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Climate insurance – Germany aims for an initiative within the G7

Climate insurance is urgently needed to protect poor countries and population groups against weather-related disasters. Click here for the 2015 Global Climate Risk Index. Source: Germanwatch

Climate change is increasing the frequency and intensity of weather-related natural disasters. This in turn increasingly puts the onus onto rich countries – as the parties mainly responsible for causing climate change – to take concrete action to protect the climate and aid affected countries in dealing with damages arising from climate change. For some time now, parties to the UN climate talks and other forums have been calling for automatic systems designed to provide security and insure vulnerable countries and populations against growing weather risks.

Germany is now working towards a climate insurance initiative within the framework of the G7. Its objective: to put additional protection against certain climate risks in place over the next five years for 400 million people who live on less than two dollars a day.  Coverage is to be provided partly through direct approaches with specific products for people affected, as well as indirect approaches in which governments can take out insurance for the provision of emergency measures for vulnerable groups. Initial details of the initiative were revealed by Development Minister Müller at an event in Berlin on May 7, 2015 and discussed with experts and representatives of civil society.

Climate insurance – examples?

Interesting examples that can be classified as “climate insurance” have arisen in recent years. Horn of Africa Risk Transfer for Adaptation (HARITA) lets Ethiopian farmers insure themselves against drought, thereby improving their long-term income security and livelihoods. The premium can be paid either in cash or through “work-for-insurance”. Farmers selecting the latter option take part in community projects to reduce risks, for example by improving soil management or irrigation systems.

African Risk Capacity (ARC), an initiative supported by African countries as well as major donors, including Germany, is another example. During past droughts in African countries, it was often not possible to mobilize money in a timely manner or in adequate amounts to respond effectively to famines. In future, the new insurance scheme will pay out funds earmarked for emergency measures according to previously negotiated plans when needed.

A signal from Elmau to Paris

At the event in early May in Berlin, representatives of the German government made it clear that a G7 climate insurance initiative should also be understood as a confidence-building measure for the climate summit in Paris. This can only succeed, however, if the announced poverty focus through targeted protective instruments such as HARITA or ARC is realized in Elmau. Insurance on a purely private basis would not be useful, as people with an income of less than two dollars a day could not afford the premiums. The objective now is to anchor the initiative with such a focus in the communique of the G7 summit in Elmau. The exact implementation of the initiative must then be worked out in cooperation with representatives of the affected states and other relevant actors. In any case, it would be important that monitoring be put in place to ensure that the insurance approaches actually benefit the vulnerable population groups.

Questions about climate finance

Development Minister Müller announced that Germany would support the initiative with €150 million from the budget of the Federal Ministry for Economic Cooperation and Development (BMZ) in 2015 and 2016. It is not yet clear, however, how the funding would be implemented; BMZ representatives were non-committal on this topic.

Further questions arise with regard to the involvement of the private sector. Various parties have highlighted the leveraging of private funds, for example. Little analytical groundwork has been done to date, however, as to whether and to what degree the participation of the insurance and reinsurance industry can be deemed a private climate finance measure. Furthermore, the risk capital made available by private companies for reinsurance must not be counted as mobilized money under any circumstances. There are thus still a number of open issues that will determine the quality of the initiative, and consequently its impact as a signal for Paris.

Sönke Kreft, Germanwatch