How to Advance Regional Climate Risk Insurances

Scherer, Nikolas 2017: How to Advance Regional Climate Risk Insurances. Berlin: adelphi.

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. Furthermore, 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. These disastrous developments put lives, livelihoods and development gains at risk.

To address this problem, affected countries, with assistance from development actors, established regional, public-private insurance institutions (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 make payouts on the basis 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.

To date these institutions 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. At the same time, a closer look reveals a number of pressing problems that need to be addressed.

In the context of the upcoming G20 summit in Hamburg, this publication provides four policy recommendations for how the G20 could advance the aforementioned regional climate risk insurance models. The policy brief suggests that the G20 should develop an action plan in which interested countries agree to: 

  • help increase premium affordability by providing full premium support;  
  • encourage disaster planning and disaster risk reduction efforts at the country level;
  • encourage insurance facilities to empower disaster risk management specialists;
  • 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.