For the first time ever, the final document of a UN Climate Conference of the Parties (COP) mentions insurance solutions as a way to facilitate adaptation to climate change. At the G7 summit in Elmau in June 2015, the member states agreed to launch a climate insurance initiative (InsuResilience), highlighting the importance of financial risk transfer concepts, particularly for emerging and developing countries.
The objective of InsuResilience is to give an additional 400 million people in emerging and developing countries access to insurance by the year 2020 to protect themselves against weather-related catastrophes. This will either be organised on a macro level with insurance cover for entire countries (indirect insurance of the population), or on a micro level with insurance policies for individual persons (direct insurance of the population). Claims payments are linked to clearly defined weather parameters such as levels of rainfall or wind speed.
Such products are known as parametric or trigger-based covers. In this way, people can insure themselves against drought, windstorm or heavy rainfall, each of which is recorded using objective measurement methods. This mechanism makes terms and conditions transparent, reduces the administrative cost of calculating claims amounts, and thus enables payouts to be made promptly. It should be remembered, however, that besides the above-mentioned advantages of parametric triggers, there is also a basis risk to be taken into account (occurrence of a loss before the defined trigger level has been reached).
However, the simplicity of the payout principle on a parametric basis means that micro and macro solutions already exist in a number of developing countries and, in line with the G7 declaration, should be further built upon. If structured well, insurance solutions not only create incentives to take preventive measures (by way of knowledge transfer and/or deductibles), but also represent an effective tool to finance claims burdens. If the public and private sectors are to overcome the immense financial impact of such disasters, it is imperative to soften their long-term impact on the economy. To this end, the introduction of climate insurance solutions promotes the construction of robust social and economic structures, thereby developing resilience.