Every year, an estimated 26 million people are pushed into poverty by natural disasters which cause an average of $300 billion in economic losses.
Quick-disbursing financial protection instruments, such as contingent credit and insurance, can reduce humanitarian impacts and save money by enabling rapid crisis response and relief efforts. In Ethiopia, for example, every $1 secured ahead of time for early drought response can save up to $5 in future costs.
Over the past 10 years, 26 countries in three regions—Africa, the Pacific, and the Caribbean and Central America—have joined sovereign catastrophe risk pools.
What is climate risk insurance?
Climate risk insurance is a type of insurance designed to mitigate the financial and other risk associated with climate change, especially phenomena like extreme weather.
- Insurance solutions can help bolster early action in the face of a disaster, and speed up recovery to restore livelihoods and rebuild critical infrastructure so that people, communities and economies can rebound.
- Climate risk insurance can help protect individuals, small businesses or entire countries from permanent damage caused by the impact of extreme weather events.
- Allows countries which are affected by climate change to become more independent; rather than waiting for months, or even longer for international aid to arrive.
- High-premiums in high risk areas experiencing increased climate threats, would discourage settlement in those areas.
Global example: In 2015, for example, thanks to the insurance policy it purchased through the Pacific Catastrophe Risk Assessment and Financing Initiative (PCRAFI), another World Bank-supported risk finance instrument, Vanuatu received $2 million to support recovery just seven days after cyclone Pam devastated the country. While it may not seem like much, the payout was eight times larger than the government’s emergency budget
- Critics of the insurance, say that such insurance places the bulk of the economic burden on communities responsible for the least amount of carbon emissions.
- For low-income countries, these insurance programmes can be expensive due to the high start-up costs and infrastructure requirements for the data collection.
- A considerable problem on a micro-level is that weather-related disasters usually affect whole regions or communities at the same time, resulting in a large number of claims simultaneously.
- No one size fits all approach: Localized assessments are imperative in order to understand the needs of vulnerable communities and identify how they can be best prepared in the event of a shock like a natural disaster.
- Climate risk insurance is no stand-alone solution: It must also always be closely linked with preventive risk management strategies, ensuring losses and damages caused by a natural disaster are kept to a minimum.
- Affordability: To make insurance affordable, the product can be partly – or fully – subsidized by governments or other donors. Regional risk pools can be created.
Transparency about how money is paid out, collaboration with organizations that have deep roots in the communities, alongside ensuring the participation and inclusion of women must be focussed.