Irrational Economist_ Making Decisions in a Dangerous World - Erwann Michel-Kerjan [114]
By calling for a “truly international endeavour,” Shu Zukang set the stage for this discussion, which proposes a radical extension of national social protection systems in the direction of an international regime that would support insurance mechanisms as a way of providing financial protection against weather-related losses in vulnerable countries.
This topic is highly relevant to development organizations, humanitarian groups, and international financial institutions. Recognizing that disasters are a major impediment to local economic development and, hence, an important contributor to poverty, and that post-disaster aid has failed to sufficiently reduce this impact, many donor organizations are already switching from aid to social protection with insurance. Insurance for the most vulnerable is also a “hot topic” on the climate negotiation agenda, which, building on the Kyoto Protocol, is expected to include adaptation as an important response to climate change. Both the Framework Convention on Climate Change (UNFCCC) and the 2007 Bali Action Plan2 specifically call for consideration of risk sharing and transfer mechanisms, such as insurance, as a means to adapt to weather-related loss and damage in developing countries.
My aim in this chapter is to make a case for including insurance in development assistance strategies as well as in the emerging climate adaptation architecture. I argue this case in full recognition that insurance is not appropriate in all contexts and that it must be designed to minimize inefficiencies through price-distorting subsidies. Donor-supported insurance programs, some of which introduce novel index-based pricing, are already serving the poor.
Below, after briefly discussing the implications of weather extremes on poverty, I review the costs, benefits, and challenges of these programs and then introduce a recent proposal for including insurance as part of the climate agreement expected, as of this writing, to emerge from the 2009 negotiations in Copenhagen. This proposal, known as the Munich Climate Insurance Initiative (MCII), offers a practical way of building an international regime for social protection.
WEATHER EXTREMES: WHY THE POOR SUFFER THE MOST
The impacts of natural hazards on economic well-being have escalated alarmingly in recent decades. Although increased population and wealth in vulnerable areas remain the main factors in explaining rising losses, the Intergovernmental Panel on Climate Change (IPCC) has predicted that extreme event impacts are “very likely” to change because of increasing weather variability.3 There is even mounting evidence of a current “climate signal,” with the IPCC (2007) reporting observations of widespread changes in temperature, wind patterns, and aspects of extreme weather, including droughts, heavy precipitation, heat waves, and the intensity of tropical cyclones.
With over 95 percent of disaster fatalities and far greater relative economic losses occurring in low- and middle-income countries, the poor suffer the most (see Figure 25.1). One reason is that developing countries employ many more people in the weather-sensitive agricultural sector. In sub-Saharan Africa, for example, 90 percent of the population relies on rain-fed agriculture for their basic food needs.4 It is important to keep in mind that the losses from disasters in low-income countries are not only economic but often existential as well.
The data pictured in Figure 25.1 do not include the long-term consequences of disasters on economic development—consequences that can greatly amplify both economic and human losses. Due to limited tax bases, high indebtedness, and low uptake of insurance, many highly exposed developing countries cannot fully recover from disasters simply by relying on limited external donor aid. In turn, external