Insuring against climate change: who will pay for the poorest?

Climate change will lead to an increase in weather-related natural disasters. Rich countries are likely to continue to depend on the commercial insurance sector for protection against many of these losses, an option not easily available to poor people in developing countries. What other forms of financial protection can be put in place?

Weather-related natural disasters have increased in frequency and intensity in recent years. Seventeen of the twenty most expensive disasters in 2003, in terms of insured losses, were weather-related. The human and financial consequences of such disasters can be crippling for poor countries. Hurricane Mitch in 1998 resulted in 10,000 deaths and cost Honduras the equivalent of 34 percent of its gross domestic product (GDP) and 158 percent of government earnings. Only 6 percent of these losses were insured.

The commercial insurance sector is least active in those developing countries where natural disasters are most likely to take place. Developing country economies are thus highly vulnerable to the impacts of extreme weather events and have few resources to help recovery. However, rich countries account for 93 percent of the global insurance market. A paper from Kirsty Hamilton, international policy consultant and member of the United Nations Environment Programme Finance Initiative (UNEPFI) Climate Change Advisory Board, considers some of the reasons for poor commercial insurance provision in developing countries, and possible alternatives:

• The commercial insurance sector is unlikely to become more active in developing countries, where the risks of weather-related natural disasters are increasing. Payments to large numbers of people would be necessary but any insurance offered would probably only be available at extremely high cost.
• The role of insurance and developing countries is being discussed under the United Nations Framework Convention on Climate Change (UNFCCC), and developing countries have proposed an international insurance fund. Contributions would be made by governments on the basis of their responsibility for climate change as a form of compensation to those countries worst affected.
• Public-private partnerships such as the Turkish Catastrophe Insurance Pool (for earthquakes), where the government coordinates and adds to payments from those to be insured, could be a model for other countries.
• Micro-finance organisations (MFOs) could provide affordable insurance packages to poor individuals and communities, such as the crop insurance schemes for small farmers in India.

These evolving approaches to insurance in developing countries need to be assessed, including under the UNFCCC process. In turn, the success of these approaches requires understanding and estimating the likely risk to developing countries from weather-related natural disasters linked to climate change.

The author recommends:

• greater collaboration between scientists, governments, the disaster management community and the professional risk community (insurance sector and others), in order to translate general data into practical analyses of disaster risk that insurers can use and governments can respond to
• inclusion of financial sector expertise in discussions with developed and developing countries, particularly to direct investment towards low and zero emissions energy options such as renewable energy and assist with technology transfer.

Source(s):
‘Insurance and Financial Sector Support for Adaptation’, IDS Bulletin, 35:3, July 2004. Full document.

id21 Research Highlight: 14 June 2005

Further Information:
Kirsty Hamilton
International Policy Consultant

Tel: +44 (0) 7986 355561
Contact the contributor: kirsty.hamilton@bcse.org.uk

Contact the contributor: kirsty_hamilton@hotmail.com

Other related links:
United Nations Environment Programme Finance Inititative

'Securing development in the face of climate change'

'Can Europe’s ex-communist states profit from the trade in greenhouse gas?'

'Learning to live with natural disasters: roadmap to a safer world?'

'Are carbon sinks really good for rural people?'

'Alleviate or adapt? How can the south prepare for climate change?'