micro insurance to address climate change risks feb'13
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MICRO INSURANCE TO ADDRESS CLIMATE CHANGE RISKS AND GLOBAL REVIEW OF INSURANCE INDUSTRY RESPONSES
“CLIMATE LITERACY FOR BANKING SECTOR”From 11.02.2013-13.02.2013
12st February2013Dr. N. Sai Bhaskar [email protected]
MCR-HRD IAP, HYDERABAD
Insurance
Insurance is the equitable transfer of the risk of a loss, from one entity to another in exchange for payment.
Individual entities can also self-insurethrough saving money for possible future losses
Floods
Fires
Hurricanes
Drought
Disease
While you’re reading this, the ice is melting. The effects of
climate change are being felt today
Real losses are being incurred
The threat of future losses can no longer be ignored
Who pays for it?
Imaginable Surprise
Some events are not truly unexpected. It is possible to imagine the conditions
necessary to produce extreme “surprises.”
Integrated assessment models are less reliable with increased probability and number of surprises.
Vulnerability
Vulnerability to climate change is the risk of adverse things happening
Vulnerability is a function of three factors:
Exposure
Sensitivity
Adaptive capacity
Adaptation
“adjustment in natural or human systems in response to actual or expected climatic stimuli or their effects, which moderates harm of exploits beneficial opportunities”
(Third Assessment Report, Working Group II)
Includes “actual” (realized) or “expected” (future) changes in climate
Adaptation (continued)
Two types of adaptation
Autonomous adaptation or reactive adaptation tends to be what people and systems do as impacts of climate change become apparent
Anticipatory or proactive adaptation are measures taken to reduce potential risks of future climate change
Climate Changes in India
Increase in surface temperature by 0.4 degree C over the past century.
Warming trend along the west coast, in central India, the interior peninsula, and northeastern India.
Climate Changes in India
Cooling trend in northwest India and parts of South India.
Regional monsoon variations: increased monsoon seasonal rainfall along the west coast, northern Andhra Pradesh and North-western India, decreased monsoon seasonal rainfall over eastern Madhya Pradesh, North-eastern India, and parts of Gujrat and Kerala.
Climate Changes in India
Observed trends of multi-decadal periods of more frequent droughts, followed by less severe droughts.
Studies have shown a rising trend in the frequency of heavy rain events and decrease in frequency of moderate events over central India from 1951 to 2000.
16
Climate Changes in India
Records of coastal tide gauges in the north Indian ocean for the last 40 years has revealed an estimated sea level rise between 1.06-1.75 mm per year.
The available monitoring data on Himalayan glaciers indicates recession of some glaciers.
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Per-capita Carbon –dioxide emission (Metric Tons)
USA Europe Japan China Russia India World average
0
5
10
15
20
25
20.01
9.4 9.87
3.6
11.71
1.02
4.25
What questions do we now need to consider?
Do you know what impact climate change could have on your area?
Do your current policies, strategies and plans include provision for the impacts of climate change?
Can you identify and assess the risks from climate change to your services?
Are developments with a lifetime of more than 20 years required to factor in climate change?
Are you addressing climate change in your local Community Strategy?
July 2005 – Mumbai Flood
On 26th July 2005 the meteorological station at Santacruz in North Mumbai (India) recorded 944 mm of rainfall within 24 hours, the highest ever in the history of precipitation recordings in India.
Tropical Cyclone Nargis, May 3, 2008
Source: http://www.reliefweb.int
Wind velocities up to 215 km/h (Cat 4)
Floods in the Irrawaddy delta, also Yangoon affected
Human catastrophe
Estimated number of fatalities about 100,000
© 2008 Münchener Rückversicherungs-Gesellschaft, GeoRisikoForschung, NatCatSERVICE
Victoria Wildfires, Australia (Black Saturday Fires) February 2009
Source: Reuters, Berlin
© 2009 Münchener Rückversicherungs-Gesellschaft, Geo Risks Research, NatCatSERVICE. As at June 2009
Wildfires, February 2009
Overall losses: US$ 1,300m*Insured losses: US$ 650m*Fatalities: 173 *Losses in original values
Heat stress
Cold stress
light
extreme
high
moderate
lightcomfortable
moderate
high
extreme
Perceived Temperature on 8 August 2003 and excess mortality
Sources: Robine et al., 2007; German Weather Service, 2004
19.500
9.400
15.000
300
2.300
20.100
2.700
1.000 800
Heat wave of 2003, with more than 70,000 fatalities the largest humanitarian natural catastrophe in Europe for centuries
25.-30.8 Hurricane Katrina, USA (1.322 fatalities)
Insured losses (US$ m): Economic losses (US$ m): 125.000
61.000 (NFIP included)
source: AP
August 2005 – Hurricane Katrina6th strongest hurricane, largest losses of a single event
Munich Re NatCatSERVICE – One of the world‘s most comprehensive databases on natural catastrophes
From 1980 until today all loss events For USA and selected countries in Europe all loss events since 1970 Retrospectively all Great Natural Catastrophes since 1950 In addition all major historical events starting from 79 AD – eruption of Mt.Vesuvio
(3,000 historical data sets) Currently more than 26,000 events documented
Great natural catastrophes:
Hurricane Ike Cyclone Nargis
Earthquake China
Winter damage China
Extreme temperature (heat wave, forest fires)
Flood
Storm
Earthquake, tsunami,volcanic eruption
Natural catastrophes 2008
© 2009 Münchener Rückversicherungs-Gesellschaft, Geo Risks Research, NatCatSERVICE. As at June 2009
Great natural catastrophes in Asia 1950 – 2008
Geophysical events(earthquake, tsunami, volcanic activity)
Meteorological events (storm)
Hydrological events(flood, mass movement)
Climatological events(extreme temperature, drought, wildfire)
© 2009 Münchener Rückversicherungs-Gesellschaft, Geo Risks Research, NatCatSERVICE – As at September 2009
Natural catastrophes in Asia
Climatological events (Extreme temperature, drought, forest fire)
Hydrological events(Flood, mass movement)
Meteorological events(Storm)
Weather catastrophes in Asia 1980 – 2008Number of events
Natural catastrophes 2008
© 2009 Münchener Rückversicherungs-Gesellschaft, Geo Risks Research, NatCatSERVICE – As at September 2009
50
100
150
200
250
300
350
400
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Global natural disasters 1980 – 2008Geophysical, meteorological, hydrological events
50
100
150
200
250
300
350
400
450
500
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Hydrological events(Flood, mass movement)
Meteorological events(Storm)
Geophysical events (Earthquake, tsunami,volcanic eruption)
----- Trend line
Num
ber
© 2009 Münchener Rückversicherungs-Gesellschaft, Geo Risks Research, NatCatSERVICE
Climate change probably has a significant impact on increases of nat cat losses, especially in North America and Asia/Australia.
Global NorthAmerica
Europe Asia/Australia
1980 –
2007
Nat cat loss trend (% p.a.) 11 11 8 15
Climate component (% p.a.) 4 5 1 6
Comments
These data are indicative only – a more precise determination of the regional loss drivers related to climate change is needed (e.g. via LSE cooperation)
Nat cat loss trend: growth rates of original/nominal values and not adjusted for inflation
Climate component: actually “Climate plus X” because influencing factors include anthropogenic climate change, natural climate variability, changes in vulnerability and changes in population distribution
Annual growth rates of nat cat losses and climate component
very likely > 90% likely >66% more likely than not > 50%
Climate Change and Extreme Weather Events (IPCC, 2007)
Trends of heavy precipitation events during summer monsoon in India
Source: Goswami, B. N. et al. (2006), Science 314
Integrating the Uncertainty and Surprises of Climate Change
Intergovernmental Panel on Climate Change (IPCC) established in 1988.
Assesses the scientific, technical and socio-economic information relevant to understanding the risk of human-induced climate change, its potential impacts, and options for adaptation and mitigation.
What’s the Policy on Climate Change? Earth Summit (1992) Kyoto Protocol (2001) World Summit on Sustainable
Development (2002)
The Insurance Industry
The Insurance Industry
It is a continuous cyclical process whereby the council:
identifies, assesses/evaluates, controls: andmonitors
potential opportunities and adverse effects that challenge the assets, reputation and objectives of the Council.
A central part of our strategic management.
It enables the Council to effectively manage strategic decision making, service planning and delivery to safeguard the well being of its stakeholders
What is risk management?
Objectives
Iden
tify
Mon
itorRisk
ManagementCycle
Control
Assess
What is Risk Management?
Political
Economic
Social
Technological
Legislative & Regulatory
Environmental
CitizenGovernance
Information/Know
ledgeCom
petitive/Procurement
Part
ners
hips
Cont
ract
ual/
Supp
liers
Peop
le
Fina
ncia
lPh
ysica
l Ass
ets
Servi
ce Continuity
Health & Safety
Programme/Projects
Customer/Client
Fraud
Decision makingReputation
Risk and Opportunity Rainbow
Drought
Flood
Extreme Rainfall
Storm
High Winds
Cold/Snow/Ice
Heat/SunFuel/Transport
Energy
Carb
on/G
reen
hous
e G
as e
mis
sion
s
Biod
iver
sity
Clea
n Ai
r/Po
lluta
nts
Serv
ice d
eliv
ery
Insu
rance
Financia
l
Legal
Market changes/demands for services
People/health & Social care
Procurement
Planning
Water
Environmental Risks
Waste
Drawing on accumulated savings of liquid assets (e.g. cash, bank account balances etc.).
Selling other assets (e.g. jewelry, land, livestock etc.). Borrowing from moneylenders, microfinance
institutions (MFIs), banks or other financial institutions. Informal risk-sharing arrangements with neighbors,
friends, family etc. (For example, if the household suffers an adverse shock, there may be an increase in remittance income sent by family members living abroad, or financial assistance provided by other households living in the same village, at least to the extent that those households are not also affected by the same shock).
Government assistance (e.g. government work programs, drought assistance programs etc.).
Formal insurance arrangements
Finance: Implications for investments, insurance & stakeholder reputation
Risks: Failure to climate proof creates difficulties in securing investment and/or insurance
cover
Potential liabilities if climate change is not factored into long term decisions about the future
Possible impacts: Insurance Policies: Check Insurers stance on undefended flood risks and impact on
premiums
Future Developments: improved specification that takes account of future climate is likely to be cost effective in most cases
Opportunities/Controls/Mitigation Evidence of climate proofing enhances reputation with all stakeholders, provides
security for investments and an opportunity to reduced insurance premiums
Climate Change Risks and Opportunities
What types of claims are we now seeing?
Long term dry conditions:
Drought affects trees- roots cause subsidence to properties and can create heave in pavements creating slips trips and falls
Wet conditions:
Flooding Drainage issues
Increase in wind speeds:
Structural damage to buildings
Extreme cold conditions:
Frozen pipes - escape of water
Understanding
Natural catastrophes, especially weather related events, are increasing in number and magnitude especially in Asia.
There is more and more scientific evidence for causal links between climate change and increasing frequencies and intensities of natural catastrophes.
Global warming is real.
We have to mitigate global warming and adapt to the changing risks in respect to the regionally specific risk patterns.
In Copenhagen ambitious CO2-reduction targets should be fixed to avoid dangerous, unmanageable climate change.
The insurance industry supports climate change mitigation and adaptation measures by sharing its knowledge with the public and providing custom made covers for innovative technologies.
The Copenhagen outcome should provide adaptation funds for developing and emerging countries, including new insurance solutions.
To date, there is little understanding of or agreement within the climate change community on the role that insurance-related mechanisms can play in assisting developing countries adapt to climate change.
India is considered to be the second most disaster-prone country in the world.
With a large and growing population, densely populated and low-lying coastline and an economy that is closely tied to its natural resource base, India is highly vulnerable to climate change.
Disaster insurance cover, however, is low compared to international standards and plays only a complementary role. Disaster risk management, including financing relief and reconstruction, is primarily the responsibility of governments, which provide actual assistance, or communities through informal risk sharing.
Frequently governments and communities do not have sufficient resources, and households lacking insurance typically turn to moneylenders, selling assets, reducing inputs in farming, or diversifying their activities. Another strategy is to send family members to work elsewhere and remit payments.
However, such traditional risk management strategies, while reducing vulnerability in the short term, can increase vulnerability over the longer term by promoting sub-optimal asset allocation. For instance, small farmers may opt for multiple cropping to reduce income variability rather than planting the most profitable crops. Traditional risk sharing strategies also break down in case of disasters affecting an entire community or area (Hess et al, 2002, Lilleor et al, 2005).
Low insurance penetration in India can be traced to a number of demand and supply side factors. On the demand side, the foremost difficulty is the unaffordability of insurance for low-income high-risk regions. Other hurdles include public myopia and low awareness among the public about insurance and risk management.
The experience of major insurance companies shows that following a major catastrophe there is a rush for insurance cover, particularly for life and assets. But this interest is short lived, and in a majority of cases these policies are not renewed. Finally, large sections of the Indian economy operate outside the formal economy – not just small businesses, but also housing.
On the supply side, easy access to insurance products is still an issue. The problem of scaling up small-scale schemes to encompass large rural areas is the biggest hurdle in enhancing overall penetration rates. The poor in many rural areas have higher disaster risk exposure and also suffer more vis-à-vis their urban counterparts (World Bank, 2003). More specifically, their vulnerability to climate- change risks is increased on two counts: their inability and/or unwillingness to involve in high-risk activities (for instance growing cash crops) that promise higher returns, and their inability to reside in disaster safe locations.
The entry of the private sector has metamorphosed insurance in India by greatly improving penetration levels. Companies have innovated with their product offerings and marketing strategies. For example, index-based weather risk micro-insurance programs have been pioneered in India as an alternative to traditional crop insurance.
These instruments are linked to the underlying weather risk defined as an index (based on historical data, e.g. for rainfall, temperature, snow, etc) rather than the extent of loss (e.g. crop yield loss). It is estimated that currently about 150,000 farmers have purchased such cover in India. More capital will also encourage a greater involvement of global partners, and thereby, enhance product innovation, service quality and technology standards.
Communities at risk, governments, international organizations, industry, and NGOs worldwide are seeking solutions for preventing and adapting to the rapidly multiplying impacts of climate change and weather-related disasters.
Article 4.8 of the United Nations Framework Convention on Climate Change (UNFCCC) and the supporting Article 3.14 of the Kyoto Protocol call upon developed countries to consider actions, including insurance, to meet the specific needs and concerns of developing countries in adapting to climate change.
The Munich Climate Insurance Initiative (MCII) was formed in 2005 by NGOs insurers and reinsurers, climate-change experts and policy researchers to provide a forum for examining insurance-related options that assist with adaptation to the risks posed by climate change. The full MCII report on Insurance Related Options for Adaptation to Climate Change will be posted on the following websites after COP 11:
www.slf.ch/drf and www.iiasa.ac.at/Research/RMS. This summary outlines concrete options for climate
negotiators to support insurance mechanisms for climate-related disasters in disaster-prone developing countries. It discusses the scientific and economic rationale of a climate “insurance” system, options for such schemes, funding opportunities, associated benefits and the role of the private sector. Special attention is given to India as a case study.
Climate disasters include such events as heat waves, droughts, bush fires, tropical and extra tropical cyclones, tornadoes, hailstorms, floods and storm surges. The losses from natural disasters are increasing, a trend that is attributed mainly to the increasing concentration of people and economic values in urban areas and the migration of populations and industries into areas, such as coastal regions, that are particularly exposed to natural hazards.
Considering weather-related disasters, a large proportion of the increase in economic losses from 1980 to 2004 has occurred in high-income countries that have experienced large increases in capital (lower middle-income countries have also experienced some increase). Still, the lower-income countries continue to bear the largest economic burden of disasters as measured in terms of GDP.
Highly exposed developing countries rely extensively on external concessional borrowings from international development banks (such as World Bank, IDB and the IMF) and international donor aid to deal with the devastating consequences of natural disasters.
A concern to donors and multi-lateral financial institutions, among others, is the increasing share of aid spent on emergency relief and reconstruction, which crowds out spending for social, health and infrastructure investments. The World Bank estimates that it has provided grants and loans for disaster relief and recovery of more than US$ 38 billion to developing countries over the last two decades (Gurenko, 2004; Gilbert and Kreimer, 1999), and the Asian Development Bank also reports large loans for this purpose (Arriens and Benson,1999). This means that disasters will continue to profoundly impact the lives, health, and property of millions of people, and will be acutely felt among the world’s poorest people. To date, these vulnerable groups have also had the least access to affordable insurance.
Weather shocks often affect all households in a local geographic area, making some forms of risk-coping, such as seeking help from nearby family, friends and neighbors, relatively less effective. Globally, household exposure to extreme weather events is likely to increase over future decades, due to climate change as well as population growth in risk-sensitive areas
Efforts have been made in India and other countries in
recent years to develop formal insurance markets to
improve diversification of weather-related income
shocks.
The Indian rainfall index insurance market. “Index insurance” refers to
a contract whose payouts are linked to a publicly observable index; in this case, the index is
cumulative rainfall recorded on a local rain gauge during different phases of the monsoon season.
This form of insurance is now available at a retail level in
many parts of India, although these markets are still in their
relative infancy in terms of product design and
distribution.
Lloyd’s (2009) estimates that around 135 million low income
individuals around the world already make use of micro-insurance in
some form, and estimates a potential final market size of 1.5bn
to 3bn households.
Growth in these markets reflects a broadening of efforts
towards greater financial access for the poor to include
insurance and savings products in addition to micro-
credit.
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