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How to Advance Regional Climate Risk Insurances

Regional climate risk insurances are increasingly popular among policymakers, NGOs and academics alike. However, while initial experiences may well speak in favour of supporting regional climate risk insurances, there is substantial room for improvement. In the context of the upcoming G20 summit in Hamburg, Nikolas Scherer provides four policy recommendations for how the G20 could advance regional climate risk insurances.

Extreme weather events are on the rise globally, with ‘developing countries’ disproportionately affected. Many countries in Africa, the Caribbean and the Pacific are highly exposed to extreme weather events such as hurricanes, droughts and floods. Further, the impact of extreme weather events in these regions has been exacerbated by other trends such as population growth, urbanization, overexploitation of natural resources and environmental degradation. This disastrous development puts lives, livelihoods and development gains at risk and needs to be dealt with.

Problematically, Caribbean, African and Pacific countries usually lack the financial resources to respond to this threat. They mobilize funds on a largely ad-hoc basis to smooth the impact of the disasters. This search for funding takes time and places additional strain on administrative capacities. Meanwhile, lives are lost, infrastructure remains unrepaired and development gains are reversed.

To address this problem, these countries, with assistance from development actors, developed regional, public-private insurance facilities (CCRIF, ARC, PCRAFI). In exchange for an annual premium, they provide Caribbean, African and Pacific countries with insurance coverage for public expenditures for disaster-related emergency and early relief measures. Underpinning all these facilities is an innovative payout mechanism. In contrast to ‘traditional’ forms of insurance, the facilities do not make payouts on the basis of real losses incurred as the result of a disaster, but rather on the performance of a model. The model processes real-time weather data (e.g. wind-speed, amount of rainfall) and combines it with geophysical, economic and population data to estimate losses as the event happens. This allows the facilities to make a payout within 14 days of the disaster. Once a certain loss level is breached, a country gets a pre-agreed payout. Another key feature of these regional insurance facilities is that they provide more than insurance. They support the countries in their disaster management efforts by providing additional forms of assistance, such as risk maps, studies and small grants.

To date the facilities have made 28 payouts to 16 countries adding up to around US$ 106 million. They quickly provide cash-strapped countries with much-needed cash to limit the impact of large-scale catastrophes. Moreover, they increasingly act as intra-regional learning platforms. This is certainly a success, and widespread enthusiasm to support these insurance models is therefore warranted. Yet, a closer look reveals a number of pressing problems that need to be addressed.

  1. Premium affordability: Countries face difficult trade-offs and are often unable to pay premiums, even if they want to. The risk is that the poorest countries – those most in need of protection – are left behind.
  2. Post-disaster planning: Not all insurances require countries to develop guiding principles or rules for how an insurance payout will be used. Yet, even a decent payout is of limited use without a clear plan for what to do with it.
  3. Input legitimacy: Despite regional insurance entities providing more than insurance, disaster management specialists are side-lined within their governance structures. Their strategic direction is biased towards financial interests.
  4. Accuracy and adequacy of payouts: Experience indicates a slight tendency towards ‘underpayment’. In at least three cases, there was no payout despite there being substantial damage – largely a data problem. Accuracy issues aside, there is also no monitoring or evaluation system in place to indicate whether payouts were adequate. 

Informed by these problems, the policy brief suggests that the G20 should develop an action plan in which interested countries agree to: 

  1. Help to increase premium affordability by providing full premium support;  
  2. Encourage disaster planning and disaster risk reduction efforts at the country level;
  3. Encourage insurance facilities to empower disaster risk management specialists;
  4. Support data collection efforts and help to establish a monitoring and evaluation system.

To advance these goals, the G20 should build upon existing institutions and collaborations such as the G7 InsuResilience Initiative to prevent parallel structures. Financial support could be linked to the carbon footprint of the respective G20 country.

Nikolas Scherer is a project manager at adelphi in the areas of climate, security and adaptation, and is completing his PhD on climate risk insurances at the Hertie School of Governance in Berlin.