Insured against climate damage?

Poor people suffer most from the consequences as in the Philippines. Photo: J. Grossmann, Brot für die Welt

In autumn 2015, the international community established seventeen Sustainable Development Goals (SDGs). At the national level, action plans are now being developed to reach those goals by 2030. Yet climate change is an obstacle on the way forward, especially for the poorest people in countries facing the highest climate-related risks. Climate-related extreme events such as tropical storms, droughts and floods threaten their harvests, their livelihoods and their lives.

No financial support for climate-related loss and damage

For more than twenty years, international policymakers have been discussing the consequences of climate change under the umbrella of the United Nations Framework Convention on Climate Change (UNFCCC) and in other fora. However, it was not until the Paris Agreement of 2015 that an institutional framework encompassing all states was put in place for dealing with climate risks and resulting damages. Previously, the industrialized countries had delayed the negotiations time and again, fearing possible damage claims.

The Paris Agreement has gaps, however. It does recognize climate-related damages as a subject matter and has commissioned the Warsaw International Mechanism (WIM) to develop solutions. Yet the agreement does not contain any commitments regarding the financial scope for the implementation of this order. Furthermore, paragraph 52 of the Paris Decision, which supplements the Paris Agreement, states that the climate agreement does not provide a basis for liability and compensation claims.

Climate justice in the context of climate-related loss and damage

This is not acceptable given the responsibility and economic performance of the countries most culpable for causing climate change. For years, NGOs and people around the world impacted by climate change have been demanding that the countries and companies responsible for global carbon emissions be held liable for climate-related damage under the precautionary principle. Climate justice means that those countries and companies have an obligation to financially support at least the poorest and most vulnerable countries in tackling climate-related loss and damage. An international fund similar to the Green Climate Fund would be well-suited for this purpose. The fact that the poorest and most vulnerable people and countries in particular are neither adequately protected against the consequences of climate change nor are being compensated by the polluters for climate-related damages is a fundamental issue of justice.

Climate risk insurance initiated by the German G7 and G20 presidencies

We therefore welcome the fact that the German government took the political initiative and made the issue of climate risk mitigation and compensation a high priority, first within the framework of its recent G7 presidency, and now again on the occasion of its G20 presidency to establish a Global Partnership for Climate and Disaster Risk Finance and Insurance Solutions. These efforts expressly take the most vulnerable population groups and countries into account. The introduction of climate risk insurance is certainly being seen as a critical issue in civil society. By itself, it certainly cannot create climate justice, but it can help to combat growing poverty due to climate-related loss and damage while closing gaps in protection. To achieve this, however, climate risk insurance must be part of a broad-based resilience strategy and should complement, but not replace, social protection systems and humanitarian aid. In order to do so, climate risk insurances must be tailored to the specific needs of the poor and vulnerable while focusing on needs, transparency, access and affordability.

Public regulatory frameworks for private-business partnerships

In the case of climate risk insurance, state guidance, insurance supervision and independent monitoring are crucial to ensuring its orientation toward public wellbeing, as is the case with other instruments of the social safety net such as social insurance programs. Experience with insurance in the poverty sector has shown that a strong state framework and flanking measures must be in place to ensure that marginalized groups are reached at all.

Climate risk insurance must be tailored to the needs of the poorest people

The gearing of climate risk insurance to the needs of the poorest must be the overriding principle. Its financing must be secure and fair. The InsuResilience climate risk insurance initiative and the proposed global partnership for risk financing and risk insurance are the first steps in this direction. Climate risk insurance can help reduce the vulnerability of the poorest. In the event of a disaster, injured parties would thus have quick access to funds to help them cope with their emergency situation; furthermore, climate risk insurance could be used to strengthen disaster relief and social protection systems.

However, climate risk insurance has hardly taken hold in developing countries at this point. People in many places lack risk awareness, or else the idea of insurance is largely unknown. In other cases, insurance is considered too expensive or a regulatory framework has not been put in place. The InsuResilience initiative established in 2015 under the German G7 presidency is an attempt to change this. InsuResilience intends to cover 400 million poor and vulnerable people by 2020. Risk transfer would thus become an integral part of resilience strategies. Under the German G20 presidency, InsuResilience could now be expanded with additional actors and instruments as a global partnership for climate risk finance and insurance solutions.

To protect the poorest and most vulnerable, climate risk insurance must be needs-oriented, easily accessible and, above all, affordable. The question of affordability is closely linked to the issue of climate justice: Who will be liable or bear the costs – the polluters or the injured? Until now, the polluter-pays principle has not been applied to climate-related loss and damage. The principle of solidarity in the transfer of climate risks – i.e. that all insured countries share the risks of extreme weather events – has so far been widespread in the InsuResilience initiative and elsewhere. InsuResilience is committed to the principles of poverty orientation and is testing “smart support” to make insurance affordable to the poor.

This focus on the poor could be lost, however, if the planned expansion into a global partnership is not implemented with care. The German government and the G20 should take this into account when structuring InsuResilience by:

1. a priority on raising awareness about insurance; legal regulation, capacity building and transparency;
2. integrating climate risk insurances into risk management strategies;
3. implementing the focus on poor and vulnerable populations as guiding principles;
4. reducing the costs of risk financing;
5. progressively ensuring that risk insurance reflects the principles of solidarity and the polluter pays principle;
6. promoting innovation through pilot projects;
7. securing ownership by vulnerable countries and civil society participation;
8. guaranteeing long-term financial support to InsuReslience;
9. ensuring that no support is provided to risk insurances that endanger food security,
10. drawing up guidelines that focus on poverty for cooperation with the private sector, and,
11. addressing the gaps in protection that cannot be closed through insurance.

These preconditions are essential to making insurance an effective tool to protect poor and vulnerable populations against the risks of climate change. This is an increasingly important discussion that highlights the importance of climate risk insurance and weighs the opportunities and risks it presents in the light of climate justice and the fight against poverty, and in the debates on vulnerability and resilience.

Sabine Minninger / Brot für die Welt

Further reading: “Protected against climate damage?”