The UN conference in Paris in December is being seen as a decisive opportunity to secure a climate treaty to slow global warming, but also to help the most vulnerable countries to adjust to climate change. These are risky transformations that we cannot deny: rising sea levels, increasing numbers of intensifying weather catastrophes – the trends are obvious, even though the consequences can vary drastically between regions.
The most substantial financial losses are still in the western world – but only in terms of absolute numbers. Developing countries are not only having to cope with the gravest humanitarian consequences – they are also suffering from the greatest impact of economic losses in relation to economic strength. So in these countries adjustment is often an essential component for improving economic development.
Insurance coverage in the most vulnerable developing countries
In order to finance these adjustments, the G7 nations have expressly pointed out the role of climate insurance, even though it is more correct to refer to this as climate risk insurance. The G7 nations set a target of increasing by up to 400 million the number of people in the most vulnerable developing countries who have access to insurance coverage against the negative impact of climate-change-related hazards by 2020.
This is to be achieved at the macro level by means of insurance for whole states, such as with African Risk Capacity, and at the micro level with insurance coverage for individuals. Payouts are made for clearly defined weather events recorded using objective parameters. Depending on the partner's coverage needs, such weather events can include drought, windstorm or heavy rainfall. This mechanism makes the programmes relatively simple to administer, inexpensive and easy to implement. Several countries already have microinsurance and macroinsurance programmes that demonstrate how this can work.
In their Declaration, the G7 Leaders said that we should build on such facilities. As macroinsurance agreements are concluded with states or special-purpose vehicles set up for that specific purpose, they allow for a large number of affected persons to be given coverage relatively quickly. In addition, appropriate constructions include incentives to prevent losses, such as early-warning systems, or the transfer of knowledge from insurers concerning risk-mitigating construction methods or land use. Recipient countries will only be accepted into the pool if they have sufficient reliable governmental and administrative structures. These insurance solutions soften the impact of economic shocks from natural catastrophes, thereby stabilising economic growth.
Insurance industry provides know-how
In order to build up sustainable climate insurance solutions – by which we mean solutions with lasting stable financing – it will be important for aid money to not just flow into a fund that will be expended over time. The aim must be to see a long-term improvement in resilience against natural catastrophes. The G7 nations can provide financial support for the stimulus by means of expanding weather data banks, developing risk-analysis tools, and building up knowledge at a local level. It is then up to the affected countries to take the next step and implement elements in their budget that allow for lasting risk financing.
The insurance industry provides know-how, risk models and best-practice expertise from other countries in order to implement the climate insurance solutions. In order for the mechanism to function in a lasting and stable manner, premium calculations must accurately reflect the risk. Only then will risk be priced correctly, and the real meaning and necessary handling of the risk will thus become apparent. It is the role of the G7 nations to substantiate when and where concepts should be implemented, and how financial responsibilities are to be allocated – and this should be done now.
It is important to prepare more strongly for the impacts of climate change
This also might make the discussions at the World Climate Conference in Paris in December somewhat easier. The expectation that the Conference will adopt an emissions-reduction treaty that limits an increase in global warming to two degrees is very ambitious.
It remains to be seen whether this hope is justified. However, it is just as important to prepare more strongly for the impacts of climate change. It is already clear that these consequences are now unavoidable. No region on earth can afford to ignore these risks, nor would that be a responsible path of action. This article was published in German newspaper Handelsblatt on 28 Sep 2015.