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Münchener RückName des Vortragenden

MCII

Insurance Instruments for Adapting to Climate Risks: Moving towards Copenhagen

Presented by Christoph Bals, Peter Hoeppe, and Koko WarnerMedia Workshop at the April Climate Talks in Bonn7 April 2009

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MCIIMunich Climate Insurance Initiative

The Munich Climate Insurance Initiative

Why? The Munich Climate Insurance Initiative (MCII) was launched by Munich Re in April 2005 in response to the growing realisation that insurance-related solutions can support the adaptation to climate change advocated in the Framework Convention and Kyoto Protocol.

Who? This initiative brings together insurers, experts on climate change and adaptation, NGOs and policy researchers intent on finding solutions to the risks posed by climate change. MCII provides a forum and gathering point for insurance-related expertise on climate-change impact issues.

What? MCII is a registered non-profit association concerned with international frameworks (UNFCCC, World Bank, international development goals, etc.) and public-private insurance mechanisms for those particularly affected by global climate change

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Climate Change: Management of Increasing Natural Hazard Risks

! Risks for losses caused by climate-related natural hazards are rising! 95 per cent of deaths from natural disasters in the

last 25 years occurred in developing countries! Currently US$100 billion economic losses / annum! Limited allocation of financial resources so far to

support adaptation

! Developing countries! Have lowest coping capacity, higher vulnerability

(majority of fatalities)

! Management of climate risks! Need to reduce risk and transfer risk in ways

conducive to climate change adaptation

! Two issues:! Link insurance with incentives to prevent losses! Deliver climate insurance solutions to benefit those

most vulnerable to the adverse impacts of climate changeDrought in Yemen, Munich Re

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Munich Re NatCatSERVICEOne 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

© 2009 Münchener Rückversicherungs-Gesellschaft, Geo Risk Research, NatCatSERVICE As at January 2009

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

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Devastating Natural Catastrophes 1980 � 2008(Kat 5: > US$ 500 Mio, 500 fatalities) � Number of Events and Trend Line

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10

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

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ber

© 2009 Münchener Rückversicherungs-Gesellschaft, GeoRisikoForschung, NatCatSERVICE

Temperature extremes,drought, wild fires

FloodsStormsGeophysical events

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

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

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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

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Great weather catastrophes 1950 � 2008Overall and insured losses with trend

US$

bn

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

Overall losses (in 2008 values) Insured losses (in 2008 values)

Trend insured lossesTrend overall losses

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100

150

200

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

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Observed changes in sea surfacetemperatures

NATL = North Atlantic WPAC = West PacificSPAC = South PacificEPAC = East PacificNIO = Northern IndicSIO = Southern Indic

Source: Webster et al. (2005),Science, 309

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Munich Re Study: Typhoons and Climate ChangeIncrease in Intensity

Share of world-wide tropical storm intensities with increasing Cat 4-5 portion

Source: Webster et al. (2005), Science.

Cat 4-5 storms

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Mean annual normalized US hurricane losses in dependence on SST-anomalies

Yellow bars: mean annual losses according to R. Pielke�s loss figures; Orange bars: similar as above, but since 1954 Munich Re�s annual loss figures were used Blue triangles: number of data points per class (right-hand axis). Source: Faust, Munich Re 2006.

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class -0.45°C to -0.15°C class -0.15°C to 0.15°C class 0.15°C to 0.45°Csea surface temperature anomaly

annu

al lo

ss [U

S$

bn]

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coun

t of

dat

a po

ints

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cla

ss

(0.3

°C in

wid

th)

2004, 2005 and 2006 were beyond the +0.45°C anomaly.

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Climate Change and Extreme Weather Events (IPCC, 2007)

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

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Trends of Heavy Precipitation Events during Summer Monsoons in India

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

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Climate Change Index

Source: Baettig et al., GA Climate Change Index: where climate change may bemost prominent in the 21st century

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Property insurance premiums(non-life including health) per person and per year

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Donor aid has been a major source of risk financing for most disaster-prone developing countries. Reliance on this source of funding has major risks:

Limitation for Donor Aid

! Donor aid is not a contractual obligation -> subject to considerable political uncertainty

! The amount of overall donor aid remained rather stable overtime as a percentage of donor countries� GDP, economic losses caused by natural disasters have grown at a much more rapid pace compared to the increase of the donors� GDP (donor fatigue, dependence on TV cameras

! The ratio of development funding, which had to be used for emergency relief by the developing countries has risen from 2% at the end of the 1980s to 9% in the last years (source OECD, 2005).

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MCII proposal at COP 14The webcast of the risk management workshop can be viewed at http://copportal1.man.poznan.pl/Archive.aspx?EventID=30&Lang=english

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The MCII Proposal

Prevention Pillar

High LayerRISK

Middle LayerRISK

Low LayerRISK

TIER 1Climate Insurance

Pool

TIER 2 Support for micro and

macro insurance systems

InsurancePillar

RIS

K M

ANAG

EMEN

T M

OD

ULE

The two-tiered insurance pillar

� Meets the principles set out by the UNFCCC

� Provides assistance to the most vulnerable, and

� Includes private market participation.

Premiums paid by AF

($5 bn)

Support financed by AF ($2 bn)

Support financed by AF ($3 bn)

Rough estimated

annual costs: $ 10 bn

RIS

K M

ANAG

EMEN

T M

OD

ULE

Prevention Pillar

InsurancePillar

Low LayerRISKmainlymainly


Pool



High LayerRISK

Middle LayerRISK

RIS

K M

ANAG

EMEN

T M

OD

ULE

Prevention Pillar

InsurancePillar

Low LayerRISK

mainly


Pool



High LayerRISK

Middle LayerRISK

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Experience with Insurance Tools to Manage Climate Risks in Developing Countries

Meso-scale solutions like microinsurance! Index-based drought insurance in Malawi, or

government supported herder insurance in Mongolia

Country-level insurance schemes! Successful or promising sovereign schemes such as

the parametric weather derivative in Ethiopia to helpgovernment protect rural poor

! Mexico´s FONDEN! Risk layers and partnership approach

Regional (multi-country) insurance pools! Caribbean Catastrophe Reinsurance Facility

(CCRIF)

Disaster insurance � with international support �has great potential for providing security to thepoor. The market acting alone cannot provide this security.

Hurricane Gustav , Haiti , August 27, 2008

Cyclone Nargis, Myanmar , May 4, 2008

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! Dom. Republik: 1.9 %! Bahamas: 10.5 %! Jamaica: 8.0 %! Grenada: 212.0 %! Cayman Islands: 183.0 %

Losses in different countries in the Caribbean due to the 2004 hurricane season compared to the annual GDP

Source: UN/ECLAC Study http://www.reliefweb.int/rw/RWB.NSF/db900SID/EVIU-68QEKZ?OpenDocument

Losses compared to annual GDP

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Key Questions about Insurance and Adaptation

UNF C C C pos t‐2012 Adaptation S trateg y

Risk mgt module

Pre

ven

tio

n

Insu

ran

ce

Tie

r 2

Tie

r 1

Other facets of adaptation strategy

UNF C C C pos t‐2012 Adaptation S trateg y

Risk mgt module

Pre

ven

tio

n

Insu

ran

ce

Tie

r 2

Tie

r 1

Other facets of adaptation strategy

Can climate insurance be designed in a way that contributes to adaptation instead of mal-adaptation?

! Eligibility, risk based pricing, index based insurance, in kind premium

What role might insurance instruments play in a climate-adaptation regime?

� In the context of adaptation framework five risk management elements: risk assessment, early warning systems, disaster preparedness, climate risk insurance, sectoral risk reduction plan.

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Who pays for Prevention Pillar? International community and private sector

Guiding principles:

! The COP /COP-MOP decides about criteria based on the UNFCCC criteria such as responsibility and capability.

! Option one: criteria based (like Swiss or Mexican proposal)

! Option two: only Annex I (like Norwegian proposal)

Prevention Pillar

! International Community in cooperation with countries

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Who pays for Insurance Pillar? International community and private sector

Insurance Pillar

! Climate Insurance Assistance Facility (Tier 2)

! International community creates enabling conditions (regional centers, etc) and reinsurance, maybe non-risk part of insurancepremium

! Private sector: premium (e.g. new insurance markets)

! Climate Insurance Pool (Tier 1)

! International community pays for fund including reinsurancepremium

! Climate Insurance Pool reinsured by private insurers and financial market instruments

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07/04/2009

Climate Insurance, high risk level tier: How much money needed?*

Level of current annual total economic losses caused byweather related natural catastrophes: US$ 100 bn (0,2% of global GDP of US$ 48 trn)

Ratio of losses in developing countries: 7% of global losses = US$ 7 bn

Ratio of global warming attribution: rough estimate 30%

Average annual economic loss per year: 100 US$ bn x 7% x 30% = 2.1 US$ bn

A very rough estimate!!!

*Peter Hoeppe, GeoRiskResearch/Corporate Climate Centre

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07/04/2009

Climate Insurance: How much Money Needed?

The loss ratio to be indemnified has to be negotiated by the international community; ultimately it should be linked to an estimated attribution of globalwarming to the losses covered.

The requisite funding for a Climate Insurance Pool (CIP) covering the top 30%of losses arising from the most extreme climate events (return period of 1 in

100 years) in eligible developing countries can be assessed as:

Indemnification of the top 30% of the total direct economic losses (both publicand private) would range between USD 2.7 bn -USD 3.6 bn, with the maximuminsured losses to be capped between 10 and 50 billion depending upon theavailability of premium income for the pool.

The gross annual costs of the suggested insurance scheme including capitaland administration costs of reinsurance would range between USD 3.2 bn andUSD 5.1 bn for the range of the above

A very rough estimate!!!

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The Insurance Sector�s Role

The role of insurance industry in partnership with society

Provision of data on weather-related losses to scientists, political decisionmakers and the public

Transparency of risks via risk measurement & risk adequate premiums" Insurance industry gives risks a price tag

Products promoting emissions reduction goals and adaptation to the changes

25

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What Needs to be Done for the CAO (Copenhagen Agreed Outcome)

1. Establish a risk management framework and request the COP to elaborate its operationalization in the context of two (three?) pillars:

! Prevention Pillar

! Insurance Pillar:

! Tier 1: Climate Insurance Pool

! Tier 2: Climate Insurance Assistance Facility

2. Include, under the financial provisions of the CAO, provisions for a fund or funding window for the two pillars - prevention and insurance

! Prevention pillar and insurance pillar work hand-in-hand to facilitate vulnerability reduction and adaptation

3. Request COP to identify suitable operating entity and detail the operation of the two pillars between 2009 and 2012

� Slow Onset Risk Transfer Pillar

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MCII will report back to the UNFCCC in June 2009:

! Technical paper with ISDR system (risk reduction, insurance, adaptation)

! Submission with operational options, designalternatives

! Insurance symposium where Parties can talk withinsurance experts

[email protected]

www.climate-insurance.org

Thank you!

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