Design Considerations to Set up Publicprivate Insurance Schemes
Design Considerations to Set up Public-private Insurance Schemes for Climate-related Risks in Developing Countries • MCII Side Event: „Climate Insurance“ • Monday, 13 November Christoph Bals, Germanwatch bals@germanwatch. org
The Two Big Challenges of a Future Climate Regime Avoiding the Unmanageable 2 degrees limit Managing the Unavoidable Innovative and binding finance instruments for adaptation • Different scale of money • Not primarily gov. money • Innovative Finance Mechanisms • Get the incentive system right (avoid moral hazard mitigation/adaptationpolluters / affected countries)
Country group based analysis in relative indicators Low Human development means high vulnerability and low insurability
Preliminary results: Climate Risk Index of 2005 events: Down Ten (Germanwatch)
Problems of (often public) post disaster solutions • Increasing losses from natural disasters make it more and more difficult for disaster-prone nations to finance economic recovery. • For example, losses during the 2004 hurricane season measured as a share of GDP amounted to 183 and 212 percent of GNP in the Cayman Islands and Grenada, respectively. • Due to limited tax bases, high indebtedness and low uptake of insurance, many highly exposed developing countries cannot, alone, fully recover from slow- and sudden-onset disasters. • Most relief and reconstruction is financed on an ad hoc basis after disasters occur (for example, local, national and international relief) • . Because of shortages and uncertainties of such "ex post" financing, there is growing interest in "ex ante" financial mechanisms where the funding is arranged in advance. • So far no coherent incentive structure for adaptation
Problems with Insurances Ø Affordability: The main problem is that the necessary premiums for high-risk cover are not affordable to lowincome governments or citizens. Given the costs of insurance instruments, it is not surprising that their uptake in developing countries of Africa, Asia and Latin America is far less than in North America, Europe, Japan and Australia Ø Non insurability: Commercial insurers are reluctant to provide cover for floods, windstorm and other potentially high consequence climate events, especially if it involves risks with little historical data. Ø Moral hazard: In spite of potential positive role of deductibles - often not well designed or difficult to control Ø Conditionality: It will create political problems, if insurance coverage is conditional on adaptation activities. But otherwise moral hazard incentive.
Climate Insurance in UNFCCC Context • UNFCC: Starting Points are Article 4. 8 UNFCCC and Article 3. 14 of the Kyoto Protocol: consider actions, including insurance, to meet the specific needs and concerns of developing countries in adapting to CC. • So far, little agreement but growing interest within the climate change community on the role that insurance-related mechanisms can play in assisting developing countries adapt to climate change.
Key Findings of SBSTA-Workshop June 2003 Workshop to consider the possibilities that insurance might offer for implementing Article 4. 8: 8 A key consensus among the expert attendees was that it is (in most cases) not possible to distinguish climate variability from climate change, and that therefore any insurance-related scheme would need to recognise this fact. 8 Insurers noted that the risk/reward balance for catastrophe business in less developed countries was unattractive to them. 8 It was agreed that insurance is just part of the solution to climate risk, and that it depends critically on risk assessment and risk reduction. 8 Much ”capacity-building” would be necessary in LDC’s before implementation could be attempted. 8 Not discussed: Could public private solutions be an answer?
Public Private Solutions: Broad Portfolio of Insurance Mechanism and Role of Donors Each has its strengths and weaknesses; what is appropriate to one situation may not work in another
Public • A transparent and rigorous framework to control and reduce the physical risks • Donor Supported Instruments (focused on high level risk, non insurable population, sectors with high administration costs) Private Technical support for: • risk assessment • risk management • product design • distribution • marketing • loss handling • and administration
Public Private • Set Criteria • Creates (within the enabling public • Preventing Moral framework) access Hazard: Couple IRM with to affordable explicit measures for risk insurance related reduction. instruments • Deductibles
Options to Generate Co-Funding • 2 -5% Adaptation Fee on CDM, JI, international Emission Trading • Climate fee on aviation (or general fee on greenhouse gases. ) • Combining efforts with other donor organisations and international financial institutions. (E. g. the World Bank is creating a Global Index Insurance Fund (GIIF), which will combine private and donor capital to support index based insurance schemes (like weather derivatives) in developing countries. )
PPP-Option A: Climate Change Financial Adaptation Fond (IAASA)
First Tier: a Global Relief Fund • The first tier is a global relief fund to cover losses that are either uninsurable or for which cover is unaffordable in poor countries. Based on the post-disaster needs of developing countries, it would provide discretionary assistance for relief and reconstruction; • Eligibility for post-disaster assistance could be tied to prescribed, stakeholder-led processes for credible efforts at reducing and managing disaster risks.
Second Tier: Global Climate Insurance Facility • Supports insurance initiatives in developing countries by providing capital backups in the form of reinsurance, by subsidising premiums or by providing technical assistance. • Would offer capacity building and financial support to nascent (climate-related) disaster insurance systems in highly exposed developing countries. • The facility could stand alone or leverage its support by partnering with other donor initiatives. • Would enable the establishment of public/private safety nets for unpredictable shocks by making use of insurance instruments that are – affordable to the poor and – coupled with actions and incentives for pro-active preventive (adaptation) measures.
Global Climate Insurance Facility (IIASA proposal)
Turkish Catastrophe Insurance Pool: Different Layers to Combine Public and Private Money for Reinsurance
PPP-Option B: Regional Climate Fund (e. g. EU) Opportunities Risks + additional potentially huge — financial resources finance sources (auctioning) only for industrialised countries? + stronger pol. interest as adaptation for the own region — less international is central “control” + stronger readiness to give money, as control stays at home + could create incentive for ET
PPP-Option B: Regional Climate Fund • Auctioning of Emission Permits • Carbon Tax, Levy on CDM etc. Cash Source: Germanwatch based on PIK Regional Climate Fund (e. g. EU)
Regional Climate Fund • Mitigation Investments in, e. g. , - R&D - Technology Deployment &Diffusion - Retrofitting • Adaptation measures, e. g. : - Infrastructure Investments - Subsidies for Climate Insurance Cash • Special Window for LDC-Support; or for Climate Change Financial Adaptation Fond
Evaluation criteria for insurance related instruments 4 Fairness Essential that insurance related mechanism be considered legitimate and fair by both contributors to the CCFAF and the recipients. 4 Affordability Can those with the greatest need benefit from the system. 4 Efficiency and Incentive Structure In the sense of providing calculable (secure) financial protection and incentives for mitigation at the lowest possible cost (cost including market price distortions). (Makes sense also to set incentives for greenhouse gas reduction. ) 4 Practicability Refers to the institutional and financial potential for implementing a CCFAF-supported mechanism or system. Source: Germanwatch based on IIASA
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