A milestone for
microinsurance was passed when it was featured in the draft
negotiating text for the climate summit that will establish
strategies for climate change adaptation following the Kyoto
Protocol
An
increase in extreme weather will have greatest impact in developing
countries
According to the 4th Assessment Report
of the Intergovernmental Panel on Climate Change (IPPC 207),
human-induced climate change trends will continue to have a major
influence on weather related risks. These risks play an important
role for segments of the growing microinsurance sector and this is
evidenced by the increasing number of weather index crop insurance
projects under way in the developing world.
The ongoing United Nations climate
negotiations are addressing extreme weather risks, their impact on
vulnerable countries and vulnerable groups of people, and the
possibility of using risk reduction and insurance approaches to
adapt to climate change. Microinsurance has been highlighted as a
possible way to enhance disaster risk management and develop
opportunities for the poor (Hellmuth et al. 2009).
Climate change and
microinsurance
An important milestone was passed at
the June 2009 Climate Talks in Bonn, Germany. The secretariat to
the climate negotiations, the United Nations Framework Convention
on Climate Change (UNFCCC), released the draft negotiating text
that will be transformed between now and December into the
Copenhagen Agreement - the critical juncture for fighting climate
change once the Kyoto Protocol's commitment period ends in 2012.
The current negotiating text lays out the crucial points for
establishing risk reduction and insurance, including
microinsurance, in the Copenhagen treaty: Three key points relate
to microinsurance.
- First, the negotiating text offers alternatives for a risk
management framework that includes insurance. At the June Climate
Talks, parties from both developed and developing countries
expressed broad consensus and support for risk reduction and
microinsurance. Countries as diverse as Bangladesh, the United
States of America, Australia, Mexico, and Switzerland showed
interest in microinsurance approaches that can help people living
in countries particularly vulnerable to the negative effects of
climate change adapt to these changes.
- Second, the negotiating text lays out options to use adaptation
funding to pay for a range of risk reduction and risk transfer
approaches, including microinsurance.
- Third, the negotiating text calls for the international
community to consider enabling activities such as the creation and
sharing of climate and weatherrelated data and institutional
support for adaptation and related activities, including
microinsurance.
In the next phases of negotiation in
August and September of this year, delegates will discuss the
options on the table, refine the negotiating text, and discuss what
kinds of institutional arrangements would need to be in place to
implement the elements that could become the Copenhagen agreement.
Experts expect that microinsurance approaches will be the focus of
concrete funding and operational discussions in the upcoming
international negotiations.
Christoph Bals, Vice Chairman of MCII
and Executive Director of the NGO Germanwatch expects that "the
climate negotiations will, by the end of 2009, create an adaptation
framework with risk management - of which insurance solutions
targeting the most vulnerable in developing countries will be
part."
Insurance proposals
at the climate negotiations
Between the climate conference in
Poznan, Poland at the end of 2008 and June of this year,
negotiators have stressed the need for risk management, including
insurance as an element of risk management, in the architecture of
the Copenhagen Agreed Outcome (UNFCCC 2008a, 2008b). In Poznan,
Bangladesh noted that at the international level, any risk
management framework adopted should incorporate microinsurance as
an element for addressing the risk transfer needs of the most
vulnerable.
Delegates from Bangladesh recommended
for the COP to investigate means to catalyse the initiation of new
and innovative microinsurance approaches, building upon available
models. Bangladesh has maintained this proactive stance and
garnered further support from other countries for its
microinsurance-related adaptation proposals. Such delegations have
called for microinsurance pilots and including index-based schemes
in developing countries, with support for such programs from
international and national private sector sources.
Numerous proposals have been put
forward during the climate negotiations that mention insurance.¹ Two detailed insurance-related proposals
were tabled by the Association of Small Island States (AOSIS) and
the Munich Climate Insurance Initiative (MCII - of which
MicroEnsure is a member).
The two proposals explore how risk
management including insurance mechanisms could fit into a
longerterm adaptation financing framework (i.e. post-2012) (AOSIS
2008, MCII 2008). Both proposals emphasize that risk prevention and
risk reduction are the points of departure for managing
climate-related disasters.
MCII´s proposal further
envisions a Climate Insurance Facility to catalyse nascent risk
sharing and risk transfer systems including microinsurance. Such a
facility could create the necessary framework for microinsurance
and other locally-tailored approaches to help the vulnerable adapt
to climate change.
MCII proposes that this facility could
provide support for data collection, technical support, activities
that lower transaction costs, and enable scaling up of
microinsurance approaches. It is also possible that such a facility
could pool medium level risks, providing a kind of reinsurance to
numerous small insurance schemes.
Key questions for the
microinsurance industry
Climate negotiators express great
interest engaging the private sector and other relevant
stakeholders and communities in the context of climate risk
insurance for those most vulnerable to climate change, the poor.
Several questions arise about what microinsurers would need to
participate in any mechanism created by the UNFCCC Copenhagen
agreement in December 2009.
Climate negotiators express great
interest engaging the private sector and other relevant
stakeholders and communities in the context of climate risk
insurance for those most vulnerable to climate change, the poor.
Several questions arise about what microinsurers would need to
participate in any mechanism created by the UNFCCC Copenhagen
agreement in December 2009.
What would be most necessary to engage
in the design and provision of climate risk insurance, the private
sector? Professor Peter Hoeppe of Munich Re emphasized that "The
insurance sector would need assurance that premiums for the various
insurance programs would be "risk adequate"- meaning that the
premiums are sufficient to cover expected losses."
Correct, risk adequate pricing is a key
for sustainable microinsurance business. In many of the target
developing countries the data base for pricing is currently
insufficient. For countries without suitable meteorological as well
as historical loss data, it is imperative to build up systems that
could fill data gaps in the medium term. During a transition phase
before all necessary data is in place, modelling approaches and
comparisons with other similar countries where data is available
could help to make risks in such countries insurable.
Further, while the appropriate data
basis is being established, the potential for inaccurate loss
estimates could be covered by an insurance pool solution such as
that suggested by MCII.
As currently the losses from
weatherrelated disasters in developing countries are about 7% of
global losses, cover of this kind should not pose an insurmountable
obstacle for the capital requirements of insurance. Climate risk
insurance programs, such as that proposed by MCII, could be
established in a time range of 3 to 5 years - assuming prompt
action would be taken to establish a sufficient basis of data.
On the road to Copenhagen
During the current Bonn Climate Talks, the delegations called
strongly for insurance measures and began hammering out negotiating
text reflecting their priorities regarding insurance. What
delegates need now is input from microinsurance experts about what
has worked in the past, what kinds of institutional set-ups are
needed, and examples of how microinsurance could be made to work
with international support in the context of climate change. Prof.
Peter Hoeppe,
Chair of MCII and Head of Geo Risks
Research of Munich Re: The decision at the climate talks in Bonn
has made it very likely that insurance solutions for developing
countries will be part of the climate agreement that hopefully will
be decided upon at the end of this year.
Dr. Koko
Warner is a founding member and Executive Director of the
Munich Climate Insurance Initiative (MCII). Warner also leads
Climate Adaptation Section at the United Nations University
Institute for Environment and Human Security (UNU-EHS). She
researches adaptation and climate risk insurance, and financial
mechanisms to assist the poor. Warner serves on the editorial board
of the International Journal of Global Warming.
References
Alliance of Small Island States (AOSIS) (2008). Proposal to the
Ad Hoc Working Group on Long-term Cooperative Action under the
Convention (AWG-LCA). "Multi-Window Mechanism to Address Loss and
Damage from Climate Change Impacts". Submission to the UNFCCC on 6
December 2008.
http://unfccc.int/files/kyoto_protocol/application/pdf/aosisinsurance061208.pdf.
Hellmuch, M.E., Osgood, D.E., Hess, U., Moorhead, A., and
Bhojwani, H. (eds) 2009. Index insurance and climate risk:
Prospects for development and disaster management. Climate and
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Impacts, Adaptation and Vulnerability Summary for Policymakers.
Cambridge University Press, Cambridge.
Munich Climate Insurance Initiative (MCII) (2008). Proposal to
the Ad Hoc Working Group on Long-term Cooperative Action under the
Convention (AWG-LCA). "International Insurance Mechanism: A
proposal for the Copenhagen Agreed Outcome". Submission to the
UNFCCC on 6 December 2008. 4th session of the AWG-LCA. Poznan 1-13
December, 2008.http://unfccc.int/resource/docs/2008/smsn/ngo/033.pdf
UNFCCC (2008a). "Report on the workshop on risk management and
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FCCC/AWGLCA/2008/CRP.7 from 6 December 2008.
UNFCCC (2008b). Mechanisms to manage financial risks
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Further reading
ALIBER, M. and IDO; A. (2002): Microinsurance in Burkina Faso.
Social Finance Programme & InFocus Programme on Boosting
Employment through Small Enterprise Development. International
Labour Office. Geneva.
ALL INDIA DISASTER MITIGATION INSTITUTE (2006): Community Risk
Transfer through Microinsurance: An Opportunity for South Asia.
BALS, C., WARNER, K., BUTZENGEIGER, S. 2006. Insuring the
Uninsurable: Design options for a climate change funding
mechanism. Climate Policy, special journal edition.
Gurekno, G. (ed.). Volume 6, Number 6, 2006. pp. 637-647.
BARNETT, B.J., C.B. BARRETT, J.R. SKEES (2008): Poverty Traps
and Index-Based Risk Tranfer Products. In: World Development
(2008). Article in Press (Elsevier).
BOUWER L.M., J.C.J.H. AERTS (2006): Financing climate change
adaptation. In: Disasters. Vol. 30, No. 1 (2006). Pp. 49-63.
CHARPENTIER, A. (2008). Insurability of climate
risks. The Geneva Papers. Vol. 33 (91-109).
CHURCHILL, C. (Editor) (2006): Protecting the Poor. A
Microinsurance Compendium. Munich Re Foundation, International
Labor Organisation, CGAP.
DIAZ NIETO, J., S. COOK, M. LUNDY, M. FISHER, D. SANCHEZ, E.
GUEVARA (2006): A System of Drought Insurance for Poverty
Alleviation in Rural Areas. Colombia, South America: Centro
Internacional de agricultura Tropical (CIAT).
DLUGOLECKI et al. (2009) Coping with climate change:
Risks and opportunities for insurers. Chartered Insurance
Institute, London.
HÖPPE, P. and E. GURENKO (2006). Scientific and Economic
Rationales for Innovative Climate Insurance Solutions, in Climate
Policy, E. Gurenko, Ed. Special Issue on Insurance and Climate
Change.
GINÉ, X., R. TOWNSEND, J. VICKERY (2007): Statistical Analysis
of Rainfall Insurance Payouts in Southern India. Policy Research
Working Paper. The World Bank - Development Research Group. Finance
and Private Sector Team.
LEVIN, T. and D. REINHARD (2007): Microinsurance apsects in
agriculture. Discussion Paper. Munich Re Foundation. CGAP
Project.
MAEZ, M.S. and S. WONG (2006): Insurance in Emerging Markets:
Sound Development; Greenfield for Agricultural insurance. In:
Sigma. No. 1 (2007). Swiss Reinsurance Company. Economic Research
and Consulting. Zurich.
MAPFUMO, S. (2007): Weather Index Insurance. The Case for South
Africa. Micro Insurance Agency Holdings LLC.
MANUAMORN, O.P. (2007): Scaling up Microinsurance: The Case of
Weather Insurance for Smallholders in India. Agriculture and Rural
Development Discussion Paper 36. The World Bank (Editor).
MAYNARD, T. (2008). Climate change: Impacts on insurers and how
they can help with adaptation and mitigation. The Geneva
Papers. Vol. 33 (140-146).
MCLEMAN, R. and B. SMIT (2006): Vulnerability to climate change
hazards and risks:crop and flood insurance. In: The Canadian
Geographer. Vol. 50, No. 2 (2006). Pp. 217-226.
MILLS, E. (2007). From risk to opportunity: 2007. Insurer
responses to climate change. CERES report, October 2007. http://insurance.lbl.gov/opportunities.
MUNICH RE (2007). Topics: Natural Disasters. Annual Review of
Natural Disasters 2006. Munich, Munich Reinsurance Group.
PROVENTION CONSORTIUM / IIASA (2005): Invest to Prevent
Disaster. The Potential Benefits and Limitations of Microinsurance
as a Risk Transfer Mechanism for Developing Countries. ProVention
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Skees, J. R., B. J. Barnett, B. Collier (2008): Agricultural
Insurance: Background and context for climate adaptation
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SKEES, J.R. (2008): Challanges for Use of Index-Based Weather
Insurance in Lower Income Countries. GlobalAgRisk, Inc.
STERN et al. (2007). Stern Review Report on the Economics of
Climate Change. Cambridge University Press.
United States Agency for International Development (2006): Index
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GlobalAGRisk, Inc. Lexington.
WARD, R.E.T., HERJWEIJER, C., PATMORE, N., MUIR-WOOD, R. (2008).
The role of insurers in promoting adaptation to the impacts of
climate change. The Geneva Papers. Vol. 33
(133-139).
WILHELM, V. (2008): Weather Index-based Microinsurance in
Developing Countries: Analysis and Evaluation. Vdm Verlag Dr.
Müller. 76 pages.