There is undoubtedly a great deal of interest in insurance right now – it seems to be the most dynamic discussion area within Loss and Damage. But is this enthusiasm well-founded? Does insurance:
- Provide major funding for disaster losses? Well, not really. Considering the 8 payouts from regional risk pools to least developed countries, the percentage of humanitarian needs that they met were 0.9%, 1.3%, 2%, 2.2%, 7%, 10%, 16% and 28%. Until all payouts are at the higher level, this cannot really be seen as a game changer.
- Provide funding faster than aid? Sometimes yes, especially for droughts, where humanitarian aid is typically late. But often some humanitarian aid arrives before cyclones hit, which enables countries to prepare, and in some cases (such as Hurricane Matthew in Haiti and Cyclone Pam in Vanuatu), by the time the payout was received, a greater quantity of aid had been given by humanitarian donors.
- Provide certainty of funding post-disaster? In many instances it does, but basis risk – which remains a real problem for all index-based schemes – undermines this. As experienced by the Solomon Islands which lost 9.2% of GDP but received no payout because they experienced a tropical depression rather than a cyclone. In Jamaica where the model estimated much lower losses and hence did not make a payout. Malawi’s funding was nine months late after problems with the model. And so on.
- Apply to all climate change events? Insurance is inherently expensive, so can only be cost-effective for relatively infrequent disasters (even the World Bank admits that ‘catastrophe risk pools cannot make insurance cheap’). It also cannot cover the slow-onset impacts of climate change like sea-level rise and ocean acidification, which are certainties not risks.
So while insurance has a role to play, it is a relatively narrow one. Insurance is not a quick fix for loss and damage and many other solutions must be actively sought and championed.
ECO notes the lack of serious conversation about who is going to pay the premiums. Insurance is not free money. It is sobering to note that Haiti’s current maximum payout for cyclones under CCRIF is US$35 million. If they were increase the pay-out to what the World Bank suggests would be ‘more adequate’, $328m, annual premiums would increase to $15m — any offers to pick up the bill?