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Equity

The authors of the “UN World Economic and Social Survey 2008” argue that security against disasters cannot be left solely to individual responsibility and market forces: “Transferring the responsibility for sufficient protection against disasters to individuals by merely ensuring that risk transfer and risk pooling, such as insurance, are available can therefore not be the primary pillar for addressing the insecurity challenge.” The case for shifting a part of the responsibility from poor to wealthy nations is greatly strengthened by recent evidence that greenhouse gas emissions are likely contributing to increased weather variability and to the risk of extreme events, and disproportionately burdening vulnerable developing countries. According to the UNFCCC’s principle of “common but differentiated responsibilities and respective capabilities,” industrialized countries are arguably obligated to absorb a portion of this burden.

To help make this principle operational, IIASA scientists have assisted the Munich Climate Insurance Initiative in putting forward a proposal to include insurance instruments in the climate-change adaptation regime expected to be agreed upon in Copenhagen in December 2009. According to this proposal, a risk-management financing mechanism would include two pillars: prevention and insurance, which would act together to reduce the human and economic burdens on developing countries. The insurance pillar has two tiers. The first is a Global Insurance Pool, which compensates part of the losses from high-level risks in vulnerable countries. IIASA estimates that if all losses to governments unable to cope with their financial burdens were compensated by an international fund, the annual costs would average about US$8 billion, a small fraction of average annual losses in the developed world. (After Hurricane Katrina in 2005, the U.S. government sought $105 billion for relief and reconstruction.) The second tier is an Insurance Assistance Facility, which provides technical and financial support to fledgling insurance systems (such as the ones in Malawi, Ethiopia, Mexico, and the Caribbean that I’ve mentioned above) to cover middle-layer risks. Both pillars would be fully financed by an adaptation fund expected to emerge from the Copenhagen Agreed Outcome, and thus by citizens of the developed world. A similar proposal has been put forth by the Alliance of Small Island States (AOSIS).

CONCLUSION: A ROLE FOR THE ECONOMIST

Shu Zukang’s words remind us that “in an increasingly interdependent world and on a fragile planet, building a more secure home is a truly international endeavour.” Accordingly, and in this spirit, the present discussion has examined the idea of an international social protection regime in the form of insurance against extreme weather that is affecting and worsening poverty in the developing world. Under the auspices of the UNFCCC, I strongly believe a rationale exists for such a regime. This rationale is based on three premises: (1) Insurance can have large benefits for low-income individuals and governments, not only enabling them to recover from catastrophic weather events but also providing the security necessary for productive investments and thus for escaping poverty. (2) The private market, alone, cannot provide this security to the most vulnerable because they are unable to afford catastrophe insurance premiums (the cost of which is far higher than anticipated losses) and because the market fails to offer protection for very rare and high-consequence events. (3) Climate change is likely already worsening weather disaster risks, and wealthy nations have committed themselves through the UNFCCC to respond according to the principle of “common but differentiated responsibilities and respective capabilities.”

A practical way forward is to include a risk management mechanism in the adaptation architecture in the Copenhagen Agreed Outcome. The recent MCII proposal for such a mechanism calls for two pillars, prevention and insurance, both of