We need insurance to reflect the reality of climate disasters

It is well known that climate change causes an increase in the likelihood and severity of natural disasters.

It is vital, therefore, that the cost of adapting and rebuilding after these catastrophes does not unduly fall on the poorest people.

For example, Hurricane Irma, which ravaged the Caribbean and North America last year, has potentially cost $300bn in damages, of which only half could be met by insurance companies.

Index insurance is one tool, which allows the victims of climate-related disasters to access finance and rebuild their lives at a time when they need it most.

Ceyla Pazarbasioglu, Senior Director at the World Bank, explained in a recent blog:

Index insurance pays out benefits based on a pre-determined index for the loss of assets and investments as a result of weather or other catastrophic events. In contrast, traditional insurance relies on assessments of the actual damage. Because index insurance allows for the claims-settlement process to be quicker and more objective, it has great potential to improve risk management and can play an important, positive role in reducing poverty.

At the moment, index insurance is rarely offered in developing countries, partly due to the lack of knowledge and capacity among insurers to do so in the right way.

Ms. Pazarbasioglu added:

Better designed index insurance will better protect the poor and the vulnerable against the challenges posed by natural disasters and climate risks...Developing this type of insurance is especially relevant in regions like Sub-Saharan Africa, where a very large share of GDP and job creation is in the agricultural sector.

However, the risks to the insurance industry from climate change are becoming better documented. In 2016, a network of 29 organisations in the industry reported that each year an estimated $100bn of assets is becoming unprotected from the increased risk of climate-related disasters. These include more frequent and stronger storms.

The Task Force on Climate-related Financial Disclosures was also recently set up to help insurers, investors and other stakeholders make accurate assessments on the financial risks posed by climate change. Its initial recommendations were published last year.

Image Credit: FEMA

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