When the United Nations conference convenes in Paris this December to craft a new global climate agreement, it will not only discuss measures wealthy nations can take, but also will look to aid the most vulnerable nations in adapting to climate change.
Rising sea levels and growing numbers of extreme weather catastrophes cannot be ignored, even if their impact varies greatly from region to region. The Western world is expected to take the greatest financial hit in absolute terms, but poorer countries face a much more daunting future. They not only will be required to deal with severe humanitarian consequences, but also in terms of relative economic strength, will suffer the greatest damage. Thus, adaptation to a changing world is an essential building block for economic development.
The G7 countries have acknowledged the role of so-called “climate risk insurances” to finance climate change – though it would be more accurate to call them “climate change impact risk insurances.”
The G7 nations want to see 400 million people in developing and emerging economies covered by insurance protection against extreme weather events by 2020. On the macro level, this means insurance for entire countries, such as the African Risk Capacity, which provides drought insurance for African countries, while on the micro level it offers insurance for individuals.
Payments would be made in cases of clearly defined weather events determined by objective parameters, whether drought, storm or floods, depending on the insurance needs of the contractual partner. This mechanism makes administration of the program relatively easy and cheap to implement.
But it is important to better prepare for the impact of climate change. It is clear it cannot be avoided and no region on earth can afford to ignore the risks.
Since macro insurance coverage can be obtained from states or risk aggregators – entities created specifically to protect against climate risk – a large number of those affected can be quickly insured. Additionally, if the policies are properly constructed, there are better incentives to take preventative measures to avoid damages, for example, through early warning systems or by changing building methods or land uses.
Countries would only be accepted into the pool when sufficient governmental or administrative structures were present. Economic shocks through natural catastrophes also could be cushioned and economic growth stabilized with insurance solutions.
It is essential for the development of long-term, financially stable climate risk insurance solutions that aid funds don’t flow into a pool that will be exhausted over time. The goal must be to improve resilience to natural catastrophes in the long term. The G7 states could support a building up of weather data banks, development of risk analysis tools and an increase of on-site knowledge. Then, it will fall to the countries involved to take the next step and secure permanent risk financing through their national budgets.
The insurance industry is making knowledge, risk models and experience available for implementation of climate risk solutions. Premiums consistent with risks must be calculated so mechanisms function stably over time. Only then can risks be given a realistic price tag. It is the job of the G7 countries to lay out concrete terms that will be implemented and clarify the division of tasks in financial sector. And it must be done now.
This could facilitate discussions at the United Nations Climate Change Conference in Paris. The goal of reaching agreement on reducing carbon emissions to limit global warming by two degrees is extremely ambitious. It remains to be seen if this hope is justified.
But it is equally important to better prepare for the impact of climate change. It is clear today it cannot be avoided. No region on earth can afford to ignore the risks. Those who do are not acting responsibly.
The author is a member of the board of management of Munich Re Reinsurers. He can be reached at email@example.com