Financing the Costs of Climate Change in Disaster-Prone Asian Nations
September 17, 2014
Disaster insurance has quickly risen up the global policy agenda in the last few years, where phrases like “loss and damage mechanisms” and “micro-insurance schemes” are catching fire in climate change discussions about how to finance the costs of more frequent and more powerful storms, floods, droughts, and agricultural shocks. And for good reason.
The question of how to build financial resilience for climate change adaptation that enables quicker and longer lasting recovery after disasters strike is critical for addressing global poverty, especially in the most vulnerable areas in the Asia-Pacific region where economic losses consistently far outweigh those recouped from limited insurance, reinsurance, and risk transfer options.
According to an assessment by reinsurance firm Swiss Re, the total insured losses from natural catastrophes and man-made disasters in 2013 were only $45 billion out of $140 billion in total economic losses, and $37 billion of the $45 billion of global insured losses that year were due to natural catastrophes alone. Similarly, according to Munich Re data, total global reported losses from all disasters are estimated at almost $4 trillion since 1980, with 74 percent due to extreme-weather events. Over the past 20 years, Asia specifically has suffered half of the estimated global economic cost of natural disasters – about $53 billion annually. This reality, more commonly referred to as the protection gap, is felt most intensely by the millions of people in Asia who depend on agriculture for their livelihoods, where severe financial vulnerability to weather-related shocks is a constant threat to food security and well-being.
However, innovations in reinsurance analysis and risk assessment services are surpassing demand in developing world economies, in part because the industry is fairly new in these cash-poor markets and also because policymakers lack evidence about the medium- and long-term outcomes of the relationships between developing countries, individuals, and insurers. There is one camp that believes micro-insurance can smooth out the impacts of disasters on poverty and help manage disaster risk, and another that argues it may cause increases in risky behavior and perpetuate dependency of post-event pay outs. There is also the question of whether loss-and-damage mechanisms should be in the form of a subsidized facility provided by the governments of the developed world or a facility that aims to become a functioning, private risk transfer market over time. The Climate and Development Knowledge Network continues to conduct research on the effectiveness of disaster insurance given this new interest in loss-and-damage products that purport to lessen macroeconomic shocks at the subnational and local levels.
In the public sector, the debate over funding adaptation through comprehensive disaster risk management during the UN climate talks in Warsaw, Poland, last November (COP19) ended in a deal that commits countries to a loss-and-damage mechanism slated to begin in 2015, in which developed nations scale-up their direct expertise and aid to countries who suffer from climate-related impacts. The Green Climate Fund (GCF) of the UN Framework Convention on Climate Change’s (UNFCCC) Global Environmental Facility (GEF) also recently agreed to split pledged contributions evenly between climate change mitigation and adaptation projects as a result of the international development community’s April 2014 Kathmandu Declaration. Recommendations include strengthening the transparency of international and national finance for local adaptation and promoting government collaboration with private sector investments in community-based adaptation.
Similarly in the private sector, there has been an increase in providing insurance support in developing nations to climate vulnerable populations in order to help transfer natural disaster risk throughout communities. There is a range of capital market options, including disaster management through improved infrastructure, building and land planning codes, and resource management (risk reduction); insuring personal and business assets (risk transfer); and microcredit lending to jumpstart local capital markets (fiscal planning). Micro-insurance, catastrophe bonds, weather-index and risk-modeling insurance software, work-for-insurance adaptation schemes, and regional risk-pooling examples such as the Caribbean Catastrophe Risk Insurance Facility and the Pacific Catastrophe Risk Assessment and Financing Initiative are innovative ways the insurance and reinsurance market can help to build climate finance resilience for macroeconomic growth in developing nations.
The World Bank’s 2013 report, “Building Resilience: Integrating Climate and Disaster Risk into Development,” reveals that “weather-related financial losses are concentrated in middle-income, fast-growing countries in Asia, where increasingly high-asset values are becoming more exposed and the average impact equaled 1 percent of gross domestic product (GDP) between 2001 to 2006 (a percentage which is 10 times higher than the average for higher income countries).” The Asian Development Bank also recently published a theme chapter on “Insuring against Asia’s Natural Catastrophes” in its April 2014 issue of the Asian Economic Integration Monitor, recommending that “key priorities for developing disaster risk financing markets and strengthening financial resilience should include business continuity planning, enhancing technical and institutional capacities, and coordinating various governmental authorities across all levels.”
The push for public-private partnerships to develop natural disaster risk transfer mechanisms for Asia and the Pacific is certainly substantial. This interest derives not only from traditional insurance and reinsurance sources, which have and continue to be active in developing financial mechanisms for the region, but also from global capital markets working to bolster the region’s ability to self-finance the costs of building climate resilience. Garnering closer collaboration between governments and insurance interventions has the potential to enhance local adaptation and disaster risk reduction systems, especially in terms of individual and business losses during severe storms as well as agricultural shocks and food security. One of the remaining issues, though, is how these new mechanisms that transfer disaster risk to the private sector can become fully sustainable, functioning capital markets that allow for accurate and affordable risk pricing and do not cave in upon themselves when tested in emerging markets. During a time when U.S. and European bilateral funding agencies are looking for ways to share the burden of humanitarian relief and recovery financing, these financial mechanisms can offer alternatives to the controversial establishment of subsidized public sector facilities funded primarily by the most developed countries.
Kourtnii S. Brown is a program officer for The Asia Foundation’s Environment Programs in San Francisco. She can be reached at [email protected]. The views and opinions expressed here are those of the individual author and not those of The Asia Foundation.
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