Christoph Bals

Insuring the uninsurable: design options for a climate change funding mechanism

Abstract There is growing interest in the potential role that insurance-related instruments can play in the implementation of climate-change adaptation, particularly for the areas most affected and least able to absorb the negative effects of extreme weather events. Sufficient climate adaptation efforts will require funding at two or three orders of magnitude above the current levels. For rapid-onset climate events, current ex-post disaster finance does not offer strong incentives for risk reduction. This article suggests that insurance-related instruments can be a tool to help in adapting to and ameliorating the negative impacts of climate change for those countries likely to be most negatively affected by climate change. One possibility for an insurance-related mechanism would be a scheme that allows countries (or regions in large developing countries) most affected by climate change to purchase insurance-like coverage for defined climate-related risks. This article refers to such a scheme as the Climate Change Finance Mechanism (CCFM). The attempt to design and implement such an insurance-related mechanism requires careful consideration of several issues, including technical and political challenges. We outline a way to indemnify countries that are likely to suffer most from global climate change and consider what the key design elements would be.

Climate Insurance as Part of a Post-Kyoto Adaptation Strategy

The Bali Action Plan specifically calls for ‘consideration of risk sharing and transfer mechanisms, such as insurance’ as a means to address loss and damage in developing countries particularly vulnerable to climate change. This paper examines the case for insurance mechanisms by addressing two fundamental questions: whether climate insurance programs should be part of an international adaptation strategy, and if so, how? Our discussion suggests that there is a promising and legitimate role for insurance mechanisms in an adaptation regime. We draw this conclusion in full recognition that insurance is not appropriate in all contexts, and that it must be viewed as only part of a comprehensive risk-management program. The challenge then becomes how developed countries can provide support to promote sustainable, affordable and incentive-compatible insurance programs for vulnerable households, smallto medium-size enterprises (SMEs) and governments, without crowding out private sector involvement. In meeting this challenge, this paper concludes by presenting a proposal for a two-pillar (prevention and insurance) international riskmanagement strategy, as part of an adaptation regime – a proposal that has recently been put forward by the Munich Climate Insurance Initiative (MCII).