Climate Risk Management and Risk Transfer:
Utilising insurance industry tools to underpin costeffective adaptation
Simon Young
CEO, Caribbean Risk Managers Ltd
Facility Supervisor, Caribbean Catastrophe
Risk Insurance Facility (CCRIF)
Main themes
• Sovereign risk pools can play a key role in
climate change adaptation
• Risk management tools from the re/insurance
industry need to be deployed to develop costeffective adaptation plans
• Public-private partnerships nurture capacity
development in the public sector and
engagement with the private sector
• Africa Risk Capacity: transitioning from
managing crises to managing risks
1. Sovereign risk pools can play a key role in
climate change adaptation
Case Study - CCRIF
• CCRIF is the first multi-national catastrophe risk pool,
covering tropical cyclone and earthquake ‘liquidity’ risk
for 16 nations
• Also first pool to utilise parametric (index-based)
insurance, enabling:
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Quick payouts (14 days) and flexible coverage
Transparency and fairness in pricing
Certainty in loss and payout calculation
Works with, not against, risk reduction
• CCRIF is public-private partnership – for-profit
insurance company, 100% owned by a beneficial trust
for the member Governments
• Partners with private sector also in bringing new risks
to the international markets
CCRIF works
• CCRIF issued 29 annual policies to 16 CARICOM countries in
2010 (fourth policy year for all countries)
• CCRIF initially raised capital to cover claims and operating costs
from donors (~$65M) and from its participants (~$22M via a
‘Membership Fee’). Countries pay annual premium of ~$21M
• Cost of coverage, due to pooling and capitalisation, is better
than halved compared to individual country open market pricing
(if it were available) due to diversification and capitalisation
• Payouts so far total $20M to 5 different countries
• Caribbean nations see the benefits of pooling with their
neighbours (mutual security), while also not wishing to subsidise
those same neighbours (enabled through risk-based pricing)
• Desire now to expand CCRIF – new perils and more coverage
2. Using risk management tools from the
re/insurance industry to help access adaptation funds
• Making the ‘business case’ for adaptation is critical in
mobilising both committed public-sector funds and
private-sector partnerships
• Quantitative analysis required to identify which tools
(e.g. risk reduction, risk transfer, etc) should be
implemented to what extent and in which order
• The re/insurance industry (and thus technical capacity
within a regional risk pool) uses these tools daily to
price risk and reward – both based on history and
based on future climate change projections
• These tools must be deployed to facilitate progress on
adaptation action in the developing world (where
adapting to the increasing climate crisis is vital to
sustainable development)
Example – Caribbean Economics of
Climate Adaptation study
Great variation in best adaptation
strategy
3. PPPs nurture capacity development in the public
sector and engagement with the private sector
• The CCRIF experience has highlighted the catalytic
effect of developing risk management capacity and a
funded pool
• CCRIF is supporting developments of index-based
insurance solutions in agriculture and to support
micro-finance development
• Farmers can hedge their climate risk, enabling them to
invest in better seeds or technology
• Private-sector lenders can hedge the exposure of their
portfolio to climate risks
• Credit is freed up to those with no collateral, if main
risk (climate) is insured
• All of these issues are becoming more critical to
sustainable development in the changing climate
4. Africa Risk Capacity: transitioning from
managing crises to managing risks
• African Union has endorsed implementation of a
three-pronged approach developed by WFP to
enabling more efficient climate risk management
in its member States:
– African Risk Capacity: Pan-African disaster risk
pool: Efficient weather-related food security risk
management through risk pooling and sharing across
regions
– Africa RiskView Software Platform: A financial
management tool for decision makers
– Climate Change Stress Tests: Stressing today’s risk
by future climate scenarios
Pan-African disaster risk pool
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Establishing an African-owned contingency fund for sovereign risk would provide
participating governments with immediate cash in the event of an extreme
drought, flood or cyclone
It is unlikely that extreme weather events will happen simultaneously in every
country and in all regions on both sides of the equator
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The AU is pursuing multiple strategies towards food security, climate change
resilience and disaster risk reduction. The risk pool provides an elegant way to
link the three in a cost-efficient and innovative manner
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Early modelling results show climatic diversity across Africa creates a powerful portfolio
affect of 50%, reducing the contingency funding requirement for drought by half (similar
to CCRIF)
President Mutharika’s vision for a food-secure Africa in 5 years: The Risk Pool is
outlined as part of the AUC strategy to support the President’s vision as a system to
protect investments in agricultural productivity
CAADP Pillar III: Pillar III outlines the need for enhanced risk management and
improved emergency response. Identifying, analysing, quantifying and financing risk are
prerequisites for achievement of these objectives
AU Climate Change Adaptation Strategy: Ahead of CoP-16, the AUC is developing a
continental strategy of which the risk pool will be part. Additionally, linkages are being
explored with ClimDev Africa for building national capacities to use climate information
effectively for decision-making
Many experiences from Caribbean can be used to assist in pool development and
implementation
Africa RiskView: Quantifying and
monitoring risk
• Underpinning the risk pool is
knowledge about how to manage risk,
utilise ‘best-of-breed’ information and
communication technology and well as
earth observation tools
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Hazard: Weather indicators
Vulnerability: Food security profiles
Exposure: response costs per person
• Africa RiskView is an open software
platform that translates satellite-based
rainfall information into near real-time
needs and costs estimates so that
decision makers can take action:
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Before a season begins, Africa RiskView estimates average
and worst-case costs
During a season it can monitor costs as the season
progresses for every first-level administrative district
Africa Risk Capacity – the way forward
• Exploring integration with ClimDev
• Enhanced engagement with interested Member States
– Technical assistance and capacity building to governments
leading to a critically aware informed decision to participate in a
risk pool. This includes:
• Refinement of underlying model with countries and their partners
• Adapting each to the country’s weather risk profile, capacity and
national disaster risk management plans and early warning processes
• Development of defined contingency plans
• Alignment with other country-level institutional processes
• Pursuit of a formal mandate to establish the ARC by Heads
of State at the January 2011 Summit
• Negotiated participation of a group of national
Governments in an initial risk pool for the June 2011- June
2012 agricultural risk season
Contact
Fatima Kassam: fatima.kassam@wfp.org
Addis Ababa Tel. +251 (0)911 502267