WARSAW (Thomson Reuters Foundation) – As extreme weather and other climate impacts become more severe, insurance could be a powerful way to drive action to cut risks and to reduce emissions, as well as playing a role in addressing growing losses and damage, insurance experts at the U.N. climate talks said.
Insurance can help both with “avoiding the unmanageable and managing the unavoidable,” said Christoph Bals, vice-chair of the Munich Climate Insurance Initiative and policy director for Germanwatch, a non-profit organisation that promotes equity and protection of livelihoods.
Insurance can not only provide resources to help those hit by severe weather to rebuild, but can push the insured to do whatever they can to cut their risks in order to pay lower premiums for insurance protection, Bals said. That could drive investment in things like effective early warning systems or putting in place better building codes.
Because the cost of insurance goes up with the level of risk, broader use of insurance could also create a financial incentive to get rid of risk-increasing policies like fossil fuel subsidies, he said, and could help provide simpler and clearer information about the level of risk a family, city or country faces.
Potentially, insurance could also form part of efforts to build a mechanism to help climate-vulnerable nations cope with worsening "loss and damage” from extreme weather and other climate impacts, such as the massive damage resulting from Super Typhoon Haiyan in the Philippines.
Payments by richer and higher polluting countries into a loss and damage fund, for instance, could pay premiums for a worldwide climate insurance pool that would issue payouts to the poorest and most climate-vulnerable countries when they are hit by climate-related extreme events.
If contributions to the fund were linked to a donor country’s levels of climate-changing emissions, that “could send a signal to polluters that it becomes more expensive if they go on polluting,” Bals said.
Broad regional or international insurance pools also could help hold down costs for insurance because “the more risks we can pool, the more diversified the risk becomes,” said the World Food Programme’s Richard Choularton, who helped design pioneering crop insurance that now serves 20,000 small-scale farmers in Ethiopia.
REGIONAL INSURANCE POOLS
Regional insurance pools are now working in several places, including a severe weather pool in the storm-hit Caribbean and a year-old extreme weather pool organised under the African Union.
That initiative aims to provide continent-wide insurance for Africa, in part to wean the continent off its current reliance on foreign aid to respond to disasters.
Raising funds through an appeal and delivering traditional humanitarian aid can take months, particularly with slower-moving disasters like drought, while “indexed” insurance - where payouts are automatic after a pre-set number of days without rain – can deliver needed cash very quickly, the experts said.
Right now, countries involved in the African pool – some of whom pay their own premiums and some of whom have them paid by donors – can get quick payouts of up to $30 million if they are hit by drought, said David Goodman, a policy officer for the African Risk Capacity programme. The organisation is working on creating systems to track and pay flood damages as well, he said.
Insurance can help prevent families and countries from seeing their assets depleted to pay for extreme weather damage, and can build up existing social safety networks and help governments better understand their risks by improving the collection of data and helping them build vulnerability maps and quantify their risks.
Smaller-scale “indexed” insurance programmes have proved particularly popular with small farmers in frequently drought-hit East Africa. Initially, many farmers in Ethiopia paid for their crop insurance by working extra days as part of a government social safety net system that guarantees a certain number of paid work days a year.
But “now we have people buying cash (policies), maybe 20 or 30 percent of them,” Choularton of WFP said. “When you do a good design process, there’s demand.”
Simone Ruiz Fernandez, of Allianz Climate Solutions, a German-based private insurance provider, said her company has seen a similar surge in interest in policies – such as crop insurance plans - to help control risks linked to climate change.
Originally, such policies were managed as part of the company’s corporate social responsibility work, she said, but two months ago they became part of the company’s main business unit, one indication that they are moving toward becoming a self-sustaining business.
LIMITATIONS OF INSURANCE
Insurance, even its backers admit, has its limitations. Harjeet Singh, international coordinator for disaster risk reduction and climate adaptation with the charity ActionAid, notes that insurance could have a place in a “loss and damage” mechanism that poorer countries are struggling to see created at the UN climate talks in Warsaw this week.
But “insurance is directly linked to probability,” he warned, and “if the probability (of an event like sea level rise) is 100 percent, no insurance company will come forward.” That means insurance cannot cover all climate-linked disaster risks, he said.
Spencer Thomas, the climate change ambassador for the Caribbean island of Grenada, also questions whether insurance companies will be able to afford the payouts – and insured nations the premiums – if efforts to curb climate-changing emissions continue to fail and the intensity of climate-linked disasters continues to grow.
“How do you ensure losses for countries in the Caribbean which in an hour could lose 200 percent of GDP?” he said. “What models can take that level of risk? Is there an adequate level of insurance for that kind of thing?”
Faced with ever-growing payouts for damage from floods, the U.S. national flood insurance programme is now $30 billion in debt, Ruiz Fernandez said, and flood insurance has become unaffordable in some flood-prone coastal areas of the state of Florida.
“If we don’t pursue risk-control approaches (such as not allowing homes to be built or rebuilt in the most flood-prone areas), the costs will be too high and insurance will not be an effective mechanism any longer,” she said.
Insurance is not the only answer to growing climate-related risks, said Bals of Germanwatch. But with climate talks making little progress in Warsaw, insurance could be a way to bridge differences on contentious issues like a new loss and damage mechanism, he said, including by allowing rich countries to make payments toward alleviating losses but not by paying compensation, something most strenuously want to avoid.
“Right now we have a high risk (the talks) lead to nowhere,” he said. “We need incentives to move forward.”
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