Saturday, October 9, 2010

The importance of transferring risk in climate adaptation

Andreas Spiegel of Swiss Re in Climate Biz: Global efforts to address climate change have been in disarray following the failed talks in Copenhagen. But even if all carbon emissions were stopped at once, climate trends would continue to expose local populations to the mounting challenges -- and costs -- of protecting greater property values against weather-related risks.

…. Case studies in eight different regions of the globe, ranging from Maharashtra, India, to Florida and Northern England, showed that up to 68 percent of expected losses from climate change can be averted using cost-effective adaptation measures. These include improved drainage and irrigation systems, sea barriers and enhanced building codes, vegetation buffers and disaster awareness campaigns, among others.

The ready availability and proven value of such measures make a strong case for preventive action. Yet, no community can afford to prevent damage from every imaginable risk event, especially from those hazards that are least likely to occur and can only be averted at a prohibitively high cost -- if at all.

…[O]ff-loading risk to the private insurance and capital markets usually proves to be the most economical adaptation measure. This can be done through a variety of risk transfer methods, such as traditional indemnity-based insurance, parametric index solutions, catastrophe bonds or other similar financial arrangements. These instruments cap losses and smooth the cost to individuals, businesses and public institutions, thereby protecting local economies from the impact of catastrophic events.

But risk prevention and risk transfer are mutually reinforcing. While insurance is a useful component in a given adaptation portfolio, keeping insurance prices in check by minimizing residual risks through prevention measures is equally important. In turn, properly set insurance premiums provide a strong incentive to invest in those types of prevention activities that promise to yield net economic rewards….

No comments: