Will insurance as a mechanism work for loss and damage brought on by climate change?

Recent reports from the National Oceanic and Atmospheric Administration (NOAA) point to an increasing certainty of attribution of extreme weather events due to the impacts of climate change.

In this regard, a mechanism to deal with loss and damage caused as a direct result of climate change is slated to be negotiated at the climate conference going on in Paris.

Insurance has been suggested as a mechanism to decrease the risk related to disasters by many leaders, including Indian Prime Minister Narendra Modi, UN Secretary General Ban Ki Moon and US President Barack Obama.

Insurance is currently being used as a mechanism to provide a financial safety net. For instance, Oxfam and the World Food Programme, in partnership with Swiss Re, a reinsurance company based in Zurich, is providing coverage to 31,000 vulnerable rural households.

This is being done to increase food security for them by integrating disaster-risk reduction, micro-insurance, livelihood diversification and credit and savings programme into productive safety net programmes. Scaling up on natural catastrophic insurance as a fail-safe mechanism at a global level would be riddled with its own set of challenges and uncertainties.

Meeting challenges with insurance-based models

There are several questions which emerge if one contemplates on insurance models. These are who will oversee the administration of such a mechanism (would it be a private player, public body at the national level or an international welfare organization?), whether a large oversight machinery will need to be instituted to execute such insurance “claims”, what kind of local partnerships will be involved and so on.

These are in addition to issues related to damage estimation and compensation disbursement, which would need to be addressed separately for different parts of the world.

The impacts of climate change will have to be measured at local levels where most of the effects are felt. In most cases, previous records of damages and database used to estimate damage seem to be skewed, with gaps.

Hence, building on globally-accepted mechanisms to estimate damage may be just the tip of the iceberg to a series of difficult issues to arrive at a plausible solution.

Delhi-based non-profit Centre for Science and Environment recently concluded a conference on crop loss estimation, relief and compensation.

As part of the conference, leading professionals working in the field of damage estimation and compensation calculations presented their views.

Crop loss estimation came up as a big bone of contention during the discussion. Although India has some of the best satellite technologies in the world, there are still no accurate and reliable methodologies for damage estimation at the micro level.

Therefore, there is a need to work towards a comprehensive set of models for damage estimation that can be implemented all over the world.

The creation of such damage-estimation models will provide a robust database which may help in obtaining long-term forecast estimates for loss and damage costs (from avoided impacts of natural disasters) in areas where adaptation projects have been implemented under projects funded by funds like the Green Climate Fund. These calculations would serve as a counterpart to emission abatement numbers for projects that focus on mitigation measures and may help in closing the adaptation gap in climate finance.

Disbursing compensation

Scaling up disbursement was another significant issue that came up during the CSE meet. The damage caused as a result of extreme weather events are not consistent over a geographical area, as localised risks and weather variations will need to be taken into account in order to come up with an accurate estimate of who gets how much.

The compensation amount disbursed would also need to be differentiated on the basis of local purchasing power parities and needs. This would require the involvement of stakeholders such as local insurance professionals, government institutions and civil society organisations.

Insurance may build financial resilience

Companies involved in large-scale disaster risk reduction and sharing mechanisms often work with insurees to increase the resilience of the insured assets.

The insurance professionals gathered in Paris have reacted to the discussions on the increasing role of insurance with a lot of enthusiasm. The chief executive officer of global insurance company XL Catlin said “Today, far too few of the world's people benefit from the resilience offered by risk sharing and transfer schemes. Our industry funds scientific research and works with governments to adopt advanced building codes and land use practices. I offer my personal commitment to work with you to ensure that the best of what our industry can offer is brought forward”

Even if taken with a grain of salt, comments such as these signal the insurance companies’ willingness to be part of a global regime of loss and damage based on insurance.

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