Can insurance help with risk reduction?

Can insurance help with risk reduction?

The Munich Climate Insurance Initiative (MCII) is urging negotiators at COP15 to adopt insurance instruments as part of the climate change adaptation strategy in the Copenhagen agreement. While insurance is usually regarded as a way to meet the costs and consequences of disaster, MCII argue that it is possible to link insurance with incentives to reduce the risk of catastrophic impact from climatic hazards.
MCII’s submission to the Parties proposes a risk management module comprising:
  • Prevention and risk reduction, and
  • Insurance to benefit those most vulnerable to the adverse impacts of climate change
The insurance sector is, arguably, best place to carry out risk and vulnerability assessments and, from there, to recommend or coordinate adaptation measures. Global reinsurers have already established worldwide databases, hazard maps and sufficient information to provide catastrophe reinsurance. For ‘medium’ level risks recent technological advances in earth observation and risk modeling helps to fill in gaps where data is less detailed. For ‘lower’ level risks it is arguable that directly funded prevention measures would be far more effective than insurance.
Recognising that even with risk management and adaptation, countries are likely to face an increase in medium and high level climate related risks, MCII propose an insurance ‘pillar’ based on a two tier approach to levels of risk:
  • for extreme losses they propose a Climate Insurance Pool, backed by the global reinsurance market requiring financial resources estimated at between $3.2 and $5.1 billion.
  • for medium losses (eg a 1 in 50 year event) they propose a Climate Insurance Assistance Facility to incentivise the private sector to engage in insurance and public-private solutions at an estimate annual cost of $2 billion.
MCII’s argument is that well designed insurance could reduce disaster losses in two main ways:
·         preventing long term loss of lives and livelihoods by providing early liquidity, with payments triggered by insured events rather than depending on post-disaster decisions and funding for aid, and
·         pricing risk so that insurance sets strong incentives for pre-disaster risk reducing behaviour, capacity building and adaptation.
Advocates point to the positive impact of index-based microinsurance in countries such as Malawi, and to the Caribbean island states’ pioneering multi-country and index-based insurance pool. Tying eligibility for access to the Climate Insurance Pool to progress in risk management and adaptation would, they argue, harness insurance as a means to discourage ‘maladaptation’ or ineffective climate risk management.
Discussing the proposal at a COP15 media briefing, Dr Koko Warner of MCII acknowledged that insurance protects against risk, not certainty. Consequently, even if a Climate Insurance Pool were set up, it would be ill-suited to deal with long term and (perhaps) inevitable impacts such as desertification or rising sea levels. At that level, perhaps the strongest statement that the insurance sector could make is that a particular impact – or country – might become too great a risk even for coverage by a Climate Insurance Pool and, in effect, uninsurable.