Climate change and development Climate risk insurance
During its G7 Presidency, Germany has made a start on developing a Global Shield against Climate Risks. The Shield gathers activities in the field of climate risk finance and preparedness under one roof. As a result, people and authorities will be able to access the assistance that they urgently need when disaster strikes more easily and more quickly.
The Shield builds upon the InsuResilience Global Partnership, which works towards comprehensive and active climate risk management worldwide. The Partnership promotes cooperation among states, the private sector, multilateral institutions, civil society organisations and research institutes.
German activities InsuResilience Global Partnership
Expanding climate and disaster risk finance and insurance solutions
The aim of the InsuResilience Global Partnership (External link) is to increase the long-term resilience of the poorest and most vulnerable groups in developing countries and emerging economies against climate risks. The expansion of climate risk financing and insurance instruments is intended to enable governments, enterprises and households to respond more quickly and effectively to natural disasters, thus minimising potential resulting costs.
During Germany's G20 Presidency in 2017, it joined forces with the UK, Fiji, Ethiopia and the World Bank to launch the InsuResilience Global Partnership as a joint G20 and V20 initiative. The V20 (Vulnerable Twenty Group) is an alliance of the finance ministers of the 55 countries that are most vulnerable to climate change. The Partnership now has more than 120 members representing industrialised and developing countries, civil society, the private sector, international organisations and the scientific community (as of September 2022). 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: to provide coverage to 500 million of the world's poorest and most vulnerable people by 2025.
Currently, 24 programmes comprising over 300 projects are in progress under the umbrella of the InsuResilience Global Partnership in more than 100 countries. As a result, 150 million people had already gained coverage against climate risks in 2021. The Global Shield against Climate Risks builds on this experience, the existing structures and the close partnership with the V20. The Global Shield shall integrate the existing activities and make them more readily accessible, while mobilising additional finance at the same time. Cover against climate risks shall thus be made more systematic, better coordinated and more permanent compared to previous instruments. The aspiration is to provide coverage against climate risks for more poor and vulnerable people and countries in a more effective manner, closing their coverage gap permanently in a step-by-step process.
Further information about the Partnership:
German activities BMZ achievements in the field of climate risk insurance
The InsuResilience Global Partnership assists 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.
Germany continues to support existing programmes such as African Risk Capacity (ARC). By mid-2020, ARC drought insurance paid out 61 million US dollars to the governments of Mauritania, Senegal, Malawi, Niger and Côte d'Ivoire and to humanitarian players such as the Start Network, assisting more than 3.2 million people in severe drought situations.
What is climate risk financing?
Extreme weather events vary in terms of their intensity and frequency. In order to effectively address the resulting climate risks, mutually harmonised risk financing instruments are needed that cover different kinds of financial needs: direct and indirect climate risk insurance, guarantees, bonds, (reserve) funds, and loans and grants help survivors to recover quickly from disasters and to protect themselves better in the future.
Climate risk financing is most effective if it is part of a country's broader risk management strategy and if provision is made for it in the government's budget and credit lines. Each financing model should be identified on a case-by-case basis, taking into account local conditions and risk factors, so as to ensure the highest possible benefit for the people affected. The choice of the most efficient instrument is based on the risk in question. For example, reserve funds in the national budget are best suited for dealing with smaller, recurrent events, whereas extreme events are most effectively covered by insurance.
Reliance on holistic climate risk financing enables governments, humanitarian players and other organisations to quickly access funding after a disaster, reducing the strain on the budget and providing financial security and predictability. At the level of the government, it is vital to define in advance how the funding will be paid out after a disaster so that the poorest and most vulnerable groups will benefit quickly and secondary consequences will be minimised.
Advantages of risk financing and climate risk insurance
Insurance is best suited to cover medium to severe risks that occur less frequently (every 15 years or even more rarely). However, suitability may vary a great deal depending on the region. Risk assessments are needed in order to determine in greater detail how to appropriately use insurance and other risk financing instruments such as reserve funds. The use of such instruments has to be laid down in precise terms, adapted to local needs, in a comprehensive financing strategy that is part of climate and disaster risk management.
Incentives for preventive action and risk reduction measures. Drought insurance contracts are based on systematic risk assessments. If an insured party, such as a small farmer, takes action to reduce risks, for example by planting drought-resistant crops or building protective infrastructure, he or she can get a lower insurance premium. This enhances awareness of the development of adaptation measures and encourages risk management to improve disaster preparedness. Moreover, some regional risk pools (such as the African Risk Capacity) require that contingency plans are in place before a party can enter into an insurance contract. These contingency plans make sure that disbursed funds are used effectively.
Synergies between public and private efforts. Generally, insurance products and financial solutions mobilise private capital in many ways. For one thing, insurance products reduce the risk of financial loss, thus facilitating additional local investment and making more projects bankable. Secondly, insurance solutions and pools rely on (private) reinsurance capital, meaning that the requisite level of solvency (risk) capital is reduced significantly. And finally, insurance vehicles such as (structured) funds, bonds and facilities are able to mobilise large numbers of private investors, attracting them through the diversification options available.
This means that, within the field of development policy, climate risk insurance is a good example of how to develop products for poor and vulnerable people in a joint effort by the public and private sectors. Insurance companies in particular are able to offer their risk capital and their expertise on risk assessments and insurance products, whereas the public sector is able to provide financial support but also has to create the necessary political and legal environment. The development of local insurance markets is also part of this field.
Risk assessment tools are a key prerequisite for insurance products. In the developing world, data availability is limited, and data quality is a factor that leads to increased uncertainty, which may result in higher premiums. Joint efforts are under way to improve the global availability of data and offer global risk models.
Greater budget resilience to climate risks. Climate-related disasters can put significant strain on government budgets as public resources have to be mobilised for emergency relief and subsequent reconstruction. This can lead to the reallocation of funds which otherwise would have gone towards the country's long-term development. Moreover, countries often have to go into debt at very unfavourable terms immediately after a disaster, with enormous consequences for the debt levels of countries that were poor to begin with.
Predefined risk finance solutions provide predictability for vulnerable countries with regard to financially coping with climate risks. Examples of such ways of responding to climate shocks and natural disasters include the establishment of reserves in the national budget; contingent loans that can be activated after a natural disaster at predefined terms; and insurance solutions which provide quick liquidity without forcing the country to enter into debt, thus enabling preparedness for extreme climate developments.
As at: 20/09/2022