Adaptation to Climate Change: Climate Insurance Solutions for Developing Countries
Peter Hoeppe
Geo Risks Research, Munich Re, Munich
In recent years there have been more and more indications that climatic change is already influencing
the frequency and intensity of natural catastrophes. According to the World Meteorological
Organisation (WMO), the last six years (2001 to 2006) were among the seven warmest recorded
worldwide since 1861. A study performed by MIT and published by K. Emanuel shows that, since the
1970s, major tropical storms both in the Atlantic and the Pacific region have increased in duration and
intensity by about 50 percent.1 Due to anthropogenic global warming the sea surface temperatures
have increased already in all major ocean basins by 0.5°C 2.
The year 2005 set a record for hurricanes in the North Atlantic: never before since records have been
kept (1850) have so many named tropical storms 27 (old record 21) and hurricanes 15 (old record 12)
developed in one season. In just one season the strongest (Wilma), fourth strongest (Rita) and sixth
strongest (Katrina) hurricane have been recorded.
From the NatCatSERVICE database of Munich Re with more than 25,000 natural disasters
documented, we learn that the frequencies of world wide large natural catastrophes have tripled since
1950. Currently the frequency of all natural loss events has increased just during the last 25 years by a
factor of 2.5 for floods, a factor of 2 for windstorms and a factor of 4 for other weather related events
like heat waves, droughts, and forest fires. In contrast the frequency of loss events from geophysically
caused perils like earthquakes, tsunamis and volcano eruptions has risen only slightly. The latter small
increases most probably are due to socio-economic factors like more people living in risk prone areas.
The difference between the increases in loss event originating in the atmosphere versus such
originating in the earth points to changes in the hazard conditions in respect to extreme weather and
thus to changes in the atmosphere. Global warming is the most dominant atmospheric change. There
is also more and more evidence from scientific studies that there is a causal link between global
warming and increasing extreme weather events.
If the scientific global climate models are correct, the present problems will be magnified in the near
future. These models suggest that we should expect:
 increase in the frequency and severity of heat waves, droughts, bush fires, tropical and extra
tropical cyclones, tornados, hailstorms, floods and storm surges in many parts of the world
 new exposures (like hurricanes in the South Atlantic or Northeast Atlantic)
 more extensive damage, economic, social, and environmental impacts from weather-related
disasters
The 4th assessment report of IPCC published recently backs such projections.
Insurance-related mechanisms can be an effective part of adaptation strategies as already indicated in
article 4.8 of the framework convention and article 3.14 of the Kyoto Protocol. They can reduce the
financial risks of an increasing number of natural catastrophes.
As the frequency and scope of losses due to major weather related natural catastrophes will continue
to increase, there is a growing need to explore options for managing and transferring risks associated
with it. The mounting and highly unpredictable losses from natural disasters make traditional disaster
funding approaches obsolete creating problems to finance economic recovery from the budget
revenues or special government disaster funds of the countries affected. This is particularly the case in
developing countries where limited tax bases, high indebtedness prevent them from relying on debt
financing of reconstruction efforts. Hurricane Ivan in 2004 e.g. has caused losses in Grenada as high
as 200% of the country’s annual GDP. Statistics of OECD and the World Bank show that despite a
common belief, disaster-related external donor aid to developing countries accounts for only a small
fraction of the total economic loss, caused by catastrophic events.
Developing countries are most vulnerable to climate change effects, but have not contributed to the
causes of global warming as they do not emit relevant amounts of greenhouse gases and have not
dome so in the past. In other words, they are exposed to an increasing risk others have caused.
1
2
EMANUEL, K. (2005): Increasing destructiveness of tropical cyclones over the past 30 years. Nature 436, 686-688.
(Barnett et al., Science 2005; Santer et al., PNAS, Sept. 2006)
Another problem for developing countries besides not having enough revenue to cope with material
losses, is the lack of a functioning insurance market to transfer at least part of the risk and in many
places also a lack of an insurance tradition and understanding of the mechanisms. However, even if
there were an insurance market the people in these countries would not have the money to pay for risk
adequate insurance premium.
This has been the motivation to found the Munich Climate Insurance Initiative (MCII) in 2005 in Munich
as a joint initiative of representatives from IIASA, Germanwatch, Munich Re, Munich Re Foundation,
Potsdam Institute for Climate Impact Research (PIK), UNFCCC, United Nations University Institute for
Environment and Human Security (UNU-EHS), World Bank, and independent experts. We think that
there is a responsibility of the industrialized countries to support insurance related systems for the
increasing damages and losses in developing countries.
MCII strives to fulfil four objectives:
1. Develop insurance-related solutions to help manage the impacts of climate change,
seeking to combine the resources and expertise of the public and private sectors.
2. Conduct and support pilot projects for the application of insurance-related solutions in
partnerships and through existing organisations and programmes. Identify success stories and
disseminate information on the factors that are necessary to design and implement effective
climate insurance-related mechanisms. These activities will focus on developing countries but
at the same time will involve evaluating insurance solutions that have been used in developing
countries.
3. Promote insurance-related approaches in cooperation with other organisations and
initiatives within existing frameworks such as the United Nations system, international
financial institutions, international donors, and the private sector.
4. Identify and promote loss reduction measures in connection with climate-related events.
Insurance in its classical sense only can cover unforeseeable sudden events, like landfalls of
hurricanes or floods caused by heavy precipitation events, but not foreseeable long term changes like
sea level rise. For the latter other compensation mechanisms must be set in place.
As the developing countries cannot afford to pay premium for such an insurance themselves, and in
respect to the aspect of causality they also should not have to do so, one solution could be that the
industrialized countries pay at least part of these premiums by contributing money into a pool
according to their current or accumulated CO2-emissions.
Precondition of the development of a climate change insurance system for developing countries is the
quantification of the increases in weather related hazards on a regional basis and the respective
proportion of the attribution to global warming. The latter currently still is an almost unsolvable task,
probabilistic approaches could help to get at least some rough estimates. Probably the attribution
assessment has to be based on a consensus between the premium payers and the insurance
beneficiaries. Pricing and definition of indemnification plans of such a climate insurance system could
be elaborated by re-insurance experts.
In order to keep a pure climate change insurance system manageable, it should only cover large loss
events (threshold to be defined), but both sovereign as well as individual losses should be included.
Being based on a compensatory scheme, the system cannot cover the whole amount of losses due to
weather related disasters as only part (currently certainly relatively small, but probably increasing) can
be attributed to global warming. There are two ways to limit indemnification to these additional losses:
- to indemnify all losses but only of real extreme events (beyond a certain percentile of the historic
distribution) or
- to only indemnify a certain percentage (representing the average global warming contribution) of the
losses
Indemnification should be linked to prior implementation of adaptation measures having been defined
by the authority managing the climate insurance pool. A certain percentage, e.g up to one third, of the
money out of the insurance pool should be assigned to such measures. Recent scientific results show,
that every dollar invested in prevention pays back many fold in loss reductions.