IPCC_Managing Risks of Extreme Events.pdf - Climate Access

Managing the Risks: International Level and Integration across ScalesChapter 7The literature clearly shows that the transfer of technologies foradaptation lags behind the transfer of mitigation technologies in termsof the scales of attention and funding. Funding transfer and fundingmechanisms for technologies that help reduce vulnerability to climatevariability, particularly to weather-related extreme events, appear to beas important for both CCA and DRR (high confidence).7.4.4. Risk Sharing and TransferThis section examines the current and potential role of the internationalcommunity – international financial institutions, NGOs, developmentorganizations, private market actors, and the emerging adaptationcommunity – in enabling access to insurance and other financialinstruments that share and transfer risks of extreme weather. Theinternational transfer and sharing of risk is an opportunity for individualsand governments of all countries that cannot sufficiently diversify theirportfolio of weather risk internally, and especially (as discussed inSection 6.3.3) for governments of vulnerable countries that do not wishto rely on ad hoc and often insufficient post-disaster assistance.Experience shows that the international community can play a role inenabling individual, national, and international risk-sharing and transferstrategies (high confidence). The following discussion identifies successfulpractices, or value added, as well as constraints on this role.7.4.4.1. International Risk Sharing and TransferRisk transfer (usually with payment) and risk sharing (usually informalwith no payment) are recognized by the international community as anintegral part of DRM and CCA (see Case Study 9.2.13 for definitions).The 2005 HFA calls on the disaster community “to promote thedevelopment of financial risk-sharing mechanisms, particularly insuranceand reinsurance against disasters” (UNISDR, 2005a, p. 11). Similarly, the2007 Bali Action Plan calls for consideration of risk-sharing and transfermechanisms as a means for enhancing adaptation (UNFCCC, 2007a).The Plan builds on the mandate to consider insurance as set out byArticle 4.8 of the UNFCCC and Article 3.14 of the Kyoto Protocol.Often by necessity risk sharing and transfer are international. Local andnational pooling arrangements (discussed in Sections 5.5.2 and 6.3.3)may not be viable for statistically dependent (co-variant) risks that cannotbe sufficiently diversified. A single event can cause simultaneous lossesto many insured assets, violating the underlying insurance principle ofdiversification. For this reason, primary insurers, individuals, andgovernments (particularly in small countries) rely on risk-sharing andtransfer instruments that diversify their risks regionally and even globally.A few examples can serve to illustrate international arrangements:• A government receives international emergency assistance andloans after a major disaster.• A family locates a relative in a distant country who provides postdisasterrelief through remittances.• After a major disaster, a farm household takes out a loan from aninternationally backed micro-lending institution.• An insurer purchases reinsurance from a private reinsurancecompany, which spreads these risks to its international shareholders.• A government issues a catastrophe bond, which transfers risksdirectly to the international capital markets.• Many small countries form a catastrophe insurance pool, whichdiversifies risks and better enables them to purchase reinsurance.Not only are these financial arrangements international in character, butmany are supported by the international development and climateadaptation communities (see, especially, UNISDR, 2005b; UNFCCC,2009b). At the outset it is important to point out that these instrumentscannot stand alone but must be viewed as part of a risk managementstrategy, for which cost-effective risk reduction is a priority.7.4.4.2. International Risk-Sharing and Transfer MechanismsThis section reviews international mechanisms for sharing and transferringrisk, including remittances, post-disaster credit, insurance and reinsurance,alternative insurance mechanisms, and regional pooling arrangements.7.4.4.2.1. RemittancesRemittances – transfers of money from foreign workers or expatriatecommunities to their home countries – make up a large part of informalrisk sharing and transfer, even exceeding official development aid flows.In 2010, the official worldwide flow of remittances was estimated atUS$ 325 billion, and unrecorded flows may add another 50% or more.In some cases, remittances can be as large as one-third of the recipientcountry’s gross domestic product (World Bank, 2011b).A number of studies show that remittances increase substantiallyfollowing disasters, often exceeding post-disaster donor assistance(Lucas and Stark, 1985; Miller and Paulson, 2007; Yang and Choi, 2007;Mohapatra et al., 2009). Payments can be sent through professionalmoney transfer organizations, but often these channels break down andremittances are carried by hand (Savage and Harvey, 2007). While simplein concept, remittances can be complicated by associated transfer fees.A survey carried out in the United Kingdom found that for an averagesizedtransfer, the associated costs could vary between 2.5 and 40%(DFID, 2005). Information pertinent to the transfer is often obscure or inan unfamiliar language, and transfers across some borders have beencomplicated due to initiatives taken by developed nations to counterinternational money laundering and terrorism financing (Fagen andBump, 2006). Finally, a major problem is difficulties in communicatingwith relatives abroad, as well as the high potential of losing necessarydocuments in a disaster.The international community has been active in reducing the costs andbarriers to post-disaster remittances. DFID, among other development418