This month, all roads lead to Bonn.
The German city on the banks of the Rhine is the venue for the United Nations Climate Change Conference (COP23). Playing host, however, is the small island state of Fiji. With good reason: climate change threatens to displace about 70 million people living in small island states.
Few need a reminder of how destructive climate change can be: think of this year’s hurricane season in the Caribbean. In Barbuda, for example, Hurricane Irma killed three people and wreaked havoc on the island, destroying 95 percent of its infrastructure – from hospital, schools and the island’s only airport to its water and telecom services. The estimated damage of $150 million is huge for an island of just 1,800 inhabitants.
This is why the COP23 will focus on how climate change could impact small island developing states. Many of the world’s 52 small island states are at imminent risk. Just recently, the inhabitants of one of the Marshall islands in the Pacific Ocean sought refuge in the United States as rising sea levels threaten their land.
Climate change refugees have become a reality.
Insurance is one of the risk-transfer instruments that can compensate climate-related damages. In 1991, the Pacific island nation of Vanuatu proposed an International Insurance Pool to address the financial losses small island and low-lying developing countries face from climate change-induced losses. While that proposal was rejected, it highlighted the importance of a pooled fund for addressing direct damage from climate change.
Between two countries with similar per-capita income, the one with a higher level of insurance coverage is more resilient to extreme natural events, according to studies. Hardly surprising, given that insurance-related solutions can help victims recover quickly, preventing them from falling into, or deeper into, poverty.
Insurance payments are also quicker and more reliable than disaster aid. For example, the Caribbean Catastrophe Risk Insurance Facility (CCRIF) paid over $50 million to seven Caribbean countries within 14 days of Hurricane Irma devastating the region.
The CCRIF offers earthquake, tropical cyclone and excess rainfall policies to Caribbean and Central American governments. A similar mechanism exists in Africa through the African Risk Capacity (ARC), which recently paid $26 million to Mauritania, Niger and Senegal after severe droughts. Both the CCRIF and ARC aim to transfer the burden of natural disaster costs from governments to markets to ensure quick and effective response.
Allianz Reinsurance Chief Executive Officer Amer Ahmed, at the launch of the InsuResilience Fund in Berlin in October, reiterated Allianz’s willingness to share its expertise in risk modeling and structuring. Speaking for the insurance industry, he said, “We will make sure that the final products are financially sound and that the right risks are being transferred.”
As a responsible corporate citizen, the company is involved in several initiatives towards this end. Within the Insurance Development Forum, Allianz works with peers to pilot insurance approaches that allow governments in countries vulnerable to climate change to provide better shelter to their population. Allianz is also participating in the Munich Climate Insurance Initiative, where it contributes expertise to making more micro-insurance solutions market-ready for the hurricane-haunted Caribbean region.
Through a partnership with the German Development Cooperation Agency (GIZ), Allianz is setting up a program that aims to reduce the flood risk of municipalities in Ghana and of small and medium enterprises (SMEs) in industrial parks in Morocco as well as find appropriate insurance solutions. If successful, these initiatives can contribute to the ambitious target set by the G7 InsuResilience Initiative to extend insurance against climate risks to 400 million more people belonging to vulnerable and poor populations until 2020.
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