4 December 2008Presentation to UNFCCC AWG-LCA Workshop on Risk Management andInsurancePrepared by the Munich Climate Insurance Initiative (MCII), and delivered by:Dr. Koko Warner, MCII Executive Board Member, andHead of SectionEnvironmental Migration, Social Vulnerability, and AdaptationUnited Nations University Institute for Environment and Human Security (UNU-EHS)TITLE SLIDEMr. Chairman, Excellencies, Distinguished Delegates, Ladies and GentlemenThe Munich Climate Insurance Initiative (MCII) is delighted to present its ideas to youtoday. Thank you, Mr. Chairman, for this opportunity, and to Parties and otherswhose submissions have so richly stimulated this discussion.SLIDE 1Climate-related risks, in particular extreme weather events, play an important role inthe climate change debate. Risks and losses from climatic hazards are rising to acurrent level of about 100 billion dollars per annum.Over 75 percent of recent economic losses caused by natural catastrophes comefrom weather events like windstorms, floods, and droughts. The IPCC anticipates thatclimate change will magnify these losses.These events burden developing countries disproportionately. 9 out of 10 deathsfrom natural disasters in the last 25 years occurred in developing countries.Today the need is greater than ever to reduce and transfer risk in ways conducive toclimate change adaptation and sustainable development. Thus, two key issuesdemand attention: first, to link insurance with incentives to prevent disaster losses,and second, to deliver climate insurance solutions that work.
SLIDE 2And, indeed, we are seeing that insurance can work in developing countries. I wouldlike to mention three prominent programs, many more exist.Experience in Malawi and other countries shows that index-based microinsurancehelps low-income households.Countries also use insurance-related mechanisms. The World Food Programmepiloted an index-based drought insurance scheme for government relief expenditurein Ethiopia.At the regional level, Caribbean island states have recently formed the world’s firstmulti-country and index-based catastrophe insurance pool.These and numerous other practical examples show us that insurance – withcoordinated public private action and some international support – has potential toprovide security to vulnerable people, and vulnerable countries.SLIDE 3Insurance-related mechanisms raise many questions. For example:When is it advisable to insure against climate-related risks?Insurance mechanisms are not the answer for every kind of risk. Further, whether ornot insurance is advisable depends on its benefits and costs. Insurance tools canspread risks temporally and geographically. Insurance brings the added benefit ofhelping communities to escape from disaster-induced poverty traps.But insurance has a pricetag, and alternative investments may make better sense inmany instances.Second, to harmonize climate insurance with adaptation, it is essential to alignincentives with prevention. Well-designed insurance reduces disaster losses in twoways: by providing early liquidity, it prevents long-term loss of lives and livelihoods;and by pricing risk, insurance sets strong incentives for pre-disaster preventivebehavior. Indexed tools provide compelling grounds for risk reduction and adaptation.So what role might insurance instruments play in a climate-adaptation strategy?The Bali Action Plan (BAP) calls for “consideration of risk sharing and transfermechanisms, such as insurance” to address loss and damage in developingcountries particularly vulnerable to climate change. But to be effective, suchmechanisms must be part of a wider adaptation strategy with other elements.Contact: email@example.comMunich climate Insurance Initiative, www.climate-insurance.org2
SLIDE 4Risk Management ModuleIn the MCII submission, risk management includes two complementary pillars --prevention and insurance. Together these two pillars tackle risk at low, medium andhigh levels.PreventionPreventing or minimizing losses is the bedrock of effective risk management. Theprevention pillar fulfils the principle of common but differentiated responsibilities andrespective capabilities by linking risk reduction efforts and carefully designedinsurance instruments. Progress in prevention helps countries qualify for participationin the Insurance Pillar.The estimated cost is 3 billion dollars per year.InsuranceIn spite of best efforts to prevent and reduce risk, countries will face rising mediumand high level climate-related risks. MCII proposes an Insurance Pillar with two tiersto deal with these.Tier 2At medium levels of risk – events such as a 1 in 50 year event –a ClimateInsurance Assistance Facility, will incentivise the private sector to engage ininsurance and public-private solutions. This will facilitate safety nets, as well as newmarkets for insurance products including microinsurance. Regional centers can helpbuild this market capacity.The estimated cost for a Climate Insurance Assistance Facility is 2 billion dollars peryear.Tier 1And still, major weather catastrophes will increasingly affect countries. To addressthese, a Climate Insurance Pool will absorb a pre-defined proportion of high-levelrisks of disaster losses, particularly in vulnerable countries, at no cost to thebeneficiary countries. The Climate Insurance Pool will be reinsured against extremeloss years in the global reinsurance market.The estimated cost for the Climate Insurance Pool including reinsurance is estimatedto be around 5 billion dollars per year.In clear terms, this proposed structure would channel funding for prevention so thatcountries can sustainably move towards adaptation, and build capacity to grownascent insurance mechanisms and markets.Contact: firstname.lastname@example.orgMunich climate Insurance Initiative, www.climate-insurance.org3
All of this can be realized for an estimated total of10 billion dollars per annum, andwould be paid for by the international community.The payment of the Prevention and the Insurance Pillar will be based on whateverformula is agreed on--maybe based on the Mexican and Norwegian proposal. But inany case the cost will be borne mainly by developed nations.SLIDE 5The decisive question is what needs to be done for the Copenhagen AgreedOutcome?First, establish a risk management framework and request the COP to elaborate itsoperationalization in the context of the two pillars just described.Second, we request the negotiators to include, under the financial provisions of theCAO, provisions for a fund or funding window for this.Third, we request COP to identify a suitable operating entity and detail the operationof the two pillars between 2009 and 2012. MCII offers its support in this process.These two pillars make sense. Prevention and insurance can improve the lives ofpeople tangibly today and they provide a space of certainty for governments trying tonavigate the rough waters ahead. Establish a framework, and put funding behind thepillars in smart ways that will foster adaptation tomorrow.As the frequency and scope of weather catastrophe losses spiral, we must explorenew avenues for managing and transferring the risks associated with climate change.We believe that prevention and climate risk insurance solutions have a role to play.SLIDE 6Thank you, Mr. Chairman and honoured delegates.Contact: email@example.comMunich climate Insurance Initiative, www.climate-insurance.org4