Insurance and Other Financing Mechanisms

Gordon McBean and Paul KovacsInstitute for Catastrophic Loss Reduction

CanadaPresentation to:

IPCC Working Group II Scoping Meeting:Possible Special Report on

“Extreme Events and Disasters: Managing the Risks”Oslo, Norway • 23-26 March 2009

Issues for Governments

Climate change

DisasterRisk

Reduction

InternationalDevelopment

UN Convention on Climate Change Article 2 - Objective

“ … stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent

dangerous anthropogenic interference with the climate system. Such a level should be achieved within a time-frame sufficient to allow ecosystems to adapt naturally to climate change, to ensure food production is not threatened and to enable economic development to proceed in a sustainable manner.”

Prevention of DANGER requires reducing the impacts of extreme events – disaster risk reduction.

World Summit on Sustainable Development - WSSD

Action Plan included:

IV. Protecting and managing the natural resource base of economic and social development

37. An integrated, multi-hazard, inclusive approach … Actions are required at all levels to: …

(a) Strengthen the role of the ISDR …;

(e) Improve techniques and methodologies for assessing the effects of climate change, and encourage the continuing assessment … by the IPCC;

Connecting hazards-climate-sustainable development

World Conference on Disaster Reduction, Kobe, January 2005

Hyogo Framework for Action (HFA)

Priorities for Action

1.Ensure that disaster risk reduction is a national and a local priority with a strong institutional basis for implementation.

2.Identify, assess and monitor disaster risks and enhance early warning.

3.Reduce the underlying risk factors.

IPCC roles in assessment

Issues for Governments

Climate change

DisasterRisk

Reduction

InternationalDevelopment

InternationalDevelopment

Issues for Governments

Climate change

DisasterRisk

Reduction

RiskManagement

Bring together in a framework of -

RISK MANAGEMENT

Insurance

• Insurance has long been about the collective management of risk – RISK MANAGEMENT– Chinese marine transport from 3,000 BC– Great urban fires of the 1600s and 1700s

• Managing the catastrophic risk– Pooling modest premiums collected from many that

reflect individual risk to pay for the catastrophic losses of a few.

– Long-standing focus on promoting adaptation to prevent loss of life and property damage.

– Now SEVERE WEATHER damage is growing much faster than other claims. Over the past 30 years global severe weather insurance claims have increased 20 fold.

Severe weather claims paid

$0

$10

$20

$30

1970s 1980s 1990s 2000s

Annual global insurance disaster claims, US$B

20-fold increase since 1970s!

Changing climate

Aging infrastructure

More people and infrastructure at risk

Institute forCatastrophic

Loss Reduction

Building resilient communities

Global weather damage

0 11 22 33

flood

drought

windstorm

other

Annual average disaster damage, $B(US)1997 - 2006

Institute forCatastrophicLoss Reduction

All other countries

Highly developed countries

Global weather fatalities

0 15 30 45

flood

drought

windstorm

other

Annual average number of people killed, thousands, 1997 - 2006

Institute forCatastrophicLoss Reduction

All other countries

Highly developed countries

Disasters and Deaths

Development• Highly developed• Medium• Least

Deaths per disaster• 22• 145• 1,052

Disasters and GDP Honduras – Hurricane 1998 75% of GDP

Turkey – Earthquake, 1999 8% of GDP

United States – Hurricane, 1992 <1% of GDPIFRC, 2001; Handmer, 2003

Insurance Today:

• Developed countries - Primary mechanism to manage the risk of property damage and support economic recovery as a result of extreme events. – World’s largest industry by revenue (annual premiums

$4T)

• World-wide insurance and reinsurance companies.• Thousands of insurance companies competing in

local markets.• Developing countries – little insurance coverage -

poorest and most vulnerable

Strengths and weaknesses • Industries: life and health; property and casualty

insurance. • Climate change:

– life, auto and liability insurance - little measurable impact compared to other shocks ($, aids).

– profound impact on the property insurance and reinsurance industries.

– Will continue to challenge the sector over next 30 or 40 years

– No impact yet on the liability insurance industry, but some believe that the future impact may be significant

– IPCC Report could further explore this issue.

HAZARD: potentially damaging physical event, phenomenon

or human activity that MAY cause the loss of life or injury, property damage, social and economic disruption

or environmental degradation.” VULNERABILITY: conditions determined by physical, social, economic, and environmental factors or processes, which increase the susceptibility of a community to the impact of hazards.

Disasters resultwhen there is the intersection of a

hazard and avulnerability

•Mitigation/prevention•Preparedness•Response•Recovery

Climate Change

RememberDRR – MitigationApprox. equalsCCA

Insurance

Changes happening

• Insurers usually slow to adapt, unless confronted by a major shock to the industry. – Hurricane Andrew in 1992 - 2004 and 2005 hurricanes –risks to

Florida and other coastal states– Wildfires - risk more advanced in California and Australia– Floods - risk most advanced in the U.K. and continental Europe.

• With escalating severe weather claims, insurance is:– starting to apply proven fire risk techniques to climate risks– learning how to measure climate related risks – working to identify and promote best adaptation practices– communicating information to society

• Insurance is only beginning to appear as a financial tool in developing countries

• IPCC Report could investigate the opportunities and challenges.

Financial tools and protection - developing countries?

• Microfinance approaches in India and other countries • Micro-insurance

– Knowledge and information– Local capacity– Financial issues

• Some initiatives, – Munich Climate Insurance Initiative – Association of Small Island States– …

• Asian Development Bank and the World Bank

• IPCC Report needs to explore and clarify how these could be most effective.

Microinsurance• Infrastructure – but also crop yields, livelihoods and assets, and personal

safety.

• Figure 1: Breakdown of literature groupings

• Literature review needs to go well beyond climate field. Insurance and other approaches to risk.

Areas for analysis• How to mainstream CCA and DRR into national policies and

programs – in developed and developing countries– Can insurance be a mechanism to bring CCA and DRR together?

• Insurance Regulatory regimes – what makes them work• Information, data, warnings

– Roles of risk assessment and uncertainty– Rich literature on insurance and disasters – academic and grey

• People and their choices – e.g., why invest, confidence• Opportunities and challenges for extending insurance and other

financial mechanisms to assist in the reduction of costs in developing countries.

• IPCC Report should explore the risk management approaches and the constraints – data, information, methodologies …

• Role of a major private sector in the climate issue – positive influence and how to enhance.

Mechanisms to manage financial risks from direct impacts of climate change in developing countries

UNFCCC Technical paper 2008/9

• Market insurance and other financial risk-transfer solutions

• Examination of the interplay and potential synergy between these different potential solutions, including insurance-related actions.

• Opportunities for non-insurance instruments as part of the adaptation provisions of a 2012 agreement.

• There is a literature for IPCC to build upon. Questions of who and how to pay. Role of developing countries, role of international financial mechanisms, roles of …

How can the international climate change discussions accelerate the appropriate use of insurance mechanisms to

protect the world’s poor and support adaptation?

• IPCC Report – UNFCCC mechanisms – Bali Action Plan – Nairobi Work Programme on IVA to CC– …

• Non-climate forums– Global Platform meetings of UN ISDR; – International Disaster and Risk Conferences, Davos;– …

• Discussion and identification of mechanisms to move this agenda ahead. Role for IPCC Report

Vulnerability of Asian coastal cities

• CITIES AT RISK• Developing Adaptive

Capacity for Climate Change in Asia’s Coastal Megacities

• February 26-28th, 2009• Bangkok, Thailand

IPCC Report should look at slow events – sea level rise – and fast events – typhoons – and impacts.

Integrated Research on Disaster Risk (IRDR)Addressing the challenge of natural and human-induced environmental hazards.

ICSU, ISSC, UN ISDR

Objective 1:Characterization of hazards, vulnerability

and risk– 1.1: identifying hazards and vulnerabilities leading to

risks;

– 1.2: forecasting hazards and assessing risks; and

– 1.3: dynamic modelling of risk.

Objective 2:• Effective decision making in complex

and changing risk contexts– 2.1: Identifying relevant decision-making systems and

their interactions

– 2.2: Understanding decision making in the context of environmental hazards; and

– 2.3: Improving the quality of decision-making practice.

Objective 3:Reducing risk and curbing losses

through knowledge-based actions – 3.1: Vulnerability assessments;

– 3.2: Effective approaches to risk reduction

1. Capacity building2. Case studies and demonstration

projects3. Assessment, data management and

monitoring

Cross-Cutting Themes

Concluding Comments

• Insurance and other Financing Mechanisms• “Invest today for a safer tomorrow”• Important topics for addressing:

– Climate Change Adaptation – Disaster Risk Reduction– Linking them – scientifically and as response strategies

• How to reduce impacts and enhancing recovery• Need to go beyond climate change • Much to learn and to assess but major benefits from

a good report.