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Insurance as a Risk Management Tool for Climate Change

This working paper aims to clarify the issues around insurance mechanisms designed to improve resilience among the poor to climate change impacts. We hope the analysis will inform the ongoing insurance discussions at the UNFCCC in the build up to the Conference of Parties in Copenhagen in December 2009.

Executive Summary

Climate change is projected to exacerbate the intensity, and frequency, of weather-related hazards such as storms and droughts (IPCC, 2007). These climatic changes are likely to intensify the growth in economic damages from extreme weather events seen over the past two decades (Munich Re Group 2008) and suffered primarily by developing countries least able to cope with them. Absent effective risk reduction strategies and activities, climate-related disasters could severely undermine the ability of regions and nations to meet basic development goals.

In this context, well-designed disaster risk management strategies are crucial adaptation investments. Such strategies comprise an array of interventions to mitigate the risk of damage, including early warning systems, local village-level responses, and structural interventions. They also include insurance.

By allowing individual countries, companies or individuals to transfer risk of future losses to an insurance provider, insurance can protect policy-holders from large-scale economic losses due to weather disasters, can provide financial liquidity immediately after a loss, and can help build resilience to economic shocks ( see Box 1). If implemented well, insurance offers a real opportunity to help the poor and vulnerable become resilient to the impacts of climate change by allowing markets to bear some of the costs of adapting to these events.

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