Insuring against climate risks – how does it work?

In order to safeguard the individual from greater harm, possible damage is distributed among the community via an insurance fee. This is the guiding principle for insurances. A small contribution by everyone will cover major claims for damages principle via risk spreading. Can this concept also help insure people in developing countries against the rigours of climate? And if so, what kind of a framework would be needed? This was discussed at a G7 Stakeholder Conference held by Germany’s Federal Ministry for Economic Cooperation and Development (BMZ) in Berlin, Germany, in early May.

Across the world, more than 300 million people are directly affected by climate change. Damage caused by floods and cyclones is now amounting to billions of euros. Since 1973, reinsurers Munich Re have recorded more than 75,000 events world-wide relating to climate-conditioned damage, and the tendency is increasing, according to Peter Höppe, Head of the company’s Geo Risks Research Department.

The latest estimates put the number of poor people insured against climate risks at just 100 million. With the aid of a G7 Initiative, it would be possible to insure a further 400 million people by 2020, said Germany’s Development Minister Gerd Müller at the opening of the conference. He pledged that 150 million euros would be provided for the establishment of climate risk insurance by 2016.

African Risk Capacity showing the way forward

Nigeria’s Minister of Finance Ngozi Okonjo-Iweala, who is also Administrative Board Chair of African Risk Capacity (ARC), showed that this kind of insurance does indeed work. Since 2012, numerous African countries have got together in ARC to support a memorandum on a climate risk insurance scheme. Germany and the United Kingdom boosted the launch with 60 million US dollars each, while ARC itself has 200 million US dollars in equity capital. Last year, a total of 70 million dollars was raised by the first countries. According to Okonjo-Iweala, a further 20 countries are starting to pay premiums this year.

The fund was active last year, disbursing drought aid to the tune of 26 million US dollars to Mauritania, Senegal and Niger benefiting 1.3 million people. According to Germany’s Development Minister Gerd Müller, such support is the ideal way to bridge the gap between disaster relief and long-term preventive measures. Thanks to the payments, farmers no longer had to slaughter their cattle in need of the remaining forage areas for their own food. In comparable situations in the past, they had often lost their livelihoods, and their children had been forced to leave school. Müller praised the model because it works faster and in a more targeted manner than official aid. He also said it set a good example of partnership with the private sector.

What do we want to insure?

However, the stakeholder conference also raised general issues. For example, damage caused by floods and cyclones is easier to insure against than the vanishing of entire islands. This is what the future holds in store for Kiribati, for example, whose President Anote Tong is tirelessly campaigning around the world to rally the support of governments against climate change. The Pacific islands are demonstrating what climate change really means. Floods are pressing seawater into the drinking water reservoirs, and cyclones are ruining entire harvests. The country is preparing for its pending submergence and is providing young people willing to emigrate with the best vocational qualifications it can afford. According to Tong, ideas like mangrove plantations as a protection against the surge of waves or large-scale dumping around the islands to prolong their existence are unusual, but good ideas. But when it came to insurance, he raised the crucial question: “What do we want to insure?” Will it be the harvest that the cyclone is going to destroy, or will it be an entire island? Achim Steiner, Executive Director of the United Nations Environment Programme (UNEP), took up the question, remarking that the aspect of climate change did not only relate to harvests, beaches and buildings. The disappearance of the islands meant that an entire culture and an entire style of life would be lost. “There are risks that cannot be insured against,” Steiner concluded.

Thus the insurance industry is facing a paradigm shift. So far, it has insured property. This results in special arithmetic. How probable are claims for damage? How much is the aggregate loss? How much must the premiums be to cover damage incurred, and how low must they be to remain affordable? One example of a viable solution is Germany’s insurance cover against the risk of hail. Every farmer has to take out such a policy. The compulsory fee distributes the risk via affordable premiums in accordance with the insurance industry. However, when it comes to insurance against the impacts of climate change, the industry faces the question of how lifestyles can be insured. Here, Allianz Re insurance expert Amer Ahmed maintains: “We need a new partnership between insurers and the government. Making out cheques won’t be enough.”

Just one part of the solution

BMZ State Secretary Friedrich Kitschelt stressed that climate risk insurance could only be one of several elements in combating climate change. The priority had to be that of implementing the reduction of greenhouse gas emissions and adaptation measures. Here, each country had to make its own contribution, and taking out insurance policies should not divert attention from these tasks. Moreover, they could create a false sense of being protected among individuals. The example of a rain insurance policy in Africa showed the conference participants that a “carefree package” could easily result in greater herds and, as a result, overgrazing. Therefore, comprehensive insurance could not be the desired goal. A climate risk insurance could not work without excess, Amer Ahmed maintained.

The long way towards implementation

Insurances that are part of everyday life in the industrialised countries often have to be explained to people in the countries of the South. Rupalee Ruchismita, Director of India’s Resilience Design and Research Lab, is campaigning for the establishment of an insurance system in India and Bangladesh. She recently extended her activities to Myanmar. “Sustainability above all means practicability,” she said. The concept of an insurance product and the way it operated had to be explained to the governments as well as the farmers. Even if the advantages become obvious in the area of subsistence farmers, a supporting infrastructure has to be developed. The parameters for payments, measuring systems for weather events and local contacts as well as data gathering are important for the insurance industry. Rupalee Ruchismita argued that the climate risk insurance discussed at the meeting was a substantial step forward, but she put a damper on exaggerated expectations. Establishing the system was going to take five to ten years. 

More information:       The African Risk Capacity

Roland Krieg, Journalist, Berlin/Germany