Weather-Based index insurance is a tool for small farmers to manage climate risk.
In late October 2015 in Ethiopia, a total of 12,000 smallholder farmers in four regions started to benefit from this nation’s first weather index insurance claims payment to cover the loss for the previous year’s crop failure due to El Nino. The weather index insurance claims paid out 2.6 million birr covering a total of around the selected smallholder farmers in Oromia, Gambella, Benishangul Gumuz and Tigray regions. The pilot insurance initiative is supported by UNDP/GEF and the Ministry of Environment, Forest and Climate Change in collaboration with two local firms, the Oromia and Nyala insurance companies.
Recently, the Oromia Insurance Company (OIC) paid 1.6 million birr to farmers who lost their cattle’s due to El-Nino caused drought and benefited 1,470 farmers. And also OIC worked on a proactive type of insurance through environmental work projects.
The prospects of climate insurance could be gigantic business since climatic risks are inevitable. Besides, with the inevitable path towards the net-zero emission targets, the industry has the opportunity to engage proactively with other key stakeholders to find the best investment strategies. However, the non-affordability of insurance premiums, pricing difficulties, unfamiliarity with insurance by mass population, food insecurity as most farmers have debt for agricultural inputs such as fertilizers and other social problems, a dearth of insurance companies in countryside’s and rural areas and lack of comprehensive legal and institutional framework both internationally and domestically remains to be a challenge.
The Munich Climate Insurance Initiative (MCII) has seven core principles of climate insurance must be observed. These are comprehensive need-based solutions, client value, affordability, accessibility, participation, sustainability and enabling environment. Although, failure to observe such principles tantamount to disaster and effective implementation.
Comprehensive climate risk insurance, when applied in conjunction with other disaster risk management measures and strategies, can protect people against climate shocks by acting as a safety net and buffer shortly after an extreme weather event. Ethiopia and many African Countries were hit by El-Nino and resulted in stark droughts. In this way, insurance can promote opportunities by helping to lessen financial repercussions of volatility and can stimulate transformation by incentivizing risk reduction behavior and fostering a culture of prevention-focused risk management. But eloquent insurance coverage is currently not widely available for poor and vulnerable people, particularly in developing countries.
Based on a broad estimate, only about 100 million people in Africa, Asia, and Latin America are covered by direct or indirect insurance against climate risks.
Under the international environmental law, the idea of climate insurance was first set in motion in Rio conference and later endorsed by leaders in New York when the United Nation Framework Convention on Climate Change (UNFCCC) was enacted in 1992.
The UNFCCC Conference of Parties (COP19) was held 2013 in Warsaw, Poland, the COP established the Warsaw International Mechanism for Loss and Damage associated with Climate Change Impacts, to address loss and damage associated with impacts of climate change, including extreme events and slow onset events, in developing countries that are particularly vulnerable to the adverse effects of climate change.
Customary international law states are required to avoid activities under their jurisdiction or control causing damage to the environment of other States. However, state responsibility and liability becomes problematic to apply in the context of climate change. To these end, the developed world is unwilling to bear responsibility for climate change impacts. Yet, the developed world has devised insurance mechanism under the Paris agreement to deal with climate problems to enhance the existing Warsaw loss and damage mechanism.
Climate insurance is reaffirmed in the UNFCCC and also further strengthened in the Paris agreement in 2015 which allowed risk insurance facilities, climate risk pooling and other insurance solutions. In other words, the agreement vividly provided that parties can use insurance to avert minimize and address loss and damage associated with the adverse effects of climate change, including extreme weather events and slow onset events, and the role of sustainable development in reducing the risk of loss and damage. Thus, risk insurance facilities, climate risk pooling, and other insurance solutions might be employed. However, the lists of areas of action and responsibility under the Paris agreement is blurred and unsettled, yet it clearly highlighting comprehensive risk assessment and management; risk insurance facilities, climate risk pooling and other insurance solutions among other measures. In this context, the overt mentioning of insurance in the Agreement and the COP21 decisions is an indicator that both developed and developing countries recognize the high potential for building financial resilience by expanding insurance. The writer argues such kinds of mechanisms are very nascent to developing countries and quite expensive to adapt soon.
Internationally, the advent of climate insurance and its inclusion in the Paris agreement and Conference of Parties (COP21) decisions recognizes that both developed and developing countries to notice the importance of insurance as an integral part of national climate risk management strategies and the high potential for building financial resilience by expanding climate insurance.
The Paris agreement is praised as “historic” since for the first time, a comprehensive approach to climate risk management including climate insurance. The Agreement has had triple objectives. These are first mitigation of greenhouse gas (GHG) emissions via limiting the increase in global temperature; second adaptation through increasing adaptive capacity and fostering climate resilience such as solutions for the management of loss and damage and climate insurance and third financing through new commitments.
In the same vein, the role of insurance is reflected strongly in another landmark international agreement, the Sendai Framework for Disaster Risk Reduction, Japan 2015 in relation to the managing of risks associated with natural hazards inter alia have opened the doors for innovative insurance solutions, in both developed and developing nations.
The climate insurance mantra is also found in other international initiatives which were launched at the sidelines of the Paris agreement/COP21. These initiatives are used as key sponsors for climate insurance development in the world. For instance, First the United Nations Secretary General, Ban Ki Moon’s A2R (Anticipate, Absorb, Reshape) Framework: Launched at COP21 to help build resilience to disaster and climate risks in the world’s most vulnerable countries with 13 members within the UN system, Second the Financial Stability Board (FSB) Climate Disclosure Task Force, is that effective climate-related disclosures by companies could promote more informed investment, credit, and insurance underwriting decisions. Third, The G7 InsuResilience Initiative in 2015 also called The G7 Initiative on Climate Risk Insurance; G7 nations pledged USD 420m with the aim of increasing the availability of risk transfer and insurance solutions to an additional 400 million people over the next five years in the most vulnerable countries.
Forth The Climate Insurance Fund: Another initiative created by KfW, the German Development Bank, to contribute to the adaptation to climate change by improving access to and the use of insurance in developing countries.
Regionally, Supported by private-sector reinsurance and capital markets solutions, regional risk pools such as the Caribbean Catastrophe Risk Insurance Facility (CCRIF), the African Risk Capacity (ARC) and the Pacific Catastrophe Risk Assessment and Financing Initiative (PCRAFI) have enabled smaller nations to secure a payment post-disaster to cover more urgent early recovery financial needs.
Internationally the monitoring bodies of climate insurance are rudimentary and not well organized it still needs time to be more effective.
From public-private partnership point of view, the insurance industry has enormous potential to contribute significantly to making societies more resilient with respect to the adverse effects of climate change and, at the same time, creating new titanic business and its advent of help to outreach the insurance industry to the mass population. With chief competencies in risk management and finance, the insurance industry is uniquely positioned to further society’s understanding of climate change and advance creative solutions to minimize its impacts. Insurers have now begun to embrace this huge opportunity, which will enable them to prosper while reducing the claims from climate change.
Traditionally, many insurance companies continue to focus chiefly on financial risk management in response to climate change, other insurers are realizing that a more proactive, holistic approach to the issue presents significant opportunities to grow revenues, reduce risk and improve brand value.
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