Not A Silver Bullet

Why the focus on insurance to address loss and damage is a distraction from real solutions.
For free

The countries most vulnerable to climate change are those that did the least to cause it. Developing countries are being increasingly hammered by the direct impacts of a growing number of climate change charged weather extremes–super-sized storms, worsening floods, and more devastating droughts–as well as the insidious, slow onset of rising sea levels. These climate events often overwhelm economies, costing poor countries, by some estimates, US$500 billion annually and forcing 26 million people into poverty each year.
Yet in an egregious injustice, developing countries are paying not just the majority of direct costs, but also for the “solution” in the form of premiums for insurance schemes, which rich countries champion as the main response to climate catastrophes. This is contrary to the responsibility, enshrined in UN agreements, of rich countries and polluting industries to pay for the costs of action to address climate change under the “polluter pays” principle. In effect, insurance schemes, which are zealously promoted by developed countries have garnered the vast majority of finance committed by all rich countries to loss and damage thus far. Insurance also remains the main focus under the work program of the Warsaw Mechanism for Loss and Damage (WIM) to advance its mandate for progress on loss and damage finance provision. 

This study argues that the focus on insurance by developed countries is too narrow and comes at the expense of a serious consideration of other options. Insurance is only one tool in a much larger toolbox. The emphasis on insurance is also self-serving and diverts the focus from the failure of developed countries to provide adequate and predictable public climate finance in order to fulfill their obligations under the climate regime to one of blaming developing countries for a lack of effort to manage their growing climate risk. This is an unfair and unreasonable expectation, as developing countries did not cause climate change.

The narrow focus on insurance is also ideologically motivated, looking to the private sector and public-private partnerships as a financing solution. This analysis finds that the evidence on whether climate insurance is the most appropriate or most sustainable risk management mechanism for poorer countries is lacking, particularly in comparison with other approaches, such as investing in informal savings schemes, social safety nets, or cash transfer programs. The evidence points to such alternative public approaches, for which affected citizens when consulted about their preferences have voiced strong support, providing better value for money than the cost of insurance premiums. 

In order to illustrate some of these points, this study considers three case studies: two comparison cases of climate impacts in the developing and developed world during the 2017 hurricane season and one case of climate exacerbated drought in Malawi. First, this paper contrasts the role of insurance in response to hurricane impacts in Dominica and the United States. In Dominica, which suffered catastrophic loss and damage from Hurricane Maria estimated at US$1.37 billion (or 226 percent of its GDP), sovereign insurance under the Caribbean Catastrophe Risk Insurance Facility (CCRIF) provided just US$19.3 million or 1.5 percent of the cost of loss and damage incurred, adding insult to injury to the injustice of Dominica having to fund their own solution to climate impacts by paying an insurance premium. In the United States, as damage from climate related events increases, loss is more and more being shifted from the private to the public sector. Despite a political emphasis on insurance provided by public-private partnerships, the exposure of the US federal government grew more than four times the rate of private sector insurance exposure. Nevertheless, even with a growing number of at-risk households paying for insurance, too many were left inadequately covered.

This study also analyses the experience of Malawi with sovereign-level drought insurance from the African Risk Capacity (ARC). ARC served as Malawi’s primary source of risk financing to address the devastating impacts from extreme weather events, such as the extended drought that followed a once-in-500-years flood in 2015, causing US$365.9 million in loss and damage. ARC, initially challenging that an insurance claim payout had been triggered, ultimately paid out US$8.1 million nine months after Malawi declared an emergency; this was not only “too little too late”, but also undermined the chief advantage of climate insurance—an immediate payout to address urgent needs post-disaster. 

Even a doubling or tripling of insurance coverage for poor countries would have only scratched the surface of the loss and damage associated with the major climate events analyzed. This study finds that insurance cannot be scaled up to the point where it would provide a viable disaster response. In each case, the bulk of support came from other sources of public finance. For developing countries future support will continue to have to rely on international finance. Selling insurance as a panacea, when it is at best only capable of playing a small supporting role, is not helpful.

This paper highlights a number of approaches to loss and damage that should receive more attention and international finance, such as national contingency funds with dedicated loss and damage savings pools or social protection programs, social safety nets, and direct cash transfers to increase the underlying resilience of communities. Alternative livelihood programs, to retrain communities confronted by the loss of resources, such as fish stock declines or desertification, are also cost-effective alternatives to insurance coverage, including by ensuring that the poorest people (who often cannot pay the premium for microinsurance schemes) are fully benefiting. Contingent emergency credits, released only following an extreme event, or increased concessionality and flexibility of green credit lines provided under climate financing mechanisms, such as the Green Climate Fund (GCF), to adapt to situations of disaster with automatic maturity extensions or loan forgiveness such as in cases of extreme weather impacts, are other options worth broader consideration and financial support.

The authors argue that a global solidarity fund should be at the center of such a package of non-insurance solutions to provide financial support for loss and damage to vulnerable countries and populations. This fund could be financed in substantial part by a Climate Damages Tax, imposed on the fossil fuel industry, thus operationalizing the polluter-pays principle. Such a tax placed on the extraction of coal, oil, and gas, if well designed, could generate most of the estimated US$300 billion a year by 2030 needed in international loss and damage finance. With the WIM up for review in 2019, climate negotiators should give it a clear mandate to consider the Climate Damages Tax, as well as other fair and equitable sources of financing (including financial transaction taxes or international levies on maritime or air transport) for loss and damage finance.

While country ownership is often emphasized in the international climate finance discourse, this ownership, and concomitant ability to determine priorities in response to climate disasters, in developing countries is undermined when developed countries push solutions to address severe climate impacts via earmarked funding for climate insurance. This approach requires developing countries to literally “buy into” these schemes by utilizing their own scarce public resources to pay for insurance premiums. Ultimately, developing countries should be able to opt for the right financial support measures to address severe climate impacts by bringing direct and immediate benefits to people, households, and local businesses. Enhanced Direct Access (EDA) approaches, currently the exception in multilateral climate funds, are more supportive of such choices. Such EDA approaches could result in transferring more international climate funding directly into existing national funds or national climate savings vehicles. In the GCF as the main multilateral fund tasked with the implementation of the Paris Agreement, EDA should be operationalized as the main access modality. In this context, the GCF should be further considered for its ability to serve as an international funding mechanism for loss and damage.

Insurance is not a silver bullet to address loss and damage, and rich countries and institutions such as the World Bank must stop pushing it above other, more appropriate, efficient, equitable, and country-owned responses to climate catastrophes.


Product details
Date of Publication
September 5, 2018
Heinrich Böll Stiftung North America
Number of Pages
Language of publication