Climate risk insurance
Climate change has an influence on the frequency and intensity of extreme weather events. Nearly everywhere in the world, an increase in extreme heat can be observed. Hurricanes are causing more damage because of increased rainfall and higher floods. Developing and emerging economies are particularly exposed, as climatic changes are posing a threat to development gains that had already been made.
Climate risk insurance enables people to better cope with the consequences of extreme weather events. The German Development Ministry is pursuing efforts for the comprehensive and active management of climate risks worldwide, especially through its involvement in the InsuResilience Global Partnership. In that connection, it supports cooperation between governments, the private sector, multilateral institutions, civil society organisations and research institutes.
Strengthening resilience to climate change
The negative consequences of climate change are hitting those particularly hard who are less able to recover from disasters economically and financially. The livelihoods and opportunities of these vulnerable groups are at risk, for instance when homes are destroyed, crops fail or livestock dies. This can result in illness, malnutrition and climate-related migration and displacement. As the regions concerned try to deal with the consequences of such developments, they may accumulate more debt and their economic development may suffer severe setbacks.
Sustainable development that strengthens vulnerable countries' and people's resilience against climate change can only be achieved through integrated climate risk management. This includes efforts to address financial damage caused by extreme weather events. Climate risk insurance can assist vulnerable people in instances in which other options for adapting to climate change have been exhausted. It covers damage that cannot be averted through risk prevention and reduction.
There is empirical evidence that the economy recovers much more quickly in countries with functioning insurance systems than in those that lack such systems. However, this is still a new approach in developing countries and emerging economies. According to figures from Munich Re (External link), the proportion of insured losses in these countries is well below 10 per cent, not counting the indirect economic consequences of (climate) disasters. In industrialised countries, by contrast, an estimated 50 per cent of losses are covered by relevant insurance.
Why is there a need for climate risk insurance?
Quick emergency relief and swift recovery. After a disaster, valuable time passes while the international community and aid organisations often have to work hard to raise money. It is not uncommon for weeks or even months to pass before the survivors receive assistance. More and more governments and humanitarian organisations are realising that climate risk insurance facilitates quick and effective action. Such insurance protects human lives, livelihoods, but also the national budget, from the impacts of climate change.
Risk financing on the basis of climate risk insurance is based on a preparedness approach. This makes it possible in an emergency to pay out money to survivors a short time after, or even before, they have incurred a loss. This saves people's lives and assets and protects development gains that had already been made. In other words, insurance schemes help to reduce poverty, secure debt sustainability, attain sustainable development and also reduce the economic push factors of migration.
Entitlement to compensation for losses. Climate risk insurance gives insurance holders the certainty that, if the predefined events occur, they will really receive assistance after a disaster, enabling them to become less dependent on assistance and making their own contributions towards securing their livelihoods. In the case of index-based drought insurance, for example, the disbursement of benefits is contingent on precipitation levels remaining below a specified limit.
German activities InsuResilience Global Partnership for Climate and Disaster Risk Finance and Insurance Solutions
The aim of the InsuResilience Global Partnership (External link) is to increase the resilience of the poorest and most vulnerable groups in developing countries and emerging economies against climate risks and disasters. The Partnership was launched by Germany, together with other partners, during Germany's 2017 G20 Presidency. The multi-stakeholder partnership now has more than 100 members from industrialised and developing countries, civil society, the private sector, international organisations and the research community. Germany is the biggest supporter of this key initiative.
The various programmes within the Partnership support pre-agreed schemes (such as climate risk insurance) which provide protection against the financial risks of climate impacts and disasters. Quick assistance and recovery protect the livelihoods of poor and vulnerable people against the consequences of climate-related events. Moreover, the Partnership supports the development of comprehensive climate and disaster risk strategies at the national and local levels in poor and vulnerable countries.
The Partnership has set itself an ambitious target in its Vision 2025 (External link): to provide coverage to 500 million of the world's poorest and most vulnerable people by 2025.
BMZ achievements in the field of climate risk insurance
In 2020, the BMZ shouldered premium payments (External link) for drought insurance under the African Risk Capacity (ARC) amounting to some 19.5 million euros as part of its Emergency COVID-19 Support Programme. As a result, up to 20 million poor people in Africa who are particularly vulnerable to crises will be reliably insured against drought damage for the 2020/21 agricultural season.
Since 2013, ARC drought insurance has paid out 65 million US dollars to the governments of Mauritania, Senegal, Malawi, Niger, Zimbabwe, Madagascar and Côte d'Ivoire and to humanitarian players such as the Start Network, assisting more than 3.2 million people in severe drought situations (as at December 2020).
Since its inception, the InsuResilience Global Partnership has already achieved a great deal. More than 1.1 billion euros have been pledged by the various donors so far to expand and develop insurance and financing approaches for climate and disaster risks. Germany is the largest supporter with around 800 million euros.
The funding is intended, among other things, to assist national and sub-national governments in developing comprehensive climate and disaster risk management strategies so as to improve their preparedness for the negative consequences of climate change.
In 2016, Germany joined forces with the UK, the United States, Japan, the Pacific island states and the World Bank to set up a new risk insurance facility, the Pacific Catastrophe Risk Assessment and Financing Initiative (PCRAFI). It offers insurance products to Pacific island governments to cover tropical cyclones, tsunamis and earthquakes. For example, following cyclone Gita in early 2018, PCRAFI paid out 3.5 million US dollars to Tonga just seven days after the disaster. In April 2020, another 4.5 million US dollars was paid out for emergency relief and reconstruction just a few days after cyclone Harold.
New implementation programmes
In order to provide larger-scale support for the development of insurance and finance solutions for vulnerable countries, Germany joined forces with the UK and the World Bank in 2018 to set up a new implementation programme, the Global Risk Financing Facility (GRiF). Another new programme is the InsuResilience Solutions Fund (ISF), which was launched jointly by the German government and KfW. While GRiF targets governments, the ISF puts a special focus on engaging and working with the private sector.
In the course of the development of new programmes, the Program Alliance was set up within the InsuResilience Global Partnership in order to ensure coordination of the various implementation efforts. Germany and the UK are represented as important donor countries. Thanks to their regular exchange within the Alliance, the various players are able to tailor their insurance and finance products even more closely to partner countries' needs and to support the introduction of new products in the market.
At the UN Climate Action Summit hosted by UN Secretary-General António Guterres in September 2019, the Partnership was highlighted as one of the key global resilience initiatives. The Partnership presented its Vision 2025 during the Summit, in which it made a commitment to place a focus on gender equality. Gender will be mainstreamed as a cross-cutting issue in all activities on insurance and finance solutions for climate and disaster risks.