The 21st Century climate challenge

Box 2.2The global insurance industry—reassessing climate riskClimate-related insurance claims have increased rapidly overthe past two decades or more. While climate sceptics and somegovernments continue to question the links between climatechange and climate disasters, many global insurance companiesare drawing the opposite conclusion.In the five years to 2004, insured losses from climate eventsaveraged US$17 billion a year—a fivefold increase (in 2004 terms)over the four years to 1990. Climate-related insurance claimsare rising more rapidly than population, income and insurancepremiums, prompting the industry to reassess the viability ofcurrent business models.That reassessment has taken different forms in differentcountries. In some cases the industry has emerged as a forcefuladvocate for the development of infrastructure aimed at reducinginsured losses. In Canada and the United Kingdom, for example,insurance companies have led demands for increased publicinvestment in storm and flood-defence systems, while also callingon Government to underwrite losses as an insurer of last resort.In the United States, insurance companies were activelyreviewing their exposure to climate risks even before HurricaneKatrina rewrote the history books in terms of storm damage costs.They have been putting caps on paid losses, shifting a greater partof the risk on to consumers, and withdrawing from high-risk areas.One of the side-effects of Hurricane Katrina has been to fuel therise of catastrophic risk bonds, which transfer risk from insurers tocapital markets: payments to bond holders cease in the event of aclimate catastrophe. The market in 2006 stood at US$3.6 billion,compared with US$1 billion two years earlier.Federal and state government insurance programmes havenot been immune to climate-related pressures. The exposure oftwo major programmes—the National Flood Insurance Programme(exposure nearing US$1 trillion) and the Federal Crop InsuranceProgramme (exposure US$44 billion)—has prompted the GovernmentAccountability Office to warn that “Climate change has implicationsfor the fiscal health of the Federal Government.”Experience in developed country insurance marketshighlights a wider problem. Climate change creates largeuncertainties. Risk is a feature of all insurance markets. Premiumsare calculated on the basis of risk assessment. With climatechange, insurance claims are likely to rise over time. Based onone estimate from the Association of British Insurers, a doublingof CO 2could increase insured losses from extreme storm eventsalone for the global industry by US$66 billion annually (at 2004prices). The diffi culty for the industry is that this trend will bepunctuated by catastrophic events that will undermine pooledrisk arrangements.2Climate shocks: risk and vulnerability in an unequal worldSource: ABI 2004, 2005b; Brieger, Fleck and Macdonald 2001; CEI 2005; GAO 2007; Mills 2006; Mills, Roth and Leomte 2005; Thorpe 2007.including the inequalities in income, opportunityand political power that marginalize thepoor. Developing countries and their poorestcitizens are most vulnerable to climate change.High levels of economic dependence on agriculture,lower average incomes, already fragileecological conditions, and location in tropicalareas that face more extreme weather patterns,are all vulnerability factors. The following areamong the factors that create a predispositionfor the conversion of risk into vulnerability:• Poverty and low human development.High concentrations of poverty amongpopulations exposed to climate riskare a source of vulnerability. The 2.6billion people—40 percent of the world’spopulation—living on less than US$2 aday are intrinsically vulnerable because theyhave fewer resources with which to managerisks. Similarly, for the 22 countries with acombined population of 509 million peoplein the low human development category ofthe Human Development Index (HDI),even small increases in climate risk can leadto mass vulnerability. Across much of thedeveloping world (including countries inthe medium human development category)there is a two-way interaction betweenclimate-related vulnerability, povertyand human development. Poor peopleare often malnourished partly becausethey live in areas marked by drought andlow productivity; and they are vulnerableto climate risks because they are poorand malnourished. In some cases, thatvulnerability is directly linked to climateshocks. Disaggregated HDI data for Kenya,for example, show a close fit between foodemergencies linked to drought and districtswhere human development is low (table 2.1).In Ghana, half of children in the droughtpronenorthern region are malnourished,compared with 13 percent in Accra. 20• Disparities in human development.Inequalities within countries are anothermarker for vulnerability to climate shocks.HUMAN DEVELOPMENT REPORT 2007/2008 79