MICRO INSURANCE TO ADDRESS CLIMATE CHANGE RISKS AND GLOBAL REVIEW OF INSURANCE INDUSTRY RESPONSES

“CLIMATE LITERACY FOR BANKING SECTOR”From 11.02.2013-13.02.2013

12st February2013Dr. N. Sai Bhaskar Reddysaibhaskarnakka@gmail.com

MCR-HRD IAP, HYDERABAD

Insurance

Insurance is the equitable transfer of the risk of a loss, from one entity to another in exchange for payment.

Individual entities can also self-insurethrough saving money for possible future losses

Floods

Fires

Hurricanes

Drought

Disease

While you’re reading this, the ice is melting. The effects of

climate change are being felt today

Real losses are being incurred

The threat of future losses can no longer be ignored

Who pays for it?

Imaginable Surprise

Some events are not truly unexpected. It is possible to imagine the conditions

necessary to produce extreme “surprises.”

Integrated assessment models are less reliable with increased probability and number of surprises.

Vulnerability

Vulnerability to climate change is the risk of adverse things happening

Vulnerability is a function of three factors:

Exposure

Sensitivity

Adaptive capacity

Adaptation

“adjustment in natural or human systems in response to actual or expected climatic stimuli or their effects, which moderates harm of exploits beneficial opportunities”

(Third Assessment Report, Working Group II)

Includes “actual” (realized) or “expected” (future) changes in climate

Adaptation (continued)

Two types of adaptation

Autonomous adaptation or reactive adaptation tends to be what people and systems do as impacts of climate change become apparent

Anticipatory or proactive adaptation are measures taken to reduce potential risks of future climate change

Climate Changes in India

Increase in surface temperature by 0.4 degree C over the past century.

Warming trend along the west coast, in central India, the interior peninsula, and northeastern India.

Climate Changes in India

Cooling trend in northwest India and parts of South India.

Regional monsoon variations: increased monsoon seasonal rainfall along the west coast, northern Andhra Pradesh and North-western India, decreased monsoon seasonal rainfall over eastern Madhya Pradesh, North-eastern India, and parts of Gujrat and Kerala.

Climate Changes in India

Observed trends of multi-decadal periods of more frequent droughts, followed by less severe droughts.

Studies have shown a rising trend in the frequency of heavy rain events and decrease in frequency of moderate events over central India from 1951 to 2000.

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Climate Changes in India

Records of coastal tide gauges in the north Indian ocean for the last 40 years has revealed an estimated sea level rise between 1.06-1.75 mm per year.

The available monitoring data on Himalayan glaciers indicates recession of some glaciers.

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Per-capita Carbon –dioxide emission (Metric Tons)

USA Europe Japan China Russia India World average

0

5

10

15

20

25

20.01

9.4 9.87

3.6

11.71

1.02

4.25

What questions do we now need to consider?

Do you know what impact climate change could have on your area?

Do your current policies, strategies and plans include provision for the impacts of climate change?

Can you identify and assess the risks from climate change to your services?

Are developments with a lifetime of more than 20 years required to factor in climate change?

Are you addressing climate change in your local Community Strategy?

July 2005 – Mumbai Flood

On 26th July 2005 the meteorological station at Santacruz in North Mumbai (India) recorded 944 mm of rainfall within 24 hours, the highest ever in the history of precipitation recordings in India.

Tropical Cyclone Nargis, May 3, 2008

Source: http://www.reliefweb.int

Wind velocities up to 215 km/h (Cat 4)

Floods in the Irrawaddy delta, also Yangoon affected

Human catastrophe

Estimated number of fatalities about 100,000

© 2008 Münchener Rückversicherungs-Gesellschaft, GeoRisikoForschung, NatCatSERVICE

Victoria Wildfires, Australia (Black Saturday Fires) February 2009

Source: Reuters, Berlin

© 2009 Münchener Rückversicherungs-Gesellschaft, Geo Risks Research, NatCatSERVICE. As at June 2009

Wildfires, February 2009

Overall losses: US$ 1,300m*Insured losses: US$ 650m*Fatalities: 173 *Losses in original values

Heat stress

Cold stress

light

extreme

high

moderate

lightcomfortable

moderate

high

extreme

Perceived Temperature on 8 August 2003 and excess mortality

Sources: Robine et al., 2007; German Weather Service, 2004

19.500

9.400

15.000

300

2.300

20.100

2.700

1.000 800

Heat wave of 2003, with more than 70,000 fatalities the largest humanitarian natural catastrophe in Europe for centuries

25.-30.8 Hurricane Katrina, USA (1.322 fatalities)

Insured losses (US$ m): Economic losses (US$ m): 125.000

61.000 (NFIP included)

source: AP

August 2005 – Hurricane Katrina6th strongest hurricane, largest losses of a single event

Munich Re NatCatSERVICE – One of the world‘s most comprehensive databases on natural catastrophes

From 1980 until today all loss events For USA and selected countries in Europe all loss events since 1970 Retrospectively all Great Natural Catastrophes since 1950 In addition all major historical events starting from 79 AD – eruption of Mt.Vesuvio

(3,000 historical data sets) Currently more than 26,000 events documented

Great natural catastrophes:

Hurricane Ike Cyclone Nargis

Earthquake China

Winter damage China

Extreme temperature (heat wave, forest fires)

Flood

Storm

Earthquake, tsunami,volcanic eruption

Natural catastrophes 2008

© 2009 Münchener Rückversicherungs-Gesellschaft, Geo Risks Research, NatCatSERVICE. As at June 2009

Great natural catastrophes in Asia 1950 – 2008

Geophysical events(earthquake, tsunami, volcanic activity)

Meteorological events (storm)

Hydrological events(flood, mass movement)

Climatological events(extreme temperature, drought, wildfire)

© 2009 Münchener Rückversicherungs-Gesellschaft, Geo Risks Research, NatCatSERVICE – As at September 2009

Natural catastrophes in Asia

Climatological events (Extreme temperature, drought, forest fire)

Hydrological events(Flood, mass movement)

Meteorological events(Storm)

Weather catastrophes in Asia 1980 – 2008Number of events

Natural catastrophes 2008

© 2009 Münchener Rückversicherungs-Gesellschaft, Geo Risks Research, NatCatSERVICE – As at September 2009

50

100

150

200

250

300

350

400

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Global natural disasters 1980 – 2008Geophysical, meteorological, hydrological events

50

100

150

200

250

300

350

400

450

500

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Hydrological events(Flood, mass movement)

Meteorological events(Storm)

Geophysical events (Earthquake, tsunami,volcanic eruption)

----- Trend line

Num

ber

© 2009 Münchener Rückversicherungs-Gesellschaft, Geo Risks Research, NatCatSERVICE

Climate change probably has a significant impact on increases of nat cat losses, especially in North America and Asia/Australia.

Global NorthAmerica

Europe Asia/Australia

1980 –

2007

Nat cat loss trend (% p.a.) 11 11 8 15

Climate component (% p.a.) 4 5 1 6

Comments

These data are indicative only – a more precise determination of the regional loss drivers related to climate change is needed (e.g. via LSE cooperation)

Nat cat loss trend: growth rates of original/nominal values and not adjusted for inflation

Climate component: actually “Climate plus X” because influencing factors include anthropogenic climate change, natural climate variability, changes in vulnerability and changes in population distribution

Annual growth rates of nat cat losses and climate component

very likely > 90% likely >66% more likely than not > 50%

Climate Change and Extreme Weather Events (IPCC, 2007)

Trends of heavy precipitation events during summer monsoon in India

Source: Goswami, B. N. et al. (2006), Science 314

Integrating the Uncertainty and Surprises of Climate Change

Intergovernmental Panel on Climate Change (IPCC) established in 1988.

Assesses the scientific, technical and socio-economic information relevant to understanding the risk of human-induced climate change, its potential impacts, and options for adaptation and mitigation.

What’s the Policy on Climate Change? Earth Summit (1992) Kyoto Protocol (2001) World Summit on Sustainable

Development (2002)

The Insurance Industry

The Insurance Industry

It is a continuous cyclical process whereby the council:

identifies, assesses/evaluates, controls: andmonitors

potential opportunities and adverse effects that challenge the assets, reputation and objectives of the Council.

A central part of our strategic management.

It enables the Council to effectively manage strategic decision making, service planning and delivery to safeguard the well being of its stakeholders

What is risk management?

Objectives

Iden

tify

Mon

itorRisk

ManagementCycle

Control

Assess

What is Risk Management?

Political

Economic

Social

Technological

Legislative & Regulatory

Environmental

CitizenGovernance

Information/Know

ledgeCom

petitive/Procurement

Part

ners

hips

Cont

ract

ual/

Supp

liers

Peop

le

Fina

ncia

lPh

ysica

l Ass

ets

Servi

ce Continuity

Health & Safety

Programme/Projects

Customer/Client

Fraud

Decision makingReputation

Risk and Opportunity Rainbow

Drought

Flood

Extreme Rainfall

Storm

High Winds

Cold/Snow/Ice

Heat/SunFuel/Transport

Energy

Carb

on/G

reen

hous

e G

as e

mis

sion

s

Biod

iver

sity

Clea

n Ai

r/Po

lluta

nts

Serv

ice d

eliv

ery

Insu

rance

Financia

l

Legal

Market changes/demands for services

People/health & Social care

Procurement

Planning

Water

Environmental Risks

Waste

Drawing on accumulated savings of liquid assets (e.g. cash, bank account balances etc.).

Selling other assets (e.g. jewelry, land, livestock etc.). Borrowing from moneylenders, microfinance

institutions (MFIs), banks or other financial institutions. Informal risk-sharing arrangements with neighbors,

friends, family etc. (For example, if the household suffers an adverse shock, there may be an increase in remittance income sent by family members living abroad, or financial assistance provided by other households living in the same village, at least to the extent that those households are not also affected by the same shock).

Government assistance (e.g. government work programs, drought assistance programs etc.).

Formal insurance arrangements

Finance: Implications for investments, insurance & stakeholder reputation

Risks: Failure to climate proof creates difficulties in securing investment and/or insurance

cover

Potential liabilities if climate change is not factored into long term decisions about the future

Possible impacts: Insurance Policies: Check Insurers stance on undefended flood risks and impact on

premiums

Future Developments: improved specification that takes account of future climate is likely to be cost effective in most cases

Opportunities/Controls/Mitigation Evidence of climate proofing enhances reputation with all stakeholders, provides

security for investments and an opportunity to reduced insurance premiums

Climate Change Risks and Opportunities

What types of claims are we now seeing?

Long term dry conditions:

Drought affects trees- roots cause subsidence to properties and can create heave in pavements creating slips trips and falls

Wet conditions:

Flooding Drainage issues

Increase in wind speeds:

Structural damage to buildings

Extreme cold conditions:

Frozen pipes - escape of water

Understanding

Natural catastrophes, especially weather related events, are increasing in number and magnitude especially in Asia.

There is more and more scientific evidence for causal links between climate change and increasing frequencies and intensities of natural catastrophes.

Global warming is real.

We have to mitigate global warming and adapt to the changing risks in respect to the regionally specific risk patterns.

In Copenhagen ambitious CO2-reduction targets should be fixed to avoid dangerous, unmanageable climate change.

The insurance industry supports climate change mitigation and adaptation measures by sharing its knowledge with the public and providing custom made covers for innovative technologies.

The Copenhagen outcome should provide adaptation funds for developing and emerging countries, including new insurance solutions.

To date, there is little understanding of or agreement within the climate change community on the role that insurance-related mechanisms can play in assisting developing countries adapt to climate change.

India is considered to be the second most disaster-prone country in the world.

With a large and growing population, densely populated and low-lying coastline and an economy that is closely tied to its natural resource base, India is highly vulnerable to climate change.

Disaster insurance cover, however, is low compared to international standards and plays only a complementary role. Disaster risk management, including financing relief and reconstruction, is primarily the responsibility of governments, which provide actual assistance, or communities through informal risk sharing.

Frequently governments and communities do not have sufficient resources, and households lacking insurance typically turn to moneylenders, selling assets, reducing inputs in farming, or diversifying their activities. Another strategy is to send family members to work elsewhere and remit payments.

However, such traditional risk management strategies, while reducing vulnerability in the short term, can increase vulnerability over the longer term by promoting sub-optimal asset allocation. For instance, small farmers may opt for multiple cropping to reduce income variability rather than planting the most profitable crops. Traditional risk sharing strategies also break down in case of disasters affecting an entire community or area (Hess et al, 2002, Lilleor et al, 2005).

Low insurance penetration in India can be traced to a number of demand and supply side factors. On the demand side, the foremost difficulty is the unaffordability of insurance for low-income high-risk regions. Other hurdles include public myopia and low awareness among the public about insurance and risk management.

The experience of major insurance companies shows that following a major catastrophe there is a rush for insurance cover, particularly for life and assets. But this interest is short lived, and in a majority of cases these policies are not renewed. Finally, large sections of the Indian economy operate outside the formal economy – not just small businesses, but also housing.

On the supply side, easy access to insurance products is still an issue. The problem of scaling up small-scale schemes to encompass large rural areas is the biggest hurdle in enhancing overall penetration rates. The poor in many rural areas have higher disaster risk exposure and also suffer more vis-à-vis their urban counterparts (World Bank, 2003). More specifically, their vulnerability to climate- change risks is increased on two counts: their inability and/or unwillingness to involve in high-risk activities (for instance growing cash crops) that promise higher returns, and their inability to reside in disaster safe locations.

The entry of the private sector has metamorphosed insurance in India by greatly improving penetration levels. Companies have innovated with their product offerings and marketing strategies. For example, index-based weather risk micro-insurance programs have been pioneered in India as an alternative to traditional crop insurance.

These instruments are linked to the underlying weather risk defined as an index (based on historical data, e.g. for rainfall, temperature, snow, etc) rather than the extent of loss (e.g. crop yield loss). It is estimated that currently about 150,000 farmers have purchased such cover in India. More capital will also encourage a greater involvement of global partners, and thereby, enhance product innovation, service quality and technology standards.

Communities at risk, governments, international organizations, industry, and NGOs worldwide are seeking solutions for preventing and adapting to the rapidly multiplying impacts of climate change and weather-related disasters.

Article 4.8 of the United Nations Framework Convention on Climate Change (UNFCCC) and the supporting Article 3.14 of the Kyoto Protocol call upon developed countries to consider actions, including insurance, to meet the specific needs and concerns of developing countries in adapting to climate change.

The Munich Climate Insurance Initiative (MCII) was formed in 2005 by NGOs insurers and reinsurers, climate-change experts and policy researchers to provide a forum for examining insurance-related options that assist with adaptation to the risks posed by climate change. The full MCII report on Insurance Related Options for Adaptation to Climate Change will be posted on the following websites after COP 11:

www.slf.ch/drf and www.iiasa.ac.at/Research/RMS. This summary outlines concrete options for climate

negotiators to support insurance mechanisms for climate-related disasters in disaster-prone developing countries. It discusses the scientific and economic rationale of a climate “insurance” system, options for such schemes, funding opportunities, associated benefits and the role of the private sector. Special attention is given to India as a case study.

Climate disasters include such events as heat waves, droughts, bush fires, tropical and extra tropical cyclones, tornadoes, hailstorms, floods and storm surges. The losses from natural disasters are increasing, a trend that is attributed mainly to the increasing concentration of people and economic values in urban areas and the migration of populations and industries into areas, such as coastal regions, that are particularly exposed to natural hazards.

Considering weather-related disasters, a large proportion of the increase in economic losses from 1980 to 2004 has occurred in high-income countries that have experienced large increases in capital (lower middle-income countries have also experienced some increase). Still, the lower-income countries continue to bear the largest economic burden of disasters as measured in terms of GDP.

Highly exposed developing countries rely extensively on external concessional borrowings from international development banks (such as World Bank, IDB and the IMF) and international donor aid to deal with the devastating consequences of natural disasters.

A concern to donors and multi-lateral financial institutions, among others, is the increasing share of aid spent on emergency relief and reconstruction, which crowds out spending for social, health and infrastructure investments. The World Bank estimates that it has provided grants and loans for disaster relief and recovery of more than US$ 38 billion to developing countries over the last two decades (Gurenko, 2004; Gilbert and Kreimer, 1999), and the Asian Development Bank also reports large loans for this purpose (Arriens and Benson,1999). This means that disasters will continue to profoundly impact the lives, health, and property of millions of people, and will be acutely felt among the world’s poorest people. To date, these vulnerable groups have also had the least access to affordable insurance.

Weather shocks often affect all households in a local geographic area, making some forms of risk-coping, such as seeking help from nearby family, friends and neighbors, relatively less effective. Globally, household exposure to extreme weather events is likely to increase over future decades, due to climate change as well as population growth in risk-sensitive areas

Efforts have been made in India and other countries in

recent years to develop formal insurance markets to

improve diversification of weather-related income

shocks.

The Indian rainfall index insurance market. “Index insurance” refers to

a contract whose payouts are linked to a publicly observable index; in this case, the index is

cumulative rainfall recorded on a local rain gauge during different phases of the monsoon season.

This form of insurance is now available at a retail level in

many parts of India, although these markets are still in their

relative infancy in terms of product design and

distribution.

Lloyd’s (2009) estimates that around 135 million low income

individuals around the world already make use of micro-insurance in

some form, and estimates a potential final market size of 1.5bn

to 3bn households.

Growth in these markets reflects a broadening of efforts

towards greater financial access for the poor to include

insurance and savings products in addition to micro-

credit.

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