Caribbean Paves the Way for Insurance-Based Climate Adaptation

In its influential Third Assessment Report (2001), the Intergovernmental Panel on Climate Change (IPCC) jumpstarted action on climate change adaptation by stating that a certain level of climate change was inevitable, and that the world should get to work preparing for it.

Last year in Cancun, the United Nations Framework Convention on Climate Change (UNFCCC) took the next logical step—it officially acknowledged that climate change will cause devastating losses despite the very best adaptation measures, and that the Convention has a role to play in mitigating that damage.

The Loss and Damage work programme, hammered out under last year’s Cancun Agreements, seeks to identify the risks and needs of vulnerable countries to determine appropriate action the Convention can take in the future. Various countries and NGOs are advising the work programme on what the appropriate scope of action might be, with an emphasis on increased risk assessment, data access, and public-private cooperation.

Amidst all this, the Caribbean has emerged as a ‘model’ region in which insurance-based climate risk management is already on the ground and evolving.

Why the Caribbean? Climate change risks in the region are tremendous. Wind, storm surge, and flooding damage already incur losses totaling 6% of some countries’ GDP in the region, and that number could increase to 9% by 2030.  Research suggests some small island nations stand to rack up rebuild costs from 14% to 150% of their respective GDPs by 2080 under a high Sea Level Rise scenario.

So the need for protection against tremendous financial losses in the region is apparent. But in developing nations such as these, traditional insurance schemes are notoriously hard to implement. 

A major obstacle is cost. Because the most vulnerable communities are also often the poorest, the problem is compounded—there is more risk to cover, and less money available to cover it. Thus, it is no surprise that 3% of potential losses are insured in developing countries, versus 45% in developed countries.

Enter the Caribbean Catastrophe Risk Insurance Facility (CCRIF). CCRIF was founded by the Caribbean Community (CARICOM) Heads of Government and the World Bank after Hurricane Ivan slammed the region in 2004, causing losses 200% higher than some island nations’ total GDP. A slew of international donors established a Trust Fund to capitalize the program, and sixteen sovereign nations are now a part of this risk-pooling body. 

CCRIF works in the developing context because of its extremely “cost-efficient” structure. It uses a system called ‘parametric insurance’, whereby an insurance claim is paid out as soon as a covered event—such as a hurricane of particular strength—impacts a covered geographic area. Instead of hiring expensive claims adjusters and filing massive piles of paperwork, CCRIF pays governments a pre-determined sum right away—thus mobilizing capital for relief and reconstruction when it is needed most.

CCRIF is also distinctive for its active engagement with the climate change issue. The Facility has offered its knowledge and expertise to the UNFCCC process since COP15 in Copenhagen, going so far as to bill its insurance approach as “an essential component of a climate change adaptation strategy.”

But there are some legitimate critiques of the role insurance might play in adaptation.

The U. S. delegation has expressed concern that investments in climate insurance could pull funds away from urgent adaptation projects, which desperately need more funding. Another particularly frightening—and equally legitimate—concern is that insurance can encourage maladaptation because covered entities have less incentive to invest in adaptive strategies when they know they will be compensated for losses. This second prospect, which has been discussed within the UNFCCC process before, should always be given careful consideration with attention paid to local contexts. Otherwise, the consequences could be disastrous.

Fortunately, CCRIF is working hard to wed its insurance policies with disaster risk reduction, data dissemination, and knowledge-sharing strategies. By doing so, it sends the message that insurance for adaptation cannot work alone—it must be accompanied by appropriate efforts to lessen the occurrence of loss and damage in the first place. This is the right approach for climate insurance schemes to be taking, and the requisite government involvement is a strong argument for designing such programs as public-private collaborations.

An exciting new CCRIF program launched this year in partnership with The Munich Climate Insurance Initiative, MicroEnsure, and Munich Re aims to extend climate-related insurance services to “small-holding farmers and day labourers in the Caribbean.” In addition to insurance, it will also provide these new policyholders with the knowledge they need to build resilience and adapt to climate threats. For instance, agricultural producers can buffer their crops from the worst effects of wind and flooding through a variety of adaptive management techniques. 

As the Loss and Damage work programme develops its agenda in Durban and throughout 2012, it is sure to keep a sharp eye on CCRIF and the Caribbean community’s trailblazing efforts. With the support of the UNFCCC, this novel approach to climate change adaptation could be a game-changer for developing countries the world over.

Cross-posted from IntercambioClimatico.com.