The WIM extends beyond aspirations for disaster risk reduction
to include climate-attributed loss and damage
that cannot be effectively reduced. This has raised aspirations especially among highly vulnerable developing countries that a form of (legally non-binding) compensation
for residual climate impacts may be in the offing. The question in this section is whether
insurance
, by reimbursing
loss and damage
from climate disasters, contributes to the ‘equitable
compensation
’ or curative aspirations for the WIM?
At the outset, it is worth emphasising that financial instruments
, including insurance
, are not neutral as to how disaster costs are shared. Risk
-based instruments that require premiums or payments from those in the insurance
program can shift responsibility
to vulnerable households and communities
and away from social institutions that may have previously aided reconstruction; in contrast, informal or public mechanisms, like remittances or reserve funds, share losses
usually across family members and taxpayers. For insurance
programs, it should be asked if the insured, themselves, pay the risk
-estimated premium thus putting the full burden on their own at-risk
communities
(and at the same time providing incentives for them to reduce their risks). Alternatively, are there arrangements, like cross subsidies, that allocate this burden differently within the risk
pool, or are there arrangements, like transfer payments, that allocate the burden at least partially to those outside the risk
pool?
Equity Principles in the Compensation of Loss and Damage
The essential question for the L&D discussions is then “who pays the premium?” To address this question in Box 21.2 we distinguish three principles of fundamental importance for organising insurance
arrangements, each principle building on a different view of equity
. Private market-based insurance
, unless it is subsidised from outside or within the pool, operates on the principle of mutuality and thus does not share losses
beyond the at-risk
insured community. Private insurers may deviate from the mutuality principle with premium cross-subsidies, e.g., by charging their wealthy, lower-risk
clients higher premiums to make policies affordable to low-income clients in high-risk
locations. Sometimes this means a flat or undifferentiated premium that helps high risk
(and often less wealthy) clients and avoids the costs and administrative burdens associated with differentiated premiums. In some cases, regulation dictates how private insurers can set premiums, usually to safeguard affordability. In India, for example, commercial insurers are required to offer ‘pro-poor’ policies, which they finance by charging their wealthy clients a higher rate. Without these forms of subsidy in a mutuality-based system the policyholders, themselves, can expect (in the long term) to pay premiums that are approximately equivalent to their received claim payments (actuarially fair premiums), plus significant additional costs (loads shown in Fig. 21.2). Thus,
in an insurance
system based on mutuality, there is no reimbursement to the victims of disasters (on average) outside of what they, themselves, contribute in premiums; in other words, the at-risk
community finances
its own curative measures
. This is an important and often misunderstood feature of the insurance
mechanism, and arguably disqualifies commercial insurance
as a curative measure as intended by the WIM.
Solidarity can take many forms, including subsidised or cross-subsidised premiums, reinsurance or other forms of assistance that reduce premiums paid by the most vulnerable. It is the fundamental principle underlying pre-disaster assistance and post-disaster humanitarian relief and reconstruction (see Schinko et al. 2018). Support can come from, among others, governments, NGOs, financial institutions or international development organisations. Indeed, almost all micro-insurance
programs and macro-level pools operating in developing countries receive some type of donor or government support (Vivid Economics et al. 2016). Importantly, solidarity, in contrast to accountability, need not appeal to a causal relationship between historical greenhouse gas emissions and loss and damage
, or culpability on the part of those providing support for insurance
instruments.
Box 21.2
Three
equity
principles for organising
insurance
Mutuality
Mutuality is at the core of the insurance
concept, according to which the insured participate in a disaster pool according to their risk
class (and pay a risk
-based premium). The pool then pays those insured in accordance with the scale of their losses
. Mutuality is the primary principle underlying private, market-based insurance
; clients enter the pool usually voluntarily, and pay according to the best estimate of the risk
they bring with them. While insured agents receive payments from the pool depending on their losses
, in the long run (and on average) they pay their own reimbursement, and more, since the premium is based on expected loss plus the additional insurance
loads shown in Fig. 21.2. According to this principle, there are no transfer payments within the pool or from outside the pool (Wilkie 1997).
Solidarity
Solidarity is a profoundly different concept in that losses
are paid according to need, and contributions to the pool are not made fully in accordance with the risks that the applicants bring with them, but perhaps partly according to ability to pay, or just equally. Solidarity can result from cross subsidies among those in the pool. It can also take the form of payments by those not in the pool, for example, aid agencies can subsidise micro-insurance
schemes. Importantly, solidarity is based on the concept of voluntary transfers for humanitarian or other grounds; there is no underlying notion of liability
. The concept of solidarity thus corresponds to the concept of distributive justice
discussed in Wallimann-Helmer et al. (2018).
Accountability
Accountability as a concept differentiates itself from the solidarity principle in one important aspect; here, it is motivated by a perceived ethical or legal obligation for compensating those experiencing climate-attributed losses
and damages. Accountability links an actor’s actions with outcomes, either causally or legally (Honoré 2010) where the allocation of responsibility
is based on causation
and (often but not always) fault or negligence. Being accountable not only means being responsible for climate-attributed impacts and risks but also ultimately being answerable for them.
A far more controversial and potent principle to underlie support for insurance
instruments is accountability for loss and damage
, which mirrors the “polluter-pays principle” that is invoked across many environmental issues. Accountability invokes questions of attribution
(James et al. 2018) as well as some degree of culpability or fault. Both can be difficult to assign to state and other actors since the science
is not sufficiently precise to estimate increased risk
of losses and damages
due to emissions of greenhouse gases, and fault for emissions can be questioned due to historical knowledge and other factors (Burkett 2014). The assignment of accountability for losses and damages
, and ultimately responsibility
, has been understandably resisted because of fears of legal liability
. Indeed, the Paris Agreement
explicitly rejects that the treaty provide a basis for liability
or compensation
(Simlinger and Mayer 2018). Yet, as Lees (2016) argues, the refusal to contemplate liability
should not lead to a refusal to contemplate the allocation of ethical responsibility
—what he refers to as a responsibility
allocation mechanism. Indeed, recognition of ethical responsibility
, as differentiated from legal liability
, may be necessary, if not essential, for motivating even voluntary support for insurance
instruments on the scale contemplated by the L&D discussions.
Principles of solidarity and accountability are strongly voiced in the Framework Convention on Climate Change
(UNFCCC
), which states that parties should act to protect the climate system “on the basis of equality and in accordance with their common but differentiated responsibilities and respective capabilities” (United Nations 1992). A fundamental element of this principle, which is restated in the preamble to the Paris Agreement
, is the need to take account of the different circumstances, particularly each State’s contribution to the problem and capacity to remedy it (Decision 3/CP.19). The WIM, likewise, refers to the need to take account of differentiated responsibility
(accountability) for losses and damages
(Lees 2016). The principles set out in the
UNFCCC
and
Paris Agreement
suggest that those bearing
responsibility
for
losses
and damages, and those most capable of addressing it, should bear some obligation to contribute to
insurance
premiums for climate-attributed risks in highly vulnerable countries. In fact, many developing country Parties and NGOs have advocated the accountability principle. The submission of CARE to the current WIM work plan is illustrative:
…(WIM) should apply principles of global equity
, including taking into account a “polluter pays”-based approach to generating finance for addressing loss and damage
from countries, companies and institutions who significantly contribute to the causes of climate change
through fossil fuel emissions (CARE International 2017).
Invoking responsibility
/accountability in the discourse on developed country support (but avoiding legal liability
) changes the paradigm of post-disaster support from ‘charity’ to ‘amends’, which has significance in terms of allocating funds beyond humanitarian assistance budgets. Arguably, a responsibility
-based discourse can change the motivation for assisting victims of climate-attributed impacts and risks—so essential to implementing the Paris Agreement
and maintaining its voluntary, cooperation-focused approach (see chapter by Schinko et al. 2018).
Experience of Micro-insurance for Equitably Allocating the Impacts and Risks Burden
Almost without exception micro-insurance
schemes that serve the resource-poor are subsidised either by national taxpayer funds or, more often, by international donors, international financial institutions, NGOs and official development assistance (Mechler et al. 2006; Schäfer and Waters 2016). Few private insurers are optimistic about the prospects of providing non-subsidised insurance
to clients below the poverty level (Swiss Re 2012).
As one example, India’s National Agricultural Insurance
Scheme (NAIS), globally the largest micro-insurance
crop program, targets mainly middle-income farmers and is heavily subsidised by Indian taxpayers (Mechler et al. 2006). As another example, the pro-poor R4 initiative discussed above is made possible by the significant support it receives from NGOs and donors as well as its reliance on funds (in Ethiopia) from Ethiopia’s Productive Safety Net Program and the World Food Programme. An innovative micro-insurance
program for herders in Mongolia is affordable and viable to insurers due to its layered system of responsibility
and payment, including herders (who retain small losses
or the lowest risk
layer), the private insurance
industry (risk
-based premium payments for the middle layer of risk
) and taxpayers (for the highest risk
layer). In addition to subsidies, micro-insurance
is typically made affordable by greatly reducing the cover offered. A micro-insurance
program in Bangladesh, Proshika, that insures savings against natural disasters
limits claims to twice the amount in the client’s savings account (Mechler et al. 2006). Similarly, a micro-insurance
project in Malawi was made affordable by limiting cover to the cost of the hybrid seeds, which protects the banks against defaults for their seed loans, but does not protect households against drought losses (Linnerooth-Bayer et al. 2009).
The extensive support for micro-insurance
falls thus solidly under the insurance
principle of solidarity, where contributions to the pool are made, not in accordance with the risks that applicants bring to the pool, but typically according to their ability to pay the premium. Climate-attributed impacts and risks will likely continue to be framed as a humanitarian issue invoking solidarity, and not as an issue invoking accountability or liability
.
Experience of Regional Insurance Pools for Equitably Sharing the Impacts and Risk Burden
The question addressed in this section is to what extent the regional insurance
pools (CCRIF, ARC and PCRAFI) provide their members with an equitable curative response to climate-attributed losses
and damages, keeping in mind that the pools provide cover to governments, which in turn (and in varying degrees) provide post-disaster support to vulnerable households, farms and SMEs. By ‘equitable’ we again refer to the three principles relevant to insurance
: mutuality, solidarity and accountability. We ask, thus, who pays the price for membership in the risk
pools, and based on which equity
principle?
All pools have received donor support, mostly through capitalisation, payment of operational expenses, direct premium support or capacity building. While the premiums are therefore less than would be required without outside support, in the case of ARC and CCRIF the relative premiums (the proportion each member country pays to the pool) tend to be based on risk
levels (i.e., there are no cross subsidies). The pools are thus based on solidarity from the outside, but mutuality in determining the relative payments from members. For ARC, all insured countries pay premiums based on risk
estimates, while for setting up and operating the pools support comes from donor organisations. In other words, donors contribute to reducing some of the loads on the insurance
premium. ARC’s non-profit mutual insurance
company (not necessarily meaning the premiums are based on mutuality) is capitalised by financial and development institutions, including the German Development Bank and the UK Department for International Development (DFID), which means that premiums are indirectly supported through a solidarity principle. For ARC, thus, there are elements of mutuality in setting country-specific trigger points and caps, which largely determine premiums, and also elements of solidarity given substantial donor support.
The PCRAFI, in contrast, bases premiums largely on ability-to-pay of its member countries rather than a calculated risk
. This means there are substantial cross subsidies across member states. In addition, multiple development partners and IDA credit have contributed to the establishment of the pool as well as to premium support. The PCRAFI is thus based primarily on the principle of solidarity in terms of both outside- and inside-pool support.
Interestingly the principle of accountability has not been invoked in justifying the contributions of the donor community to these systems, even though climate change
is a concern to all regional pools. However, not surprising after the devastating 2017 Hurricanes Harvey and Irma, the attribution
of the covered hazards to climatic change is under investigation for CCRIF and the other pools. More specifically, as an innovative proposition, ARC is setting up an Extreme Climate Facility (XCF) that would be capitalised by the international community if trends in extreme weather
are found attributable to climate change
(Wilcox 2014). Thus, the XCF can be considered a manifestation of climate change
risk
, although there is no direct discussion of this facility extracting payments based on greenhouse emissions from wealthy countries, and thus no direct appeal to the accountability principle.
Box 21.3
The Extreme Climate Facility (XCF) of the African
Risk
Capacity (ARC)
Function
Additional financing for countries already managing their current weather risks through ARC.
Data-driven modus operandi
Payments to countries will be entirely data-driven over a 30 year period—if there is no significant increase in extreme events over current climatology, then no payment is made.
Climate Adaptation
Countries must use payments to invest in DRR or climate change
adaption measures specified in pre-defined country level adaptation
funds.
Scale
Payment size would increase with extreme event number and magnitude over and above a pre-specified threshold, corresponding to the degree of confidence that extreme events are increasing due to climate change
.
Action focus
Leveraging ARC’s existing infrastructure, XCF will ensure that countries and the international community properly monitor climate shocks and are financially prepared to undertake greater adaptation
measures should their frequency and intensity increase.
Source Wilcox (2014)