Paying the Premium: Insurance as a Risk Management Tool for
Climate Change

AARJAN DIXIT AND HEATHER MCGRAY



By allowing individual countries, companies or individuals to
World Resources Institute Working Papers contain preliminary
transfer risk of future losses to an insurance provider,
research, analysis, findings, and recommendations. They are
insurance can protect policy-holders from large-scale
circulated without a full peer review to stimulate timely discussion and
economic losses due to weather disasters, can provide
critical feedback and to influence ongoing debate on emerging issues.
financial liquidity immediately after a loss, and can help build
Most working papers are eventually published in another form and
their content may be revised.
resilience to economic shocks ( see Box 1). If implemented

well, insurance offers a real opportunity to help the poor and

vulnerable become resilient to the impacts of climate change
Suggested Citation: Dixit et al. 2009. “Paying the Premium: Insurance as a
by allowing markets to bear some of the costs of adapting to
risk management tool for climate change”. WRI Working Paper. World
these events.
Resources Institute, Washington DC.


Box 1 | Insurance Defined
I. EXECUTIVE SUMMARY

Insurance is a financial mechanism that allows one party to

transfer the risk of future losses to a second party (insurance
Climate change is projected to exacerbate the intensity, and
provider) willing to bear this risk for a fixed period in return for
the payment of premiums. These transfers are made possible
frequency, of weather-related hazards such as storms and
by the following:
droughts (IPCC, 2007). These climatic changes are likely to

Risk Assessment: Insurance requires the assessment of risks
intensify the growth in economic damages from extreme
so that they can be recognized and priced.
weather events seen over the past two decades (Munich Re

Risk Pricing: Insurance puts a monetary value on risks.
Group 2008) and suffered primarily by developing countries

least able to cope with them. Absent effective risk reduction
Insurance can help restore the wellbeing of a policy holder
strategies and activities, climate-related disasters could
after a shock. Also, if well designed, insurance can create
incentives for policy holders to reduce risky behavior.
severely undermine the ability of regions and nations to meet

basic development goals.
A. Insurance at the UNFCCC


In this context, well-designed disaster risk management
Interest in insurance as a risk management mechanism has run
strategies are crucial adaptation investments. Such strategies
high within the international climate change negotiations
comprise an array of interventions to mitigate the risk of
under the United Nations Framework Convention on Climate
damage, including early warning systems, local village-level
Change (UNFCCC). Indeed, insurance is one of the few
responses, and structural interventions. They also include
specific policy instruments for adaptation listed in key
insurance.
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Paying the Premium: Insurance as a Risk Management Tool for Climate Change
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UNFCCC decisions.1


The table on the next page gives an at-a-glance summary of
The challenges of increasing effective insurance coverage for
the types of insurance discussed, how they relate to UNFCCC
climate-related events in the developing world are, however,
proposals, and the roles of key players in implementing each
substantial. Insurance is a complex financial product that
type of instrument.
needs strong regulatory oversight, support from the banking

C. Conclusions
and credit systems, reliable weather data, and significant

technical capacity. Insurance must also be carefully targeted
Based on our analysis, WRI suggests that, as Parties further
and tailored to meet the needs of the insured.
develop their ideas around insurance, priorities should include:

program elements that promote effective risk reduction;
Within the UNFCCC negotiations based around the 2005 Bali
clear, realistic roles for the UNFCCC, national governments
Action Plan, various insurance related proposals have been put
and the private sector; mechanisms for assuring that the
forward. However, because insurance is technically complex,
poorest and most vulnerable benefit from insurance; and
different proposals have been conflated or linked in ways that
safeguards to prevent maladaptation.
obscure their functions and objectives, as well as the decisions

or actions needed to implement them.
Section V of this paper suggests several options for

elaborating current proposals to address these key elements.
B. About this paper

Each of the proposals under discussion at the UNFCCC has
This working paper aims to clarify the issues around insurance
the potential to address these effectively. Without further
mechanisms designed to improve resilience among the poor to
development, however, Parties cannot be assured that any of
climate change impacts. We hope our analysis will inform the
the proposals will form the basis of an effective insurance
ongoing insurance discussions at the UNFCCC in the build up
mechanism.
to the Conference of Parties in Copenhagen in December
2009.

The next section makes the connection between poverty,
climate change and the role of insurance. Section III
articulates three types of instruments – solidarity fund,
catastrophic risk finance mechanism, and consumer insurance
products - that could be undertaken under the auspices of a
global climate agreement. Section IV analyzes three current
UNFCCC insurance proposals in light of this typology.
Section V identifies four design objectives required for
negotiators to come up with an effective UNFCCC-led
insurance mechanism: risk reduction, roles of key
stakeholders, benefits to the most vulnerable people, and
incentives to adapt to changes in the climate.

1 The Bali Action Plan of December 2007 calls for
“consideration of risk sharing and transfer mechanism, such as
insurance” as a means to address losses in developing
countries due to climate change. Article 4.8 of the UNFCCC
and article 3.14 of the Kyoto Protocol also allow room for
insurance to be included as a tool to combat the impacts of
climate change.
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Paying the Premium: Insurance as a Risk Management Tool for Climate Change
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Table 2 | Insurance Instruments Proposed in the Submissions to the UNFCCC
Instrument
Specific
Included
Instrument
UNFCCC’s Role
National
Private Sector’s
Category
Instrument
in
Objectives
Governments’ Role
Role
Global fund
Solidarity fund,
AOSIS
The fund pays out directly
Set up governance structure
Annex I parties provide
None. The fund would
compensation
Proposal
to countries that have
of fund.
funds. Non–Annex I
be comprised of public
mechanism
suffered catastrophic
Mandate Annex 1 parties to
parties receive funds
money and flow directly
damages from a climatic
pay into fund
and decide how to
to public institutions.
event or climate change
Create mechanisms to
spend them.
impact.
disburse funding.
Decide eligibility of recipient
countries.
Catastrophic
Subsidized
MCII
Rich countries pay
Set up global risk-pooling
Plan and implement
Decide on price for
risk
global risk pool
Proposal;
insurance premiums to a
facility, including governance
comprehensive risk
climate risks.
insurance
Secretariat
global risk-pooling facility
structure and facility operator
management
Build risk models
Scheme C
on behalf of vulnerable
(likely from the private
frameworks.
incorporating risk data.
countries.
sector).
Decide how they will
Operate insurance
Provide for gathering and
take part in this
scheme either
management of data and
scheme.
independently or under
information necessary to
Complete prevention
a public-private
determine premiums,
activities as part of
partnership.
including comprehensive
eligibility criteria.
global risk assessments

Agree architecture through
which Annex I parties pay
premiums.
Decide eligibility of
participating vulnerable
countries
Decide what risks are
covered.

Sovereign risk
Secretariat
Vulnerable countries pay
Help set up risk pooling
Join regional insurance
Operate mechanism
pool
Scheme C;
premiums to insure their
facilities.
mechanisms.
through the private
MCII
budgets against
Provide technical support and Pay premiums to an
sector or a public-
Proposal;
catastrophic risks. When
financing support for
insurance facility.
private partnership.
AOSIS
multiple countries pool
backstopping (if losses are
Decide how much
Reinsure through
Proposal
their risks, premiums are
very high).
insurance coverage to
capital markets.
lower and countries have
Provide data and risk models.
purchase.
Determine (private
better access to capital
Decide how to spend
sector) prices for risks
through reinsurance.
insurance payouts.
and premiums.
Provide data.
Build risk models.
Improve and
Sell insurance
standardize insurance
coverage.
market regulations.
Consumer
Commercial life
Secretariat
Individuals and
Provide technical support,
Form and improve
Provide insurance
insurance
and property
Scheme C; businesses pay premiums
incentives, and help in
regulatory frameworks
through private
products
insurance
MCII
to a commercial entity to
removing market barriers.
for insurance.
commercial entities.
Proposal;
spread the risk of a
Safeguard contract
Provide reinsurance
AOSIS
certain event in the future
enforcement and other
through global insurers
Proposal
over a period of time.
legal rights.
and capital markets.
When an event occurs,
insurance policy holders
receive payouts.
Microinsurance Secretariat Insurance is specifically
Offer technical support
Establish national
Determine price and
Scheme C; designed for and targeted
(program and policy design,
regulatory frameworks.
model risks.
MCII
to the poor, which often
funding for research, sharing
Obtain valuable local
Operate insurance
Proposal;
means providing
best practice, support for data
data through
programs.
AOSIS
insurance to a large
gathering)
meteorological and
Provide reinsurance of
Proposal
number of people with
agricultural extension
Financial support for
microinsurance
small assets to insure.
insurance pilots
services.
portfolios.
Offer research and
education on insurance
and risk management.
Decide whether to set up
stand-alone or integrated
insurance programs.
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Paying the Premium: Insurance as a Risk Management Tool for Climate Change
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percent of total losses (Hoeppe and Gurenko 2006).
II. CLIMATE CHANGE, INSURANCE AND THE

POOR
Just as the Gross Domestic Products of poor countries are hit

harder by disasters than those of rich countries, it is the poor in
The Intergovernmental Panel on Climate Change’s (IPCC)
all countries who suffer the most from extreme weather events
fourth assessment report in 2007 confirmed that natural
(Mechler, Linnerooth-Bayer, and Peppiatt 2006). The well-to-
disasters have been occurring more frequently, with the
do can cope using a variety of measures: they can buy private
number of extreme events expected to rise each year owing to
insurance, sell assets, or draw on their savings. But because
anthropogenic climate change (IPCC 2007). Economic losses
the poor have fewer assets and only limited access to formal
attributable to weather events also show a rising trend
financial institutions, their options in response to a natural
(UNFCCC 2008a). In the last decade (1996 to 2005),
disaster are much more limited. They may reduce their
economic losses from disaster events were seven times greater
consumption of food, eat cheaper but less nutritious food, take
than those in the 1960s, and insured losses rose by a factor of
their children out of school, or sell key productive assets such
twenty-five (Hoeppe and Gurenko 2006). Most of these losses
as tools or livestock. Although such steps can help poor
are attributable to global population growth, the greater
households cope with an extreme weather event in the short
concentration of people and economic value in urban areas,
term, in the long term they undermine well-being. Recovery
and the worldwide migration of populations and industries
from such episodes will become much harder as the frequency
into areas like coastal regions (which are particularly exposed
of extreme events increase with climate change. In other
to natural hazards). However, the increasing severity of
words, the worsening physical impacts of climate change will
climate forces has also contributed to this rising trend. Figure
aggravate the vulnerabilities of poor communities (Mechler et
1 shows the global increase of catastrophic events in the last
al. 2006; WRI 2008).
few decades, including growth in climate related events.


As the need to bolster the resilience of the poor grows more
Figure 1 | Number of Natural Catastrophes
urgent under a changing climate, options for improving access
Worldwide, 1980 to 2008
by the poor to insurance deserve careful consideration. If well
designed, insurance can offer cost-effective resilience to
weather shocks (Dercon 2004; Morduch 1994) and can help
poor households build and maintain other resources that
provide resilience, such as savings, remittances, and access to
credit. Insurance can help poor households in three ways.
First, insurance can provide access to immediate financial
liquidity after a disaster and the losses it may cause. The

Source: Munich Re Group, 2008
availability of cash immediately after a disaster means that

people do not need to sell their productive assets—and fall
Between 1985 and 1999 - due to their economies’
deeper into poverty (Barnett et al. 2006). Second, access to
considerably greater vulnerability to natural disasters -
insurance can unlock other development benefits like access to
developing countries lost 13.4 percent of their combined GDP
credit and other financial instruments that may be vital to
owing to natural disasters, compared with losses amounting to
sustaining livelihoods (Linnerooth-Bayer and Mechler. 2006).
2.5 percent of combined GDP in industrialized countries
Finally, insurance can continue to provide a long term safety
(Freeman and Scott 2005). Yet, while coverage of developed
net to protect the poor from losses caused by weather
countries’ commercial insurance for natural disasters has
extremes.
doubled over the last 20 years from about 20 percent of

economic losses to about 40 percent, insurance coverage in
Coupled with prevention and risk reduction measures and
developing countries has remained stagnant at about three
other innovations that help prevent the moral hazards
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Paying the Premium: Insurance as a Risk Management Tool for Climate Change
5
associated with shielding people from risks, insurance can
Facility (CCRIF) is an example of this second type of
help the poor make riskier investments that may bring them
insurance mechanism (see Annex A).
higher returns (see Box 2 and Box 3) (Churchill 2006; Hoeppe

C. Consumer Insurance Products
and Gurenko 2007; Holzmann and Jorgensen 2000).
Both individuals and businesses can purchase private

Box 2 | Moral Hazards and Maladaptation
insurance. New insurance products allow insurance to tackle

risks from weather disasters, remove moral hazards and also
Moral hazards in insurance happen when the availability of
insurance protection alters an individual’s motives to prevent
decrease transaction costs. Poor individuals may best be
losses. Such moral hazards increase costs to the insurance
served by microinsurance from a public-private partnership
provider and ultimately increase the price of coverage. Often
between insurance companies and the state or other non-
insurance, especially crop insurance is unfeasible in many
developing countries due to the high costs of controlling moral
governmental organizations (see Annex B for an example).
hazards. Shielding insurance policy holders from climate risks

can cause them to behave in ways that increase the risks and
cause maladaptation in the future. For example, the availability
Box 3 | Climate-Related Innovations: Index-Based
of subsidized insurance to home owners in flood plains can
Insurance
lead to more development in areas that will be more

susceptible to climate change.
Index-based insurance instruments are a recent innovation in

insurance design to respond to large-scale losses from
To remedy this, several innovations like index based
weather disasters and have helped lower the transaction costs
insurance, are emerging in insurance design linking incentives
of providing traditional loss-based insurance. An index can be
for insurance with preventive behavior. For example, insurance
used with many different types of insurance (e.g. those in
premiums can be tied to specific land and natural management
Table 1). Using an index, insurance payouts are tied to a
practices, or insurance holders themselves can police each
physical parameter like rainfall, instead of basing payouts on
other to ensure that risks are minimized. These minimize moral
actual losses. If the level of rainfall is below a certain reading at
hazards and decrease the risk of maladaptation. If the
a particular station or a geographic range, a payout is made,
incentives to reduce risk are properly aligned with the
regardless of the damages sustained. The rainfall acts an
incentives to buy insurance, insurance can guide individuals to
index in the scheme.
make decisions that will strengthen their resilience to climate

change impacts. Moreover, low-income households’ access to
Insurance policy holders have little control over how the index
insurance can aid in development, which in turn can strengthen
behaves and receive a payout irrespective of individual losses
their resilience to climate change.
as long as an index threshold is crossed. This mechanism

provides incentives for policy holders to reduce individual risks
because they can receive payouts even if they sustain no
III. TYPES OF INSURANCE RELAVANT IN THE
actual losses from a specific climate event. Moreover, since
UNFCCC
the coverage normally extends to everyone in a geographic

area affected by the physical index, it is less likely that only
those individuals at most risk will be the primary purchasers of
In this brief we consider three general categories of insurance
insurance.
for managing the risks associated with climate change, based

Index based insurance does, however, have disadvantages. It
on who pays, who is insured, and the value of assets insured:
requires an index parameter that tracks damages very closely.

An index that does not do so increases the likelihood that
A. Global Fund
buyers are not sufficiently covered for the actual losses that
The global community sets up a solidarity fund or some other
may occur due to a weather event. Such insurance schemes
also require reliable and accessible historical data to correctly
form of a compensation mechanism to pay the governments of
price losses and model risks. Policy holders in many
vulnerable countries against catastrophic risks caused by
developing countries also need to be familiar with the idea of
index based insurance, in particular, and insurance, in general.
climate change directly through an emergency fund.
Often, these concepts are new and unfamiliar in many

developing country contexts. Finally, index insurance schemes
B. Catastrophic Risk Insurance
require payouts as soon as a trigger is reached. This means
The international community sets up a global risk pool to pay
that scaled-up schemes need to have large cash reserves or
extensive reinsurance to finance such payouts.
premiums for vulnerable countries to insure them against the

impacts of climate change. Alternatively, vulnerable counties
IV. RISK MANAGEMENT AND INSURANCE IN
themselves share the risks because of weather-related
THE UNFCCC
catastrophic events through sovereign risk pools and risk

transfer facilities. The Caribbean Catastrophic Risk Insurance
There is growing recognition, both in the UNFCCC and
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Paying the Premium: Insurance as a Risk Management Tool for Climate Change
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outside, that insurance is only one of many tools needed as

part of wider risk management programs that both national
Figure 3 | Insurance Providers: Key Players
governments and the international community need to
undertake. Preventing and reducing risks first by surveying,
selecting and designing interventions or mechanisms are often
the best course of action. These first three steps of the risk
management process help to minimize risks that an individual,
community or a country faces. Risks that are impossible to
prevent or reduce can then be pooled and transferred through
insurance. In this context, insurance must operate in very close
coordination with other disaster risk reduction and prevention
measures, and is frequently the last step in risk management

Source: UNFCCC 2008b.
strategies (UNEP 2007). Figure 2 illustrates the role of

insurance in risk management.
A. UNFCCC Proposals


Figure 2 | Typical Sequence of Risk Management
Steps
A number of insurance proposals have been made in the
course of the climate negotiations under the Bali Action Plan,
covering all the insurance types outlined above in Table 1.
Most focus on establishing an insurance program to cover
catastrophic climate-related risks for vulnerable countries, and
would require large infusions of capital. The most recent Party
proposal on insurance was made by Barbados and the Cook
Islands on behalf of the more than forty countries of the
Alliance of Small Island States (AOSIS) (AOSIS, 2008).
Switzerland, Mexico, some countries of the European Union,
Bangladesh (on behalf of the Least Developed Countries),
China, India, Argentina, the Philippines, Malaysia, and Saudi

Arabia have also expressed interest in insurance schemes. The
Source: UNEP 2007.

Munich Climate Insurance Initiative (MCII), an observer
Insurance that manages the risks of climate change can operate
organization, also has submitted an insurance proposal (MCII,
on many levels and take many different forms. Each approach
2008). Of these submissions, only two are sufficiently detailed
functions differently and has different stakeholders and a
to provide a basis for analysis. We also examine the UNFCCC
different design. For example, the kinds of technical capacity,
Secretariat’s suggestions for an insurance mechanism in a
data, and governance needed to operate a global risk pool for
technical paper prepared for the Poznan talks in December
catastrophic risks differ from those needed to start a national
2008 (UNFCCC, 2008b).
micro- or macroinsurance program. Similarly, an insurance

product that services low-income households in developing
1. The AOSIS Proposal

countries will require a different business plan, involve
The AOSIS proposal includes elements covering insurance,
different stakeholders, and operate differently than will a
rehabilitation, and risk management (see Figure 4). The
commercial insurance product for corporations. Figure 3
insurance component would cover damages from extreme
differentiates insurance products according to the size of
weather events like hurricanes and cyclones. The
assets they cover and identifies some of their stakeholders.
rehabilitation component would address problems that Small

Island Developing States (SIDS) face as a result of climate

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Paying the Premium: Insurance as a Risk Management Tool for Climate Change
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change such as rising sea levels, desertification, and water
catalyzing micro- and national-level disaster insurance
shortages. This component would cover risks that most
systems, as well as technical support for collecting and
traditional insurance would not cover by calling upon the
disseminating weather data, financing risk assessment studies,
developed world to compensate the SIDS for damages caused
investing in weather station infrastructure, and offering
by climate change. Finally, the risk management window is
delivery services. In addition, this tier could provide more
intended to aid in mainstreaming risk management initiatives
direct support by offering or brokering pooling and
into national development planning and help in preventing the
reinsurance arrangements or even subsidizing premiums when
various risks associated with climate change. This proposal
needed (MCII 2008; MCII 2009).
places insurance in a larger framework that includes a

Technical Advisory Facility, and a Financial Vehicle that
Figure 5 | The Munich Climate Insurance Initiative
would help set up insurance systems in places where insurance
Proposal
markets have failed or are likely to fail.



Figure 4 | The AOSIS Proposal








Source: Mace, MJ. 2008. AOSIS presentation Poznan
Source: MCII presentation, Poznan, Poland December 2008.

2. The UNFCCC Secretariat’s Recommendations
2. The Munich Climate Insurance Initiative Proposal


The technical paper prepared by the UNFCCC secretariat
The Munich Climate Insurance Initiative (MCII) proposal has
proposes three different schemes for insurance related to
two broad pillars that are designed to operate simultaneously
climate risk management, the first two designed for countries
(see Figure 5). The first is a prevention pillar, which engages
with fairly mature financial markets. Scheme A is aimed at
countries in risk reduction and prevention. The second is an
finding reinsurance channels for existing insurance providers
insurance pillar, which has two tiers reflecting the different
in a particular country. The international process would help
levels of risk that need to be addressed. The first tier would
remove some of the existing barriers to an effective market by
insure against events causing damages that exceed the ability
providing funds for the data gathering, risk modeling,
of any one country to pay for disaster financing. Annual
technical training, and the development of regulatory
contributions from Annex I countries to a Climate Insurance
frameworks. Scheme B is similar, but would enable a number
Pool (CIP) would be used to purchase the insurance liability
of different insurance providers from different countries to
for each country eligible for coverage for such events. The
pool and transfer their weather-related risks for property and
insurance payments would most likely go to governments, and
infrastructure to the global reinsurance markets.
deductibles and eligibility criteria (participation in the

prevention pillar) would be used to avoid moral hazard
Scheme C is similar to the MCII proposal and is designed to
problems and encourage preventive measures.
include large parts of the global community, and to cover risks
The second tier would be a Climate Insurance Assistance
that could not otherwise be insured (see Figure 6). Like
Facility (CIAF) that would provide support and capacity
Schemes A and B, it contains provisions to help national
building for all other types of insurance mechanisms. This tier
insurance companies and other risk carriers (local
would provide capacity-building services in the form of
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Paying the Premium: Insurance as a Risk Management Tool for Climate Change
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cooperatives, NGOs, multilateral institutions, and insurance
mechanism: risk reduction, roles of key stakeholders, benefits
companies) gain access to international reinsurance. The
to the most vulnerable people, and incentives to adapt to
scheme also would incorporate two facilities; a technical
changes in the climate.
advisory facility to help countries build capacity, determine

prices, and model risks; and an optional financial vehicle to
Table 2 | Insurance Instruments Proposed in the
give countries access to better coverage and lower premiums.
Submissions to the UNFCCC
The financial vehicle also would regulate access to a
Instrument
Specific
MCII
AOSIS
Secretariat’s
Category
“responsibility fund” financed by both Annex I countries and
Instrument Proposal
Proposal
Proposal,
Scheme C
those participating countries that may use the fund as a
Global fund
Solidarity fund/ NA Compensation
NA
reinsurer. The fund would be designed to cover frequently
compensation
and
mechanism/
rehabilitation
occurring, lower-levels risks that may be uninsurable. It could
Responsibility
Window
also help insure very risky events, but only if the countries
fund
used the financial vehicle as a means to transfer risks to the
Catastrophic
Subsidized
Tier 1
NA Responsibility
risk
global risk pool (Climate
Fund feeding
international markets.
insurance
Insurance
into Financial

Pool)
Vehicle
Figure 6 | Scheme C of the UNFCCC Secretariat’s
Sovereign risk
Tier 2
Insurance
Risk pooling
Insurance Proposal
pool
Window,
component

Consumer
Commercial
Tier 2
Technical
Technical
insurance
life and
Advisory
Advisory
products
property
Facility and
Facility and

insurance
Financial
Financial
Vehicle/facility
Vehicle assist
carriers to
provide
insurance to
populations
Microinsurance Tier
2
Technical
Technical
Advisory
Advisory
Facility and
Facility and
Financial
Financial
Vehicle/facility
Vehicle assist
carriers to
provide

insurance to
Source: UNFCCC 2008b.
populations


Table 2 categorizes the different proposals according to the
A. Risk Reduction
typology of insurance instruments described in section III.


As noted above, submissions and Party interventions
V. NEXT STEPS: ELEMENTS OF AN EFFECTIVE
make it clear that the Parties have reached a certain level
UNFCCC INSURANCE MECHANISMS
of consensus on the importance of risk reduction and the

need to consider insurance in the context of a larger risk
The insurance proposals tabled thus far provide a diversity of
management framework.2 However, there is no consensus
insurance options for the Parties to consider. However, these
proposals cannot be judged solely on the type of insurance

2
they would institute – the effectiveness of a UNFCCC
For example, speaking on behalf of the European Union on April 6,
2009, in the Adaptation Contact Group breakout sessions on risk
insurance mechanism will depend heavily upon detailed
management and insurance during the UNFCCC Bonn talks (March
elements of the proposals that, in many cases, remain to be
29–April 9, 2009), the Czech Republic identified a spectrum of risk
management activities including mitigation, adaptation, disaster risk
fleshed out. Here, we raise four key issues that will need to be
reduction, sharing/transferring risks and humanitarian interventions.
addressed before Parties can craft an effective insurance
According to the EU, each country needs to determine for itself what
means of addressing risks is the most effective.
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Paying the Premium: Insurance as a Risk Management Tool for Climate Change
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yet regarding the role of the UNFCCC in promoting risk
of developing countries’ national governments, though
reduction and the relationship between risk reduction and
technical and administrative support may be funded through
insurance under the new agreement. Parties will need to
the UNFCCC. For consumer products, costs of premiums are
select among the following options:
more likely to play out in the market, though they may fall, at

least partly, to national governments under many
1. Risk reduction measures are a condition for
microinsurance program designs. Most of these instruments
participating in a UNFCCC insurance scheme.
This approach has the advantage of preventing the moral
will also need to access re-insurance from the international
hazard that may emerge under proposals where premiums are
markets.

not paid by the insured. It is proposed by MCII and rejected
2. Information
Management

by AOSIS.
Insurance requires accurate data and technical modeling in

order to price risks. Normally a private company would carry
2. Insurance programs create incentives for
participants to reduce their risks.
out these tasks but would keep them proprietary. Given that
Creating such incentives would depend on careful design of
markets have largely failed to provide the types of insurance
the insurance mechanism so that the price of insurance would
under discussion here, however, governments or the UNFCCC
vary with the level of risk reduction. For example,
may need to be engaged in the development and dissemination
participation in a prevention “window” could result in lower
of risk assessments, weather data, and pricing models. This
premiums for countries participating in a risk pooling scheme.
need is likely, regardless of the instrument selected.
Such incentives will be harder to create for insurance products

3. Building technical capacity and enabling
where those who are insured do not pay the premium
environments
associated with their risk.
Insurance requires considerable technical capacity to design

and operate local, national, and international schemes. The
3. The UNFCCC promotes risk reduction separately,
without an explicit link to an insurance scheme.
UNFCCC can support the building of such capacity in
Disaster risk reduction, early warning systems, and better
countries, and may wish to draw upon emerging experience in
management and planning are necessary for adapting to
other multilateral institutions (see Box 6). However, much of
climate change and may be priorities for adaptation support
the needed technical skill lies with the private sector, and it
elsewhere within the UNFCCC, regardless of the kind of
remains to be seen whether private sector players can be
insurance system put in place.
engaged via the UNFCCC, or whether national governments

will need to play the central role in forming public-private
B. Roles of Key Stakeholders
partnerships. Likewise, the global community can work

together on models of enabling environments (regulations,
Implementing the different types of insurance would require
data, and policies) for making insurance effective, but
different sets of actions on the part of the UNFCCC, national
ultimately, only national governments have the power to make
governments, and the private sector. For the most part,
the necessary changes.
proposals on the table have not yet acknowledged these

players’ distinct roles or addressed in any detail how they will
Box 6 | Risk Transfer and Insurance by Multilateral
be performed. Table 1 describes more fully the roles played
Institutions
by each of these stakeholders in each type of insurance under
The Global Index Insurance Facility (GIIF)
discussion. The roles can be roughly categorized as follows:
A newly launched insurance facility under the World Bank3 is

designed to:
1. Financing
•
Provide technical assistance and infrastructure
For catastrophic risk insurance, the costs of insurance
premiums will fall to developed countries if premiums are

3The World Bank is now considering a partnership with PartnerRE.
paid (or subsidized) through the UNFCCC. If a sovereign risk
Although the facility has not yet been set up, it was approved by the
pooling model is selected, premiums will be the responsibility
World Bank Group board in November 2007.

WORLD RESOURCES INSTITUTE • June 2009

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Paying the Premium: Insurance as a Risk Management Tool for Climate Change
10
support to develop index insurance.
insurance pay-outs are likely to go directly into government
•
Aggregate and pool risk from different developing
countries to improve pricing and risk transfer into the
budgets. The benefit of insurance pay-outs to vulnerable
global reinsurance and capital markets.
populations will then depend largely on whether national
•
Cofinance certain insurance products on a bilateral
governments choose to use the funds to support the needs of
basis

the poor. Such decisions, in turn, depend upon the
A new and dedicated re-insurance company with capital of
effectiveness of the channels through which the interests of the
$100 million would also be created The private sector would
cover 50 percent of the costs; the European Investment Bank
poor are represented in government decision-making.
(EIB) and the International Finance Corporation (IFC) would

cover 20 percent each; and the balance would be covered by
other multilateral and bilateral donors. The facility’s commercial
In the case of catastrophic risk insurance, the UNFCCC could
functions would include market intermediation, risk pooling,
design incentives or eligibility requirements to focus on
limited holding of risk (risk warehousing), and market
development.
assessment of social drivers of vulnerability and planning for

service to the poor. This could be accomplished by designing
UNDP Climate Risk-financing Facility
pro-poor elements into risk reduction options identified in
UNDP is exploring ways to open a climate risk–financing
facility to aid development efforts generally. The facility would
section A above.
assist public authorities in implementing development and risk

reduction–oriented climate change risk transfer mechanisms at
Commercial insurance products often do not serve low-
the local and regional levels.

income, vulnerable populations very effectively, and typically
The new facility’s objectives include
•
require government intervention if the market barriers to

Providing technical assistance to design and
implement required policy and institutional
serving these populations are to be overcome. Microinsurance
infrastructure to develop risk-sharing instruments.
is a form of commercial insurance product specifically
•
Linking national and regional actors with
national/international insurers and reinsurers.
designed for and targeted at the poor, and it usually is
•
Facilitating financial flows to risk products through
delivered through a public-private partnership. Smartly
innovative financing schemes.
designed microinsurance programs that are tailored to local


conditions can help build resilience to climate shocks. The
C. Benefits to the Most Vulnerable
UNFCCC could support such designs through technical

assistance and information provision. However, even
As discussed in Section II, poor and marginalized populations
microinsurance requires policy holders to have a minimum
are frequently those most vulnerable to the effects of climatic
level of productivity, and is unlikely to reach those people
events. Many of them live in countries where insurance is not
who have no insurable assets.
available, or when it is, is not designed to meet their needs at a

price they can afford. Although proposals to the UNFCCC all
D. Incentives to Adapt
cite the need for insurance programs to service poor and

Improving the insurance coverage of low-income people can
vulnerable populations, they do not explain in any detail how
help them build resilience to the effects of extreme climatic
they would extend access to insurance in the developing world
events. This resilience-building is itself an important
or how they would design smart insurance programs that aid
adaptation, given that climate change is projected to increase
in reducing vulnerabilities.
the frequency and/or severity of extreme events in many parts

of the world.
Whether and how a UNFCCC insurance mechanism benefits

the most vulnerable will depend upon a range of decisions,
However, by shielding policy holders from future risks,
few of which have yet been addressed in any detail through
insurance also provides incentives for behavioral change. Such
the negotiations. Many key decisions, in fact, are unlikely to
incentives can work in two opposing ways. On the one hand,
be made in the negotiations, but will fall to decision-makers
access to insurance can cause maladaptive actions if such
within participating countries. For example, if the UNFCCC
incentives promote behaviors that lock policy holders in a
supports a subsidized global risk pool or a sovereign risk pool,
development pathway that does not account for the future
WORLD RESOURCES INSTITUTE • June 2009

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Document Outline

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