Can Insurers Help Climate Change Adaptation?

Climate change poses a great set of risks to mankind. Who knows better how to deal with, assess, and respond to risk than insurers? The United Nations Environment Programme (UNEP) ClimateWise, the Geneva Association, the Munich Climate Insurance Initiative (MCII) have teamed up to offer suggestions on how to better integrate insurers into efforts to adapt to climate change.

Their statement is backed by over 100 of the world’s leading insurers. These insurers have a major stake in dealing with the effects of climate change. Over the past three decades, direct economic loses due to all natural catastrophes have average $90 billion a year. Of those disasters, 78% were weather-related.

As climate change continues to alter seasons, the number of disasters and price of dealing with them is likely to increase if nothing is done. Climate shocks are also likely to increase more in developing countries where comparatively small economic loses can have larger, longer repercussions than in developed countries.

By helping societies adapt to climate change, risk is likely to reduced. The statement from the UNEP calls on governments to work within existing frameworks and create new ones to enable this goal. One international agreement already exists to guide governments in reducing risk. The Hyogo Framework for Action, which was signed by many parties to the UN in 2005, lays out some pretty simple but beneficial goals for national governments to follow. These include climate-proofing infrastructure, enforcing strong building and zoning codes, and appointing a national risk officer.

The statement also calls for investments in risk exposure data for future planning and providing a strong environment for risk reduction through good corporate governance and market oversight for insurance services. There are a number of successful examples governments can look to on both these fronts.

In Malawi, a wide network of weather stations coupled with startup funds from the World Bank has aided a pilot weather index insurance project. Index insurance uses an index such as rainfall or temperature to determine payouts. One of the benefits of index insurance is it removes “moral hazard,” or the possibility that someone with insurance will act dishonestly or recklessly. In Malawi, farmers can buy index insurance to cover crop losses in case of drought. A similar scheme has been used in Mongolia in case of livestock loss due to extreme cold and Ethiopia for grain loss due to drought.

On a larger scale, a partnership between 16 Caribbean governments and insurers looks to provide short-term liquidity to deal with natural disasters. The mechanism worked to provide the Haitian government with liquidity after the 2010 earthquake.

While insurance will not solve the problem of climate change, it will contribute to insulating those who will be most affected. There are a number of realistic examples already functioning. Governments need to look at them and move forward to reduce risk.

Article by Brian Kahn, appearing courtesy Justmeans.

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