Thursday, June 2, 2011

The role of insurers in climate change adaptation

Claudia Woo at CSR Asia: …Not all disasters are related to climate change, but the increasing occurrence of natural disasters due to climate change has indeed placed a huge financial burden on governments worldwide to provide immediate aid to victims and to fund rebuilding efforts in the aftermath. With less capacity and economic resources to alleviate or adapt to climate change, developing nations are particularly vulnerable to natural catastrophes. It is estimated that the cost of climate change to emerging economies is between one and 12 per cent of annual GDP. This figure could surge to 19 per cent under severe climate conditions, according to the Economics of Climate Adaptation (ECA) Working Group.

Regardless of the efforts to control greenhouse gases emissions, it is increasingly apparent that adaptation to climate change is necessary, including seeking ways to finance economic losses after a climate disaster occurs. Climate-related micro-insurance, which usually charges a low premium for the poor, is a cost-effective means of promoting climate change adaptation measures. It indemnifies low-income groups against specific losses due to climate hazards.

For instance, an insurance scheme has been implemented in Ethiopia under the Horn of Africa Risk Transfer for Adaptation (HARITA) project to compensate local farmers growing *teff and are affected by drought. The scheme is unique because instead of using money, local farmers can pay insurance premiums by labouring on projects that will reduce climate change effects in their communities, such as tree planting….

Other examples of climate-related micro-insurance schemes can be found in Kenya (index-based weather insurance), Caribbean nations (parametric insurance against hurricanes), and Mexico (catastrophe bonds). Such insurance system can be adopted or adapted to other nations by taking into consideration location-specific climate conditions.

…Nevertheless, penetration of catastrophe-related insurance is still extremely low in developing countries in Asia, For example, it is still under five per cent in India, the Philippines and China. Many people tend to ignore the risk of natural perils due to the low frequency rate, but such attitudes may change over time given the increased incidence of climate disasters globally….

Fire insurance marks on display at Bedford Museum. Shot by Simon Speed, Wikimedia Commons, public domain

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