New Forms of Insurance Needed to Deal with Climate Change

15/11/2006

Warning that by 2040 the world could witness a year in which losses from droughts storms surges hurricanes and floods hit $1 trillion the United Nations Environment Programme (UNEP) today called for new kinds of insurance and financing including public-private partnerships to help developing countries adapt to climate change.

“Widespread insurance cover has been generally confined to developed countries where consumers businesses and industry have in the past been able to pay for premiums” UNEP said in launching its new report – “Adaptation and Vulnerability to Climate Change: The Role of the Finance Sector” produced by its Finance Initiative.

“However the time has come to forge public-private partnerships to bring new kinds of creative financial instruments to developing countries where the impacts of climate change are likely to hit hardest” it added quoting insurers and banks.

“Otherwise the costs of coping with a rising tide of full scale climate-linked natural disasters could outstrip current levels of humanitarian aid putting increasing strain on international aid budgets.”

The report launched during the final week of the UN Climate Convention in Nairobi Kenya cites figures showing estimated overall losses of nearly $13 billion from typhoons which struck China Japan and the Philippines just from July to September this year. In Africa the ongoing drought and floods in Ethiopia and Somalia have left some 280000 people homeless. Since 2005 the drought has affected an estimated 3 million people.

“It seems likely that there will be a ‘peak year’ that will record losses of over $1 trillion before 2040” the report says. “In fact since so much development is taking place in coastal zones the figure may arrive considerably before 2040.” It cites some promising initiatives already underway including one by the UN World Food Programme (WFP) that cover that covered Ethiopian farmers during the March to October season and was designed to pay out if rainfall fell below a key threshold via a finance instrument known as a “weather derivative.” The pilot scheme involving a UNEP FI member called AXA the World Bank and the United States Government was aimed at preventing communities spiralling into chronic poverty and aid dependency due to drought. Other projects are being examined to help pastoralists with payments triggered when the condition and availability of forage for livestock deteriorate below a pre-determined point.

The report also highlights how microfinance institutions in India working with the re-insurer Swiss Re are helping farmers in Andhra Pradesh use “weather hedges” against lower than expected monsoon rains. Community-wide cover of around $150000 is in place for an annual premium of just $1600.