How to ensure (and insure) climate change resilience

As the smoke clears from the fireworks launched to celebrate the climate change treaty in Paris, the world is still left with its current 1 degree Celsius increase in global temperatures over pre-industrial levels. Weather patterns will continue to change in the coming decades, and the poor will remain the most vulnerable.

“Studies show that losses caused by weather-related natural catastrophes already account for up to 6 percent of the annual [gross national product] in some Caribbean countries,” according to the Munich Climate Insurance Initiative, a multistakeholder association. “This is likely to increase by as much as three percentage points by 2030.”

Looking at it from the household point of view, a World Bank study identified three ways that climate change is already hitting the poor: spikes in food prices, natural disasters, and disease and other health problems.

“We looked at how these three things are changing over time, and in most cases they are getting worse,” said Stéphane Hallegate, senior economist for the Sustainable Development Network at the World Bank.

Better risk management must be part of the response to increased vulnerability. And while insurance is a subset of risk management, it is hardly the only option, argued Hallegatte, adding that the “right instruments will be different for different circumstances.”

Non-insurance measures include what the World Bank report calls “climate-informed” development and “targeted adaptation interventions” — climate-smart agriculture and protected ecosystems; land use regulations and better and more infrastructure for natural hazards; and better health infrastructure and universal health care — as well as “a more robust social safety net system.”

The latter includes models such as the “4Ps” cash transfer program in the Philippines. Using the program’s administrative infrastructure, the government was able to distribute $12.5 million in the first four months following Typhoon Haiyan in November 2013. UNICEF and the World Food Program used that network to expedite their disaster assistance. “It was quicker and more efficient,” said Hallegatte.

The World Bank report hardly mentions it, but no financial tool has created more buzz in the risk management realm than insurance. The Group of Seven launched the InsuResilience initiative at its summit in June, which aims to extend access to direct or indirect climate risk insurance to up to 400 million poor individuals.

MCII Executive Director Koko Warner likes that idea and one might imagine her and Hallegatte to occupy opposite sides of the risk management debate. Yet both rushed to cite Ethiopia’s Food for Work Program as an innovative approach to risk management.

Under the basic program, hungry citizens literally trade labor for food instead of cash. However, farmers who have a bit of spare time to work but sufficient food reserves in the storehouse can earn credits toward agricultural insurance. Backed by the WFP, the initiative covers over 26,000 smallholders. In times of crisis, Warner explained, they receive payouts to buy seeds thus avoiding the spiral into oblivion of farmers who must eat their seeds to survive and wind up unable to plant the next season.

If the Ethiopian scheme is any indication, the future of insurance for the poor will only superficially resemble the old school policies commonplace in rich countries.

“We have to be open and innovative,” Warner said. “We have to be thoughtful and ask the right questions.”

For starters, many in the target group have neither tangible assets nor bank accounts. Even the delivery of benefits can turn problematic.

“The point is not to sell what we have, but to figure out what will help people,” she said. “We need to use the principles of insurance to do new stuff.”

This, she explained, included knowing how to share both the risks and the benefits, for example when the members of a cooperative chip in to buy a tractor.

During the COP21 in Paris, MCII launched a report that outlined four conditions necessary to ensure that climate change risk insurance effectively reaches the poor:

1. Tailor new insurance products and delivery channels to meet the needs of the target groups, often through public-private partnerships.

2. Make sure that the potential clients participate in designing the products and their delivery mechanisms.

3. Improve the capacity of local partners in financial risk management, data collection and processing, and the development and implementation of contingency plans.

4. Focus on social and economic sustainability, and encourage risk reduction.

Policies must be attractively priced and/or subsidized for people who “turn over every penny twice” before spending it, said Warner. If subsidized, the price tag will continue to be an issue for governments and donors.

“Parametric, or index-based insurance, is one way to lower costs,” said Warner. “There may be other ways that we have not explored yet.”

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