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

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Kirsty Hamilton
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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
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
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.