IPCC_Managing Risks of Extreme Events.pdf - Climate Access

Chapter 9Case Studieswhile they provide relief and assistance for recovery and rehabilitation.Because it does not cover all costs, CCRIF provides an incentive forgovernments to invest in risk reduction and other risk transfer tools. Thecost of participation is based on estimates of the respective countries’ risk(measured as probability and cost). The advantage of pooling is that dueto diversifying risk it greatly reduces the costs of reinsurance comparedto the price each government would have paid individually. Fundingfor the program, although mainly the responsibility of participatingcountries, has been supported by a donor conference hosted by theWorld Bank.Insofar as weather extremes are increased by climate change, the CCRIFcontributes directly to disaster risk reduction and climate changeadaptation. By providing post-event capital it enables governments torestore critical infrastructure so important for reducing the long-termhuman and economic impacts from hurricanes. Experience with CCRIFalso shows the importance of designing programs that reflect the needsof the participating countries. Finally, it demonstrates how internationalassistance can support disaster management in tandem with nationalresponsibility.9.2.13.4.4. Outcomes – the role of risk transfer for advancingdisaster risk reduction and climate change adaptationAs these examples illustrate, risk-transfer instruments and especiallyinsurance can promote disaster risk reduction and climate changeadaptation by enabling recovery and productive activities. By providingmeans to finance relief, recovery of livelihoods, and reconstruction,insurance reduces long-term indirect losses – even human losses – thatdo not show up in the disaster statistics. Risk transfer arrangementsthus directly lead to the reduction of post-event losses from extremeweather events, what is commonly viewed as adaptation. Moreover,insured households and businesses can plan with more certainty, andbecause of the safety net provided by insurance, they can take on costeffective,yet risky, investments. This ultimately reduces vulnerabilityto weather extremes and by so doing contributes to climate changeadaptation.Experience in developed countries has demonstrated additional ways inwhich insurance and other risk-transfer instruments have promotedDRR and CCA as listed below:• Because risk-transfer instruments require detailed analysis of risk,they can both raise awareness and provide valuable informationfor its response and reduction; for example, in some developedcountries insurers with other partners have made flood and otherhazard maps publicly available (Botzen et al., 2009; Warner et al.,2009). Potential challenges include the technical difficulties relatedto risk assessment, dissemination of appropriate information, andovercoming education and language barriers in some areas.• By pricing risk, insurance can provide incentives for investmentsand behavior that reduce vulnerability and exposure, especially ifpremium discounts are awarded. Differential premium pricing hasbeen effective in discouraging construction in high-risk areas; forexample, UK insurers price flood policies according to risk zones,but insurers are reluctant to award premium discounts for othertypes of mitigation measures, such as reinforcing windows anddoors to protect against hurricanes (Kunreuther and Roth, 1998;Kunreuther and Michel-Kerjan, 2009). The incentive effect ofactuarial risk pricing should be weighed against the benefits ofincreasing insurance penetration to those unable to afford riskbasedpremiums. The positive incentives provided by insuranceshould also not overshadow the potential for negative incentivesor moral hazard.• Insurers and other providers can make risk reduction a contractualstipulation, for example, by requiring fire safety measures as acondition for insuring a home or business (Surminski, 2010). The USNational Flood Insurance Program requires communities to reducerisks as a condition for offering subsidized policies to their residents(Kunreuther and Roth, 1998; Linnerooth-Bayer et al., 2007). It wasnoted above that the WFP might require risk-reducing activities asa condition for its support for weather derivatives.• Providers can partner with government and communities toestablish appropriate regulatory frameworks and promote, forinstance, land use planning, building codes, emergency response,and other types of risk-reducing policies. Ungern-Sternberg (2003)has shown that Swiss cantons having public monopolies that providedisaster insurance outperform cantons with private systems inreducing risks and premiums, mainly because the public monopolieshave better access to land use planning institutions, fire departments,and other public authorities engaged in risk reduction. In manycountries, insurers have co-financed research institutes and disastermanagement centers, and in other cases, have partnered withgovernment to achieve changes in the planning system andinvestment in public protection measures (Surminski, 2010).9.2.13.5. Lessons IdentifiedGovernments, households, and businesses can experience liquidity gapslimiting their ability to recover from disasters (high confidence). There isrobust evidence to suggest that risk-transfer instruments can helpreduce this gap, thus enabling recovery.There are a range of risk-transfer instruments, where insurance is themost common. With support from the international community, risktransfer is becoming a reality in developing countries at the local,national, and international scales, but the future is still uncertain. Indexbasedcontracts greatly reduce transaction costs and moral hazard(medium confidence); while more costly than many traditional financingmeasures, insurance has benefits both before disasters (by enablingproductive investment) and after disasters (by enabling reconstructionand recovery) (medium confidence). Insurance and other forms of risktransfer can be linked to disaster risk reduction and climate changeadaptation by enabling recovery, reducing vulnerability, and providingknowledge and incentives for reducing risk (medium confidence).525