Climate risk insurance: when weather and climate become hazards
Nowadays, there is insurance for almost everything: pop stars, world-class pianists and footballers insure their legs or hands for multi-million sums. But for many of those who see their livelihoods being blown away – in a very literal sense – by a tropical cyclone, there is often no social safety net. Most of the time, it is the poorest who are defenceless against natural disasters.
2017 will be remembered as a year of extreme weather. In August and September, Hurricanes Harvey, Irma and Maria left a trail of devastation – estimated at USD 215 billion – across the Caribbean, worse than in any previous season. On islands such as Barbuda and Saint Martin, scarcely a house was left standing in Irma’s wake. At the same time, according to the German Red Cross, there was severe drought in many African countries, while South Asia was hit by the worst floods for 30 years. In four states in northern India, flooding affected 31 million people and left more than 800,000 homes uninhabitable, while in Bangladesh, 1.5 million farmers lost their crops to the floodwater. The World Bank reports that the impact of extreme natural disasters forces some 26 million people into poverty each year.
Climate risks: the facts
Climate risk insurance, then, is more relevant than ever. The purpose of climate risk insurance is to prevent an extreme natural event from turning into a disaster that not only destroys homes and crops, but permanently threatens the affected communities’ livelihoods.
Climate risk insurance: how does it work?
There are two types of climate risk insurance. The first is direct private insurance, which is available to smallholder farmers, for example. The second – indirect – form of insurance is generally taken out by governments to cover the financial risks associated with climate-related disasters. Governments pay an annual premium and, in the event of a claim, receive an agreed sum which is used to provide assistance to people in need and rebuild damaged infrastructure. This type of insurance cover is subject to specific conditions, such as the wind speed above which a payout becomes due after a storm.
Only around 100 million people in developing countries currently benefit from this form of financial protection; 55 million have their own direct policies and 45 million are covered indirectly. As Nikolas Scherer from the adelphi think tank explains, the concept of insurance is largely unknown in developing countries. „People tend to question – possibly rightly – why the government spends so much taxpayer money on insurance that never pays out, given other urgent short-term needs.”
“Insurance makes people more aware of weather-related and climate risks”
In our interview, Christina Ulardic from insurance provider Swiss Re reports on how smallholder farmers in India can take out insurance against crop losses resulting from floods and which economic sectors are still affected by climate risks. She also explains how Swiss Re assesses risk and how climate risk insurance builds vulnerable communities’ resilience.
The German Federal Ministry for Economic Cooperation and Development (BMZ) regards climate risk insurance as a successful model, as Parliamentary State Secretary Thomas Silberhorn pointed out in October 2017: “Two years ago, a total of USD 26 million was paid out to Mauritania, Senegal and Niger, enabling them to provide support to 1.3 million people affected by drought, save 500,000 domestic animals, keep children in school and ensure that there was no need to break into seed stocks. All of this helped to restore people’s livelihoods.”
Climate risk insurance: opportunities and limits
However, there is criticism from some quarters. Bread for the World, the development and relief agency of the Protestant Churches in Germany, for example, is demanding more climate justice. Countries like Fiji are severely affected by climate change but produce negligible carbon emissions compared with major polluters such as China and the US. Bread for the World is therefore asking: “Who is liable? Who covers the costs – the emitters or the affected countries?” Ultimately, affordability is a key determinant of the level of uptake of these insurance policies: “If climate risk insurance is to be genuinely effective in protecting the poorest and most vulnerable, it must be needs-based, easily accessible and, above all, affordable.”
Climate risk insurance is high on the international agenda, for despite the justified criticisms, the overriding mood is one of optimism. At their 2015 summit in Elmau, the G7 countries therefore set up the InsuResilience initiative, which is committed to poverty reduction principles and aims to increase access to insurance coverage against the impacts of climate change for up to 400 million in developing countries by 2020.