Tuesday, June 14, 2011

Risk insurance in the Asia Pacific Region: How the processes under UNFCCC can help?

Risk insurance can provide an effective means of catastrophic risk reduction and climate change adaptation in the developing countries. The ongoing discussions by the Conference of Parties to the United Nations Framework Convention on Climate Change are putting substantial efforts to promote climate change adaptation through international cooperation in the form of providing additional finances and technologies including proposals to promote a global or regional climate risk insurance facility. Case studies from within and outside the Asia-Pacific region provide valuable lessons which could be used for promoting risk insurance by the future climate regime (post-Kyoto Protocol beyond 2012). The analysis of these risk insurance proposals to the Convention and comparison of what they intend to achieve with that of the existing issues within the risk insurance sector in the developing Asia-Pacific indicate that these proposals address some of the major issues that are limiting the spread of risk insurance. However, no single proposal is comprehensive enough to address all the issues and all the proposals lack details in terms of how they can achieve what they intend to achieve. There is a need for the proposals to the Convention to give more thought on how they address the issues such as high base risks, lack of historical data required for designing risk insurance systems, limited awareness in the utility of insurance instruments, keeping the premium prices within affordable levels, encouraging the role of private sector, enabling greater access to reinsurers, and instituting enabling policies to create a proactive risk mitigation environment with an eye on sustainability. A convergence approach wherein the proposals incorporate lessons from on-the-ground experiences from regional, national and local initiatives could provide an effective model for promoting the risk insurance.

.........Not a full article......

The natural and man-made hazards have historically undermined the developmental gains across the world. The Asia-Pacific region is one of the most vulnerable regions to a range of primary hydro-meteorological natural hazards such as storms, floods, and droughts. The data from EM-DAT suggest that the number of hydro-meteorological natural disasters has been increasing at an average annual rate of 217% over the past 40 years in the Asia-Pacific region (EM-DAT, 2010).

 In the region, the total human lives lost due to disasters were 3729 with estimated damage costs of 11.54 billion USD in 2009. Similar increase in the number of catastrophic natural disasters and related losses was also reported by Munich Re according to which both the insured and uninsured losses have been increasing over the years.

Climate change has brought an additional dimension to disaster risks in the Asia-Pacific region as it is projected to exacerbate the intensity and magnitude of various natural hazards such as storms, high-intensity rainfall events, heat waves, floods and droughts. Especially, the projections suggest high probability for an increasing trend in the high-intensity and low probability events (IPCC, 2007; Kunreuther and Michel-Kerjan, 2007). These increased catastrophic risks will further undermine the developmental gains already made in the Asia-Pacific region.

Taking agricultural sector as an example, being one of the highly vulnerable sectors in the region, farming communities are in particular at greater risk due to weather related crop failures. Often, farmers borrow loans from local banks prior to the cropping season. However, farmers, banks, and governments are put at higher financial risk due to increasing frequency of crop failures, and often governments are forced to waive the loans. In case of India, estimates suggest that the government waived off crop loans worth 16 billion USD in 2008 alone (Srinivasan, 2008). Similar incidences are observed across other countries in the Asia-Pacific region (Sompo Japan Insurance Inc., 2010).

Hence, in order to address additional risks brought by the impact of climate change, there is a need to relook at and reframe the current risk reduction strategies especially in terms of development and utilization of risk spreading instruments within the Asia-Pacific region. This working paper reviews the current status of risk insurance and identifies emerging issues and experiences. These issues and experiences are applied to various risk insurance proposals made by the Conference of Parties (COP) to the UNFCCC for assessing the extent to which they consider experiences to address issues for promoting the risk insurance.

The concept of risk transfer or risk spreading entails that the individual (the insured) risks be reduced by spreading or transferring the risks from the insured to the insurance provider (the insurer) since the insurer is in a stronger financial position than the insured (Njegomir and Maksimovic, 2009). The insurance provider is able to insure the risks of the insured largely due to the fact that the insurer obtains premiums from a large number of insured who are at different levels of risks by making sure that the total amount of premiums collected are far greater than or exceeds the underwriting of risks (termed as law of large numbers). Insurance agencies in turn underwrite some of these risks with reinsurance firms that provides needed buffer against catastrophic event related losses. In sum, the risk insurance scheme functions as part of the social security net through risk transfer mechanism and thereby contribute to build the resilience of vulnerable societies.

Risk transfer has been widely advocated as one of the best means of risk mitigation across the world (Arnold, 2008; Siamwalla and Valdes, 1986; Swiss Re, 2010) due to several advantages it provides:
·         Promotes emphasis on risk mitigation compared to the current response-driven mechanisms.
·         Provides a cost-effective way of coping financial impacts of climate and weather induced hazard events.
·         Supports the climate change adaptation by covering the residual risks uncovered by the other risk reduction mechanisms.
·         Stabilizes rural incomes and hence reduce the adverse effects on income fluctuation and socio-economic development.
·         Provides opportunities for public-private partnerships.
·         Reduced burden on government resources for post-disaster relief and reconstruction.
·         Helps communities and individuals to quickly renew and restore the livelihood activity.
·         Depending on the way the insurance is designed, the insurance mechanism can address a wide variety of risks emanating from climatic and non-climatic sources.

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