damage - the equivalent of two years worth of national income lost in two days.

Emergency aid provided some relief. But like many countries facing such disasters, Grenada struggled to find money to rebuild and get services running again.

"They realised they needed something," said Koko Warner, a climate change adaptation expert at the United Nations University.

That has turned out to be insurance, which climate adaptation specialists predict will soon play an important role in helping the world's most vulnerable countries and people survive worsening climate-related disasters, from extended droughts to intensified and more frequent storms.


Under one proposed international scheme, a share of the billions of dollars that richer countries are expected to pay each year to help poorer nations adapt to climate change would go to create an insurance pool for the worldÂ?s most vulnerable countries.

Countries that did sufficient work to lower their vulnerability to disasters - through measures like building sea walls or creating early warning systems - would then be eligible to receive payouts.

Other insurance schemes focus on giving poor farmers no-cost coverage against crop losses from drought or flooding if they contribute labor toward digging community water retention ponds or other measures to mitigate droughts and flooding.

Studies suggest that at a national level insurance could help reduce the financial uncertainty that climate change brings and protect storm-hit governments from having to divert education and health funding to disaster relief efforts.

Smaller-scale insurance could help poor farmers and herders get the seeds and replacement animals they need to start over again when disaster strikes, rather than being forced to migrate or pushed into deeper debt and poverty.


Because trying to judge insurance claims is extremely difficult in such situations, such small-scale insurance would be "indexed," which means farmers would get payouts when rainfall falls below a certain level, for instance, or winds reach a certain high speed.

"We're trying to create a space of certainty in the uncertainty of climate change, to give countries some planning space and make sure development doesn't go down the drain when they're getting battered," said Warner, who studies and has become an advocate for climate insurance efforts.

Providing disaster insurance in an era where the number and strength of disasters is expected to grow might not sound like a financially viable proposition.

But research suggests that insurance to protect the most vulnerable countries from what are now disasters of a scale expected every 50 to 100 years would cost only about $2.6 billion a year, said Joanne Linnerooth-Bayer, a risk and vulnerability specialist at the International Institute for Applied Systems Analysis in Austria.


Largely that's because risk would be spread over a worldwide pool of nations, rather than countries taking out individual insurance policies. The policies would also cover only the percentage of a disaster attributable to climate change, which insurance adjusters and researchers have currently set at an average of 30 percent.

Most important, however, the insurance would only go to nations that try to dramatically cut their own risk through other adaptation programs, which means damage in extreme storms should be reduced

Perpetually storm-battered Bangladesh, for instance, has since the 1970s halved the financial damage caused by major typhoons and slashed deaths even more dramatically by installing effective early warning systems and building elevated concrete coastal schools that double as storm shelters.

Expanding similar efforts to some of the most climate-vulnerable countries - Mozambique, Sudan and Honduras, among others - could have a dramatic effect in a world where 95 percent of deaths from natural disasters come in developing countries and losses from such disasters average $100 billion a year, said Peter Hoeppe of Munich RE, a "reinsurer," or company that provides insurance coverage to smaller insurers.


Right now such vulnerable countries have some of the lowest insurance rates in the world. Africa, in particular, "has very little insurance," Hoeppe said.

Andreas Spiegel, a climate change adviser to Swiss RE, another reinsurer, said insurance appears to be the most cost-effective way for countries to address high-severity storms and other disasters, and can help them avoid 40 to 65 percent of the costs associated with recovering from such disasters.

Failing to address the problem could cost the world's most vulnerable countries between 1 and 19 percent of their annual income by 2030, according to studies his organization has done in Mali, Guyana and other climate-vulnerable nations.

The range depends in part on how severe climate change becomes, he said.

Climate insurance experts say an integrated program of large-scale national insurance and small-scale insurance for farmers and other producers in the world's most vulnerable countries, combined with money for effective adaptation measures to cut disaster risk, would cost on the order of $5 billion a year.


A smaller version of the national insurance effort already exists in the Caribbean, where 16 countries - including Grenada - two years ago banded together in a catastrophe insurance pool, Warner said.

The Caribbean Catastrophic Risk Insurance Facility provides a few million dollars in payouts each year to storm-hit nations, Warner said.

As countries recover from storms, "it makes sure teachers get paychecks, that the government can keep functioning," Warner said.

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