How Insurance Can Support Climate Resilience Swenja Surminski, Laurens M

opinion & comment COMMENTARY: How insurance can support climate resilience Swenja Surminski, Laurens M. Bouwer and Joanne Linnerooth-Bayer Insurance is gaining importance in and beyond the climate negotiations and offers many opportunities to improve climate risk management in developing countries. However, some caution is needed, if current momentum is to lead to genuine progress in making the most vulnerable more resilient to climate change. as 2015 ‘the year of climate of governments and individuals across value for money. Some critics point out insurance’? Statements emerging the world. that traditional insurance is an expensive Wfrom the G7 leaders and COP21 mechanism with high transaction and in Paris certainly suggest so. Article 8 of the … but some scepticism remains capital costs, making premiums far higher Paris Agreement includes “Risk insurance Any new insurance scheme in developing than expected losses. This suggests that facilities, climate risk pooling and other countries needs to overcome difficult adaptation funds might be better spent on insurance solutions” as areas of action1. challenges, including lack of risk data, other types of safety net rather than on Earlier in the year, at their summit in limited financial literacy, and weak financial buying insurance cover from international Germany, the leaders of the G7 launched a infrastructure; it also needs high levels of insurance markets8. new Initiative on Climate Risk Insurance support to make it viable for people with Critics further caution that subsidized (InsurResilience), pledging to bring very low income. Many of the new pilots insurance can dampen incentives to reduce climate insurance to 400 million currently and pools have been designed with this risks. A recent study for the Climate uninsured individuals in poor countries by in mind. However, utilizing insurance for Investment Fund9 suggests that climate 2020. In many ways the G7 initiative and adaptation and poverty reduction faces insurance can play an important role in the Paris Agreement are the culmination of even more challenges: how can a scheme climate adaptation. But it also warns that a long process to establish insurance as an reach the most vulnerable, and how does inappropriately set up insurance schemes accepted climate adaptation instrument2–4. it cope with and address changing risk can have unwanted consequences and may levels? As the intensity and frequency of neither benefit the poor nor foster climate High hopes and expectations … climate extremes increase7, is it fair to resilience. This echoes the IPCC report The supporters of climate insurance shift responsibility on to those who are on managing the risk of extreme events7. point to increasing losses from weather the least responsible for climate change, This report concludes that insurance extremes — such as floods, droughts and the least able to shoulder the premiums, can be a tool for risk reduction and for tropical cyclones — where the absence of and in many cases the least able to reduce recovering livelihoods, particularly in insurance can have negative implications their losses? the face of extreme weather events, but it for the scale and duration of the economic Without substantial external support, also warns that insurance could provide impact of disasters, the resilience of insurance could shift the burden of climate- disincentives for risk reduction, if not businesses, individuals and governments, related impacts to the most vulnerable in correctly structured. and speed of recovery5. Insurance can shift society, by requiring them to pay insurance There are no ‘one size fits all’ solutions the mobilization of financial resources away premiums rather than offering them direct for climate insurance, and insurance is not from ad hoc post-event payments, where help and support. Subsidized premiums are suitable for certain risks, such as slow-onset funding is often unpredictable and delayed, one answer to this; other solutions include events like sea-level rise. However, this towards more strategic and, in many cases, publicly funded reinsurance arrangements tool does offer many benefits, particularly more efficient approaches that were set up and technical support — each of which compared with reliance on post-disaster in advance of disastrous events6. Making indirectly reduces premiums. For this aid. We therefore believe that there is a these tools available to the most vulnerable purpose, discussions on the G7 initiative role for carefully designed and supported seems attractive. A number of regional risk include the potential of global and regional insurance instruments, such as index-based pools such as the African Risk Capacity, facilities financed by wealthy countries micro-insurance where pay-outs are based the Pacific Catastrophe Risk Assessment to absorb a high layer of risk and support on triggering of certain weather parameters and Financing Initiative, and the Caribbean local insurance arrangements in the most like rainfall, and sovereign insurance pools Catastrophe Risk Insurance Facility, as well vulnerable countries, as suggested early in which national governments are covered as new pilot schemes, such as index-based on by the Alliance of Small Island States. against the impacts of natural hazards agriculture micro-insurance, are offering However, external support, especially on their annual budget. But their success financial protection to a growing number direct subsidies, raises the question of will depend on making them fair and NATURE CLIMATE CHANGE | VOL 6 | APRIL 2016 | www.nature.com/natureclimatechange 333 © 2016 Macmillan Publishers Limited. All rights reserved opinion & comment affordable to the poor, and on integrating for insurance purposes need to be fed into Establishing an insurance scheme does them into an overarching adaptation and national assessments and to inform the not mean that we can take the climate development strategy. design of climate adaptation measures. challenge more lightly. This would be the Projections of weather risks, such as wrong message. The G7-proposed insurance Insurance to improve climate resilience those performed in scenario studies at cover for 400 million uninsured individuals The limited experience available suggests the national or local scale13, can provide can support climate change resilience for the that climate insurance can enhance indications of future impacts as well as the poor only if the premiums are directly or resilience10, but only if it is part of a wider actions required to curb trends in ever- indirectly subsidized. However, this will only adaptation strategy, rather than being increasing losses and keep risks insurable. be viable if insurance is linked to adaptation considered in isolation or, worse, as an An increasing number of investment and efforts that address the underlying risk alternative to adaptation. In other words, development organizations now require factors, otherwise climate insurance will if we do not address the underlying issues risk assessments to include such climate be short-lived and far from cost-effective. then risks will become uninsurable because scenarios to allow them to plan more Funding climate-resilient infrastructure, of lack of supply (availability of cover) or robustly for the future14. The insurance establishing data collection and monitoring demand (affordability of premiums). This industry itself, as the world’s largest networks and adjusting agricultural is a key lesson emerging from existing institutional investor, clearly has a role to practices — these are all important elements insurance schemes in Europe and the USA, play here. Ironically, investment decisions by that insurance can complement but where flood insurance especially is already insurers do not usually consider the climate not replace. ❐ under heavy pressure from rising risk levels risk knowledge gained on the underwriting due to misguided building and land-use side. Far too often infrastructure investment Swenja Surminski is at the London School of practices, as well as environmental and decisions go ahead without any reflection Economics and Political Science, Grantham climatic changes. Recent figures emerging of climate risks. Addressing this would Research Institute on Climate Change from the UK, highlighted by the Bank of in turn make climate insurance more and the Environment, Houghton Street, England11, show that climate change and viable and thus create new markets and London WC2A 2AE, UK. Laurens M. Bouwer socioeconomic risk drivers are expected to opportunities. This has been recognized is at Deltares, PO Box 177, 2600 MH, Delft, widen the gap between ‘affordable’ flood by some companies, and it is the subject of The Netherlands. Joanne Linnerooth-Bayer is at insurance premiums and premiums that new initiatives, such as the R!SE Initiative IIASA, Schlossplatz 1, A-2361 Laxenburg, Austria. reflect the technical price of flood insurance. (http://www.preventionweb.net/rise/) and e-mail: [email protected] For developing countries in particular, this the industry’s pledge at the UN Climate References means that climate insurance should be Summit in New York in 2014 to increase its 1. Adoption of the Paris Agreement FCCC/CP/2015/L.9/Rev.1 (United considered only if it is closely aligned and climate-smart investments. Nations Framework Convention on Climate Change, 2015). 2. Dlugolecki, A. F. et al. in Climate Change 1995: Impacts, integrated within an equitable and efficient Furthermore, it is important to consider

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