Can insurance effectively support climate resilience?

In December 2016, negotiators at the Paris climate meeting adopted insurance as an instrument to aid climate adaptation. Earlier in the year, leaders of the Group of Seven (G7) had pledged to bring climate insurance to 400 million uninsured individuals in poor countries by 2020.

In their discussion paper, researchers from the IIASA Risk and Resilience Program welcome these developments, but also lay out the difficulties that policymakers will face in turning the ideas into action. They warn that ill-designed and poorly implemented insurance instruments could fail to reach the goals of negotiators, or worse, prove detrimental to the very people they are intended to protect. While insurance could provide funding to help people in need, the researchers point out several ways that such mechanisms could fail.

First, any new insurance scheme in developing countries needs to overcome difficult challenges, including lack of risk data, limited financial literacy, and weak financial infrastructure. Second, insurance for the poor will only be viable if it is linked to adaptation and risk reduction efforts that reduce the underlying risk factors. Climate-resilient infrastructure, adapted agricultural practices, and early warning systems must be included, otherwise climate insurance will be short-lived and far from cost-effective.

In addition, traditional insurance is an expensive mechanism with high transaction and capital costs, making premiums far higher than expected losses. This suggests that adaptation funds might be better spent on other types of safety net rather than on buying insurance cover from international markets. Insurance will also need high levels of subsidies or other forms of support to render it affordable and to avoid shifting responsibility on to those who are the least responsible for climate change, the least able to shoulder the premiums, and in many cases the least able to reduce their losses.

In order to avoid these problems, IIASA experts argue that policymakers should consider climate insurance as part of a wider adaptation strategy rather than in isolation or as an alternative to adaptation. When installing an insurance scheme, climate change and other factors contributing to the risks need to be taken into account. Also, insurance needs to be coupled with adaptation efforts to deal with these risk factors, otherwise it will be not be sustainable or cost-effective. What is critical for any adaptation or insurance scheme is that there is a good understanding of current and future risks from extreme weather. This is where the experience and tools for risk assessment assembled by risk research will be instrumental.