The Role of Insurance in Climate Adaptation · 9. Bertram-Huemmer, Veronika, and Kati Kraehnert....

The Role of Insurance in Climate Adaptation Dr. Annette Detken

KfW Development Bank

Scaling Up Agricultural Adaptation through Insurance

Bonn, 14 May 2017

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The Role of Insurance in Climate Adaptation

1. How can insurance improve adaptation and increase resilience?

2. When is insurance the right instrument for adaptation?

3. How to make the agricultural sector more resilient to climate risks?

Scaling up adaptation through insurance, Bonn, May, 14, 2017

Key Questions

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Growing Importance of Insurance


Sendai Framework

for DRR

(2015-2030)

Paris Agreement

(COP21)

Sustainable

Development Goals

(SDGs)

(2015-2030)

„…promote mechanism for disaster risk transfer and insurance […] to reduce the

financial impact of disasters…“ [Paragraph 30b]

„…support may include […] risk insurance facilities, climate risk pooling and other

insurance solutions.” [Article 4, 4.f]

„…increase by up to 400 million the number of people […] who have access to direct

and indirect insurance coverage…“

[G7 Joint Statement]

G7 InsuResilience

Initiative

(2015-2020)

Disaster Risk

Reduction

(DRR)

1994: Yokohama; UN Rio Summit;

UNFCCC

1997: Kyoto

2000: MDGs

2005: Hyogo Framework for Action (2005-2010)

2010: Cancun Adaptation

Climate

Change

Sustainable

Development

2015

Insurance is critical to the achievement of at least 6 of the 17 SDGs.

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Income & Welfare

Risk Awareness

Risk Prevention

Risk Response

Recovery



The virtuous cycle of resilience

Higher Level of

Resilience

Resilience

Resilience:

Amount of change a system can

undergo without changing state (IPCC, 2001).

Adaptation:

Practical steps to protect countries and

communities from the likely disruptions

and damage that will result from the

effects of climate change (UNFCCC).

Improving climate adaptation

through insurance leads to higher

level of resilience against climate

risks.

Income & Welfare

Risk Awareness

Risk Prevention

Risk Response

Recovery

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Example: Macro-level Insurance

Goal:

› Drought insurance for African states combined with

ex-ante contingency planning

Product:

› Index-insurance based on satellite data

Ownership:

› African States as members of ARC

Current state:

› Total sum insured in 2015/2016: 178 mn USD

› Product development for tropical cyclone, flood


African Risk Capacity (ARC)

ARC Insurance Company Ltd.

Established: 2013

KfW on behalf of BMZ: Capital 78 mn EUR

Technical assistance

14 mn EUR

Direct beneficiaries: potentially all

members of the

African Union

Indirect beneficiaries: poor and vulnerable

households/farmers

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1 2 3 4 5 6 7

Months

Traditional

Safeguarding

mechanisms

Harvest

The impact of insurance: an example of drought insurance in African states

Risk Analysis &

Contingency Plans Implementation

Insurance

Payout Response

Drought Insurance

African Risk Capacity

Assessment UN Appeal Implementation Funding

Response

-2 -1

Use Savings Sell productive

assets Food

Reduction


International

Disaster Relief


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2. When is insurance the right instrument for adaptation?


Reallocation of resources

Savings

Credit for ex-ante adaptation

investments

Ex-post Financing Ex-ante Financing Disaster

Low frequency /

high severity

High frequency /

low severity

Asset Sales

BUDGETARY

INSTRUMENTS

LOANS

INSURANCE

SAVINGS

Credit for reconstruction and

reinvestment

Macro-level insurance

Meso-level insurance

Micro-level insurance

Insurance as adequate tool to cope with high-severity, low-frequency climate risks.

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3. How to make the agricultural sector more resilient to climate risks?

Who bears climate risks? What kind of risks? Insurance solutions

Governments

› human losses

› costs for disaster response

› damages of public infra-

structure and buildings

› development setbacks

Macro-level insurance:

› index-based climate risk

insurance (e.g. ARC)

› Cat-bonds etc.

Agricultural service providers

› loss of income and profits

› damage of assets

› credit failures

› bankruptcy

Meso-level insurance:

› bundled insurance products

› index-based insurance, etc.

Farmers / pastoralists

› income losses and reduced

consumption

› asset losses

› persistent poverty

Micro-level insurance:

› harvest/livestock insurance

› index-based/indemnity-based

insurance etc.


Insurance solutions at all levels are crucial to increase resilience of the agricultural sector.

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1. Insurance improves climate adaptation at different stages of risk management

leading to a virtuous cycle of resilience.

2. Insurance is a complementary instrument of adaptation to better cope with high-

severity, low-frequency climate risks.

3. Insurance solutions at all levels are crucial to improve climate resilience of the

agricultural sector.

How to Scale-up Adaptation through Insurance?


Key conclusions:

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Bibliography

1. Sendai Framework for Disaster Risk Reduction 2015-2030 (A/RES/69/283)

2. Sustainable Development Goals (A/RES/70/1) – „Transforming our World: the 2030 Agenda for

Sustainable Development“

3. Paris Agreement (FCCC/CP/2015/10/Add.1)

4. G7 Joint Statement on InsuResilience

5. Karlan, Dean et al. „Agricultural decisions after relaxing credit and risk constraints.“ The Quarterly

Journal of Economics 129.2 (2014): 597-652.

6. Mobarak, A. & Rosenzweig, M. „Informal risk sharing, index insurance, and risk taking in

developing countries“, The American Economic Review: Papers & Proceedings, 103 (3): 375-380.

7. Machemer, Alberto: „Insurance against weather-related risks in developing countries – what is

known about impact“ Materials on Development Financing 6 (2017).

8. Norton, Michael. “Managing risks to agricultural livelihoods: Impact evaluation of the Harita

Programm in Tigray, Ethiopia, 2009-2012.” (2013).

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Bibliography

9. Bertram-Huemmer, Veronika, and Kati Kraehnert. "Does index insurance help households

recover from disaster? Evidence from IBLI Mongolia." DIW Discussion Paper No. 1515 (2015).

10. Chantarat, Sommarat, et al. „Welfare impacts of index insurance in the presence of a poverty

trap“ World Development 94 (2017): 119-138.

11. Schaefer, Laura & Waters, Eleanor „Climate risk insurance for the poor & vulnerable“ Munich

Climate Risk Insurance Initiative 2016, November 2016.

12. Golnaraghi, Maryam & Khalil, Patrick, „The Stakekolder Landscape in Extreme Events and

Climate Risk Management“, The Geneva Association.

13. Clarke, Daniel & Hill, Ruth Vargas, „Cost-Benefit Analysis of the African Risk Capacity Facility“,

Vol. 1292. Intl Food Policy Res Inst, 2013.

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Insurance products and insurance sector expertise foster adaptation through…

Production & Welfare

Risk Awareness

Risk Prevention

Risk Response

Recovery

Adaptation

Insurance

products

Insurance Sector

Expertise

› Finance

reconstruction

& rebuilding

› Knowledge on

„build-back-

better“

Insurance

products

Insurance Sector

Expertise

› Finance

disaster relief to

mitigate

negative effects

› Knowledge on

ex-post disaster

coordination

and activities

Insurance products

› Enabling investments and increased

production & welfare

Insurance

products

Insurance Sector

Expertise

› Price signal of

risk

› Incentive for

preparedness

(e.g.

contingency

plans)

› Data collection

› Risk analysis

› Preparedness

(e.g. early

warning)

Insurance

products

Insurance Sector

Expertise

› Incentives for

risk reduction

and prevention

› Enabling

investments in

adaptive

technologies

› Knowledge on

adaptive

technologies

and

infrastructure

building

5

1

2

3

4

Insurance supports climate adaptation at

different stages of risk management

process.

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The Role of Insurance in Climate Adaptation · 9. Bertram-Huemmer, Veronika, and Kati Kraehnert....

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