Thursday, February 21, 2008

Insurance against climate change impacts?

An article in IPS cites several experts who observe that the world’s poor may need insurance to deal with humanitarian needs arising from climate change. Climate change will be soon eclipse wars and internal struggles in heightening the demand for relief, and for some, insurance-based options are a possibility. But not everyone is enthusiastic at the prospect: …In 2006 the world experienced 427 natural catastrophes that affected about 143 million people, and the trend is rising, says Ulla-Maija Finskas, director of the department for humanitarian assistance in the Finnish ministry for foreign affairs. These included 254 floods and related disasters, 43 percent higher than the 2000-2004 average, says Sir John Holmes, under secretary-general for humanitarian affairs and emergency relief co-ordinator at the UN Office for the Co-ordination of Humanitarian Affairs (OCHA)…

Holmes says an insurance-based response should be explored. Since vulnerable people in places most likely to be affected by humanitarian disasters cannot afford insurance, donors could pay a small premium to insure them against extreme weather conditions. "It may be a more cost effective response than trying to raise money after the event."

…Insurance could provide cash to people in such situations automatically, Holmes said. "A hungry farmer who has lost his crops in a flood would need relief agencies for food, but if he has the money he doesn't have to depend on them." Three years ago the World Food Programme (WFP) signed a contract with global reinsurance company AXA RE for a pilot project in Ethiopia to insure farmers against severe drought.

The pilot was developed by the WFP and the World Bank Commodity Risk Management Group to test out insurance against widespread destruction that threatens 17 million farmers in case of drought. Payout would be triggered when rainfall from March to October falls below a given minimum. The project has not been tested because there has been no severe drought the past three years.

Finskas concedes that insurance might provide timely relief, but warns against the "stingy" practices of insurance companies. "If one continuously breaks his or her car, the insurance bonus quickly disappears. So if drought occurs repeatedly, insurance companies might refuse to underwrite the costs," she said.

Insurance managers agree. "Insurance is based on unforeseen risks, but if drought or floods occur frequently, then it is no longer unpredictable," Veli-Pekka Kemppinen, insurance manager at the Finnish insurance company IF told IPS. "Insurance cannot cover such events."

Finskas warns also that given dwindling aid budgets, donor governments might decide to pay low premiums rather than increase aid. Helping developing countries build capacities to respond to disaster – as done in Mozambique -- is a better way to minimise damage, she said.

"Seasonal Flooding in Southern Africa", the Barotse flood plain, from NASA/Visible Earth, Credit: Jacques Descloitres, MODIS Rapid Response Team, NASA/GSFC, via Wikimedia Commons

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