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Countdown to Copenhagen: Paying the Premium - Options for the UNFCCC on Insurance in Copenhagen

Heather McGray — Wed, 04 Nov 2009 12:17:19 -0500

WRI examines current insurance proposals under discussion in the UNFCCC and considers options for a global agreement in promoting insurance as a climate change solution.

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The last several decades have seen growth around the world in economic damages from extreme weather events. Most of these losses are attributable to global population growth, the greater concentration of people and economic value in urban areas, and the worldwide migration of populations and industries into areas like coastal regions, which are particularly exposed to natural hazards. However, the increasing severity of climate forces has also contributed to this rising trend. Poor people and poor countries – those least able to cope with such damages – are likely to suffer disproportionately as these trends intensify under a changing climate.

Effective adaptation to climate change will require risk management strategies that can reach vulnerable people in the developing world. Insurance – a financial mechanism through which a policy-holder pays a premium to transfer the risk of future losses to an insurance provider — could be an important component of these strategies. But to provide the adaptation benefits that vulnerable people need, insurance schemes must be designed carefully.

Insuring Against Climate Change: A Challenge for Public and Private Decision-makers

As the climate changes and more people experience weather extremes, the insurance industry will be called upon to provide products and services to a large new set of customers. At the same time, the current supply of insurance could be negatively affected if insurers are unable (or unwilling) to cover climate-related losses under changing risk profiles. Insurance providers will have to develop innovative products and delivery systems if they are to expand coverage to the poor and vulnerable while simultaneously covering growing weather-related losses among those who already have access to insurance.

Private insurers alone are unlikely to succeed in this dual challenge of expanding and deepening insurance coverage in response to climate change. For this reason, a growing number of public entities – including the Parties to the United Nations Framework Convention on Climate Change (UNFCCC) – are considering their own role in helping to make insurance an effective adaptation option.

How Can Insurance Help in a Changing Climate?

Insurance is a form of ex-ante preparedness for economic losses and can help build resilience to shocks such as storms, floods, or drought. If designed and operated well, insurance can provide immediate financial relief when a climate hazard strikes, providing several resilience benefits that are becoming increasingly important as the climate changes:

At the household or business level, insurance can help prevent an extreme climatic event from leading to long-term reduction in assets. This helps to prevent a household from falling into a poverty trap, and enables a business to continue to grow.
At a government level, insurance can help prevent extended gaps in government services after an extreme event, and can speed reconstruction of roads, energy systems, and other important infrastructure. Doing so can help, broadly, to maintain economic, social, and political stability.

Parameterized insurance, where insurance payouts are tied to a physical parameter (or an index) like rainfall – rather than to actual losses – can be especially effective in addressing large weather-induced losses. Parameterization reduces the administrative costs involved in calculating insurance benefits, and speeds delivery of payouts to clients. It is also an important design element in insurance products for small farmers and other low-income consumers. Typical loss-based insurance products rarely reach these customers, due to the high transaction costs involved in providing a large number of very small insurance policies.

Types of Insurance for Negotiators to Consider

The adaptation stream of the post-Bali negotiations has seen extensive discussion of whether and how to address insurance through the UNFCCC. Types of insurance that have been discussed include:

Post-catastrophe Resource Fund: The global community pays into a fund that directly supports the governments of vulnerable countries in contending with large-scale catastrophic losses caused by climate change. This is not true insurance, as there is no risk-based premium pricing. Solidarity funds (like the EU solidarity fund for disasters) and the proposed compensation mechanism both would function this way.

Subsidized Global Risk Pool: The international community establishes a global risk pool and pays the premiums on behalf of vulnerable countries to insure them against the large-scale catastrophic losses related from climate change.

Sovereign Risk Pool: Vulnerable country governments themselves share the risks of weather-related catastrophic events by paying into regional or global sovereign risk pools. (The Caribbean Catastrophic Risk Insurance Facility is an example of this type of risk pool.)

Commercial Insurance: Individuals and companies purchase private insurance to cover extreme weather and climate change related risks.

Micro-insurance: Poor and vulnerable individuals purchase specially designed insurance products that cover small-scale household- level losses due to weather extremes.

Insurance Proposals Under Discussion

Several proposals have been made regarding possible insurance programs in the UNFCCC:

AOSIS

The Alliance of Small Island States (AOSIS) has actively called for the Copenhagen agreement to include insurance. They have submitted a detailed proposal for creating a new global insurance mechanism that would include “windows” for increasing insurance coverage for climate impacts and for supporting countries in promoting commercial and micro-insurance.
AOSIS recognizes that insurance can have limits. Beyond insuring for weather related damages, they ask for compensation and rehabilitation funding to address catastrophic climate losses that insurance will not be able to cover, such as the inundation of entire island nations.

MCII

A consortium of organizations called the Munich Climate Insurance Initiative (MCII), which includes private insurance companies, NGOs and universities, has also submitted a detailed proposal for a UNFCCC-led insurance program. Instead of asking for compensation, MCII imagines a multilayered insurance system with a subsidized global risk pool that pays out to affected countries if they are hit. Annex 1 countries would be expected to put money into such a pool.
Like AOSIS, the MCII proposal includes a “pillar” addressing commercial and micro-insurance.

Risk Reduction Proposals

Parties are also exploring ways through which insurance can be integrated into larger risk reduction and management strategies that are vital to adapt to a changing climate. The AOSIS proposal leaves the nature of non-insurance risk reduction activities at the discretion of participating Parties; MCII makes risk reduction a condition of access to the insurance mechanism.
Some Parties (mostly Annex I countries) see insurance as just one element of risk reduction and have not supported the creation of a special UNFCCC insurance mechanism.

The Next Step on Insurance: Deciding What Role the UNFCCC Should Play

The costs of insurance programs under discussion have only been roughly estimated, and the overall pool of adaptation finance available through the post-2012 regime remains unknown. The initial level of finance may constrain options for insurance program design, and may force some difficult trade-offs between insurance programs and other adaptation activities that could be supported through the UNFCCC. This situation calls for concrete and specific discussions about options for the roles the UNFCCC should play in the promotion and provision of insurance, and for the institutional arrangements needed to support each option.

The role of a global institution like the UNFCCC in supporting the provision of insurance may vary depending upon:

which type(s) of insurance Parties prioritize
the scale of finance available
Parties’ decisions about what roles are appropriate and feasible
Parties’ expectations regarding the roles of the private sector and national governments

Moving Forward on Climate Adaptation in South Africa

Preeti Verma — Fri, 04 Sep 2009 10:31:44 -0400

To be successful, adaptation efforts must dovetail with human development needs such as poverty reduction and employment.

South Africa’s winter season is turning out to be one of the stormiest and wettest on record. The recent floods in Cape Town were reminiscent of the severe storms that thrashed the South Coast of KwaZulu-Natal almost exactly a year ago, resulting in nearly US$500 million in damages. South Africa is Africa’s strongest economy, yet it remains highly vulnerable to extreme climate events—a susceptibility that will likely worsen as the earth warms. This vulnerability is partly due to projected environmental changes, such as increasing severe storm events and decreasing water availability, as well as a lack of social, institutional, and governance capacities for addressing these projected changes.

Barriers to Integrating Adaptation and Development

South Africa is increasingly realizing the importance of pursuing a social development course that helps communities adapt to changes in their environment. This can be called “climate-resilient development.” However, integrating climate concerns with national development priorities can be difficult in practice. In South Africa, climate programs currently do not directly address basic human development needs such as AIDS prevention, employment, health care, and housing. Adaptation planning must address these social issues if it is to be successful; otherwise, adaptation efforts will be sidelined.

An Overview of Adaptation

Enabling Climate Adaptation
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Redirecting Adaptation Planning at the National Level

Many working in South Africa’s climate policy arena understand this dilemma and are taking steps to plan for a climate-resilient society. With a dedicated and resourceful core group of researchers and advocates, the country recently developed several climate policies that address development. These include the Long-Term Mitigation Scenarios (South Africa’s roadmap for reducing emissions), the National Sustainable Development Framework, and important climate response strategy documents from both the environment department and the department of science and technology.

In March 2009, the South Africa government officially inaugurated the process for creating a National Climate Change Response Policy (NCCRP). The NCCRP is intended to be the country’s comprehensive adaptation strategy, creating a roadmap for dealing with projected climate change impacts. Although the final policy document is not slated for completion until sometime in 2010, this high-profile endorsement by the national government has increased public understanding of climate change issues and has generated support from all sectors of society.

Local Level Adaptation Planning

Meanwhile, many important actors at other levels of society are building momentum on adaptation. The cities of Cape Town (PDF) and Durban and the provinces of Western Cape and Limpopo (Word File) have taken a lead in drafting localized strategies for incorporating adaptation efforts into development. Belynda Petrie, CEO of Oneworld Sustainable Investments in Cape Town, who also helped draft Western Cape’s Climate Change Strategy and Action Plan (PDF), believes there is huge potential for integrating adaptation planning and sustainable development, particularly at the municipal and provincial level. Furthermore, Petrie believes that South Africa has incredible research and institutional capacity for synthesizing climate efforts across different sectors.

Perspectives on the South African Experience

The general sentiment among stakeholders involved in climate legislation and adaptation planning in South Africa is positive. South Africa’s newly elected administration, under the leadership of President Jacob Zuma, is on its way to developing a coherent national climate change strategy. However, this effort cannot succeed on the ground without the engagement of a wide diversity of governmental departments, academic institutions, NGOs, and citizens. In the national government and at the “grass tops” of civil society, many of these players understand the need for reconciling adaptation with national development priorities. However, broad public awareness about climate change remains low, and many citizens do not yet see how climate adaptation is relevant to their own social and economic concerns.

Nonetheless, many are concerned that even with South Africa’s relatively advanced industrial base and infrastructure, the majority of its people remain highly susceptible to climate change impacts. Since apartheid ended in 1994, South Africa’s development agenda has focused on reducing poverty and eradicating racial inequality; work that remains far from complete. Even still, South Africa continues to face challenges—such as corruption, limited resources, and lack of local capacity—that prevent it from reaching a level of development that would provide adequate resilience to climate change impacts.

Meanwhile, other parts of Sub-Saharan Africa are beginning to watch South Africa’s progress for ideas and lessons. The South African experience in developing its climate response strategy may have a strong bearing on future prospects for adaptation planning across the rest of the region.

Jennifer Morgan to Lead WRI’s Climate Team

Paul Mackie — Mon, 03 Aug 2009 15:35:08 -0400

The World Resources Institute (WRI) has named Jennifer L. Morgan as director of its Climate and Energy Program.

Morgan will join WRI next month after working in distinguished roles at a variety of organizations, including E3G, the Worldwide Fund for Nature, and the U.S. Climate Action Network. At WRI, she succeeds Jonathan Pershing, now the deputy special envoy for climate change under U.S. Secretary of State Hillary Clinton.

WRI President Jonathan Lash said, “At this crucial time in the climate change and energy challenges, we are fortunate to have someone as experienced and talented as Jennifer. She will be a strong leader for WRI’s top-notch team of climate experts.”

Morgan added, “This is a pivotal moment in time to avoid the worst impacts of climate change. I think WRI can play a key role in transforming the conventional debate and building new coalitions. We can map a pathway to a prosperous future for the people and the planet.”

For the past three years, Morgan was director of the Climate Change Program at E3G (Third Generation Environmentalism), a London-based think-tank. During this time, she has been a key advisor to the German government and advised former U.K. Prime Minister Tony Blair on his Breaking the Climate Deadlock project.

E3G’s CEO Nick Mabey said, “Though we are of course sorry to lose someone with Jennifer’s unique talents, we are also proud to see her move to back to the U.S. to take such an important role at WRI. E3G and WRI have a longstanding organizational relationship, and Jennifer’s move will help strengthen our collaboration in the common goal to fight climate change.”

Prior to working at E3G, she led the Global Climate Change Program at WWF and acted as chief spokesperson for the organization on climate change. As director, she doubled the size of WWF’s climate team and established a presence in several new countries, especially in the Asia Pacific region.

Morgan has also worked on city planning for the International Council for Local Environmental Issues, international trade for the Natural Resources Defense Council, and World Bank policy for the National Audubon Society. She has served on a number of boards, including the Climate Action Network, the Renewable Energy and Energy Efficiency Partnership, and REN21. Morgan will continue to serve on E3G’s board.

WRI’s Climate and Energy Program has recently grown to more than 40 people, and has a 2009 budget of more than $6.5 million. The program conducts independent policy research and analysis, and works with partners around the world to advance effective international and U.S. responses to climate change.

Adaptation: Key Questions and Answers

Heather McGray — Sat, 28 Mar 2009 17:05:25 -0400

Heather McGray, WRI senior associate, explains what a successful deal on adaptation in December would look like, and how countries should follow through at the national level.

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Q: What do people mean when they talk about adaptation to climate change?
Dealing with climate change isn’t just about reducing greenhouse gas emissions anymore, unfortunately. Already we are seeing changes in the climate—like longer summers, more severe storms, and glaciers melting all over the world. Adaptation means learning to live with these changes, and preparing for other changes that are unavoidable. Individuals, organizations, and governments will all have to do some things differently if they are to succeed under a changing climate.

Q: What is the UNFCCC’s role as part of global efforts on climate adaptation?
The UN Framework Convention on Climate Change has multiple roles in the adaptation arena. The first, and perhaps most important, is to support policies and measures by developing countries to adapt to climate change impacts. In 1997, the convention’s 153 signatory countries agreed that developed countries would provide “new and additional” funds to assist “developing countries… particularly vulnerable to the adverse effects of climate change in meeting the costs of adaptation to those adverse effects.” Twelve years on, very few of these funds have materialized. Key questions for Copenhagen negotiators include how to “scale up” adaptation funding, how to channel it to the countries and people who need it most, and what types of activity should be funded to maximize its effectiveness (see Good Adaptation).

Another important role is to foster knowledge sharing between nations by capturing and disseminating examples of good practice in adaptation policies. By doing this, the convention can help to set norms for adaptation efforts supported and implemented outside the UNFCCC.

Q: What must governments agree to at Copenhagen to produce a successful outcome on adaptation?
It is important to remember that in many cases the impacts of climate change will be felt hardest by the world’s poor, who have done the least to create the problem. This means there is a strong moral and political case for financing adaptation internationally. Substantial new funding for adaptation needs to be put on the table by developed nations. While estimates for supporting future adaptation needs vary, they all far exceed the amount currently made available. A Copenhagen deal requires that these funds be scaled up substantially.

Annual Adaptation Costs in Developing Countries
Assessment	Annual Cost	Year
UNDP 2007	$86 billion	2015
UNFCCC 2007	$28–67 billion	2030
World Bank 2006	$9–41 billion	present
Oxfam 2007	$50 billion +	present
Stern Review 2006	$4–37 billion	present
Sources: UNDP (2007, p 192–194); Agrawala and Fankhauser (2008, p 69)

A key vehicle for channeling adaptation finance is the Kyoto Protocol Adaptation Fund, which supports developing countries’ adaptation using proceeds from a 2 percent levy on carbon offsets projects through the Clean Development Mechanism. The fund is governed by a board that has a majority of members from developing countries, and which has made a commitment to transparency in its decision-making. The Fund Board is working to make funding accessible directly to developing countries, with minimum transaction costs. While the Adaptation Fund is still new and will not release its first grants until later in 2009, it represents an important innovative funding model that has already influenced the governance of adaptation funds elsewhere. It is important that the Adaptation Fund Board continue its work after 2012, and that the resources that fl ow through the fund grow.

The Copenhagen meeting should also launch an international process through which all participating governments commit to implementing an enhanced national adaptation planning process. This process should follow a framework that addresses a key set of shared national adaptation functions, and would be informed by lessons learned from the existing National Adaptation Programs of Action (NAPAs).

Q: Insurance is a hot topic within the UNFCCC adaptation negotiations. Why?
One of many reasons why climate change will hit poor countries harder is because their citizens lack access to insurance. When poor communities are hit by a severe drought or flood or a series of such events (as will be increasingly common with the changing climate) insurance can be a very helpful tool in preventing them from sinking deeper into poverty that has potentially life-threatening consequences. Within the convention negotiations, there is a lot of emphasis on creating an internationally funded insurance facility that insures vulnerable countries from catastrophic climate risks. But insurance programs need to be incorporated into the national adaptation plans and policies of countries and reach the poor if they are to help people adapt to climate change. The UNFCCC parties should therefore be very careful in designing a global insurance regime, and make sure that insurance reaches those most in need. A clear role for the convention lies in developing effective policy models and technical assistance channels to help developing countries set up national insurance schemes that work for the poor. If done right, insurance could play an important role in helping developing countries effectively tackle the effects of climate change.

Good Adaptation: Key Elements

So what might an effective national adaptation policy look like? Requirements will vary from country to country, but some common, key elements of good adaptation include:

Integrated Approaches: To be most effective, climate adaptation programs and policies should be integrated with day to day economic development activities, such as water and forestry management and agricultural policy.
Multi-Level: Adaptation needs planning and action at multiple levels — national, state, local and project-level.
Top-Down: Policy changes at national, state and provincial levels can enable behavioral change at the household and community levels. For example, extension service personnel need to know about climate change in order to help farmers adapt agricultural practices.
Bottom-Up: Communities’ priorities and innovations need to inform national decisions, and their adaptation successes should be replicated and scaled up.
Citizen-Centered: Local communities, especially those who will be most affected by climate impacts, must be involved in adaptation planning and decision-making at all levels, and their rights respected by the global community and national governments. Flexible: Adaptation itself must also be flexible and adaptive. We don’t know exactly how the changing climate will affect us. Having policies and systems in place that can adjust is very important. So are monitoring systems to track climate impacts on ecosystem services (such as drinking water and soil) on which people depend.

Countdown to Copenhagen is a regular bulletin from the World Resources Institute. The authors, WRI experts on climate policy, analysis and science, explore key issues related to the UNFCCC international climate negotiations ahead of the Conference of Parties meeting in December 2009. For more information, please contact our climate communications associate, Stephanie Hanson

WRI’s Pershing Named No. 2 Climate Diplomat for Secretary Clinton

Paul Mackie — Mon, 23 Mar 2009 11:04:06 -0400

Dr. Jonathan Pershing today becomes the new Deputy Special Envoy for Climate Change under U.S. Secretary of State Hillary Clinton.

Dr. Jonathan Pershing

Pershing will work alongside U.S. Special Envoy for Climate Change Todd Stern, who was appointed by Clinton on January 26 as President Barack Obama’s lead climate negotiator.

For the past five-and-a-half years, since 2003, Pershing has been director of the Climate and Energy Program here at the World Resources Institute (WRI).

“I can think of no other person more fitting to handle the complexities and political considerations of creating domestic and international policy on climate, the most important issue of our time,” said WRI President Jonathan Lash. “We’ve been honored to have him build our climate team.”

At WRI, Pershing provided strategic vision for the Climate and Energy Program, which, under his leadership, grew from 4 to more than 40 people, and has a 2009 budget of more than $6.5 million.

Pershing said, “We have a huge task to do: the change in administration has not solved the problem, but rather opened a door to the possibility that we can do so. I am fortunate to have spent the past five years working with the extraordinary group at WRI and honing my thinking on how we might do this. Now the implementation phase begins.”

Pershing has served on the California Market Advisory Committee, was the facilitator for the Northeast states’ Regional Greenhouse Gas Initiative (RGGI) and for the Illinois Climate Change Advisory Group, and has testified numerous times before the U.S. Congress.

He has also advised major U.S. and multinational companies on the business strategies for climate change and building up green power. Pershing has been instrumental in WRI’s participation in the United States Climate Action Partnership.

On the international front, he is a regular participant in climate negotiations for the United Nations and was lead author for the recent Nobel-Prize winning Intergovernmental Panel on Climate Change (IPCC) Fourth Assessment Report. Pershing has led WRI’s initiative to grow the GHG Protocol into an international standard for greenhouse-gas accounting and reporting, and has been an active participant in the design of WRI’s new standards for carbon capture and storage.

Before joining WRI, he worked as the head of the energy and environment division at the International Energy Agency and served as deputy director and science advisor for the State Department’s Office of Global Climate Change.

Jennifer Layke, formerly Pershing’s deputy in WRI’s Climate and Energy Program, has been named acting director. She has been leading business and climate change initiatives at WRI since 1997.