New Book: ‘Managing Extreme Climate Change Risks through Insurance’

Botzen, Wouter J.W. (2013). Managing Extreme Climate Change Risks through Insurance. Cambridge University Press.

Description: In recent years, the damage caused by natural disasters has increased worldwide; this trend will only continue with the impact of climate change. Despite this, the role for the most common mechanism for managing risk – insurance – has received little attention. This book considers the contribution that insurance arrangements can make to society’s management of the risks of natural hazards in a changing climate. It also looks at the potential impacts of climate change on the insurance sector, and insurers’ responses to climate change. The author combines theory with evidence from the rich experiences of the Netherlands together with examples from around the world. He recognises the role of the individual in preparing for disasters, as well as the difficulties individuals have in understanding and dealing with infrequent risks. Written in plain language, this book will appeal to researchers and policy-makers alike.

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New Article: ‘The Greening of Insurance’

Mills, E. (2012). The Greening of insurance. Science, 338 (6113): 1424-1425

Summary: Every sector of the economy telegraphs climate risks to its insurers. In turn, climate change stands as a stress test for insurance, the world’s largest industry, with U.S. $4.6 trillion in revenues, 7% of the global economy (16). Insurers publicly voiced concern about human-induced climate change four decades ago (1). I describe industry trends, activities, and promising avenues for future effort, from a synthesis of industry progress in managing climate change risk [see supplementary materials (SM)].

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New Article: ‘The Potential Role of Insurance Law in Addressing Climate Change-related Risks and Disasters in South Africa’

Abstract: Global warming and climate change are now creating new risks and also altering risks we face on a daily basis. The impacts of these are usually on the environment, earth, and atmosphere with devastating effects on movable, immovable, living and non-living things which are all subjects of insurance. It is against this background that this paper examines the potential role of insurance law in addressing these novel weather events-risks  and disasters. The paper argues that despite the fact that these risks are not expressly provided for or defined in the core laws regulating insurance law and business in South Africa, significant provisions are in the Long Term Insurance Law, general principles of insurance law and other related statutes to be the legal basis upon which these risks can be regulated and managed. The article offers insightful proposals for inclusions and reforms by engaging in comparative study.

Full Citation: Odeku, K.O. (2012). The Potential Role of Insurance Law in Addressing Climate Change-related Risks and Disasters in South Africa. Journal of Human Ecology: International, Interdisciplinary Journal of Man – Environment Relationship, 39 (2): 103-113 (Available for download with subscription at: http://www.krepublishers.com/02-Journals/JHE/JHE-39-0-000-12-Web/JHE-39-0-000-12-Contents/JHE-39-0-000-12-Contents.htm). 

New Article: ‘Preempting the next disaster: Catastrophe insurance and the financialization of disaster management’

Abstract: The 2007 launch of the Caribbean Catastrophic Risk Insurance Facility (CCRIF) introduced a new mechanism of state security against the uncertainties of climate change. Proponents argue that increasing the ability of member-states to finance disaster recovery through catastrophe insurance mitigates the effects of increasingly frequent and intense hurricanes and thus contributes to climate change adaptation. In contrast, I offer a critical analysis of the CCRIF that draws out how it facilitates what I call the ‘financialization of disaster management’. The introduction of financial logics and techniques enables the state and capital to visualize a population’s self-organizing adaptive capacity as both a threat to state-based forms of order and a value that can be leveraged on capital markets as catastrophe risk. Leveraging enhances a state’s ability to repair its critical infrastructure and preemptively negate undesirable adaptations. The CCRIF blends risk pooling with parametric insurance techniques to turn the uncertainty surrounding a population’s immanent adaptability into catastrophe risks that can be leveraged to enhance state security and capital accumulation in an emergent environment.

Full Citation: Grove, K. (2012). Preempting the next disaster: Catastrophe insurance and the financialization of disaster management. Security Dialogue, 43 (2): 139-155 (Available with subscription at: http://sdi.sagepub.com/content/43/2.toc)

Table of Contents Alert: The Journal of Environment & Development 21 (2)

See below for some of the articles that was published in the latest Special Issue:  Policy Instruments for Sustainable Development at Rio +20 in The Journal of Environment & Development 21 (2)

The Promise and Problems of Pricing Carbon: Theory and Experience
Joseph E. Aldy and Robert N. Stavins
Abstract: Because of the global commons nature of climate change, international cooperation among nations will likely be necessary for meaningful action at the global level. At the same time, it will inevitably be up to the actions of sovereign nations to put in place policies that bring about meaningful reductions in the emissions of greenhouse gases. Due to the ubiquity and diversity of emissions of greenhouse gases in most economies, as well as the variation in abatement costs among individual sources, conventional environmental policy approaches, such as uniform technology and performance standards, are unlikely to be sufficient to the task. Therefore, attention has increasingly turned to market-based instruments in the form of carbon-pricing mechanisms. We examine the opportunities and challenges associated with the major options for carbon pricing—carbon taxes, cap-and-trade, emission reduction credits, clean energy standards, and fossil fuel subsidy reductions—and provide a review of the experiences, drawn primarily from developed countries, in implementing these instruments. Our summary of relevant theory and survey of experience from industrialized nations may be helpful to those who wish to examine the potential applicability of carbon pricing in the context of developing countries.

Environmental Policy and Political Realities: Fisheries Management and Job Creation in the Pacific Islands
Joshua Graff Zivin and Maria Damon
Abstract: Effective environmental policymaking requires an understanding of how environmental goals interact with other political goals. This article analyzes development strategies in the PICT’s, where policymakers aim to leverage tuna resources into sustainable economic development and job creation. The authors develop a model that analyzes costs and benefits of different development strategies, with a focus on job creation and local socioeconomic factors that drive optimal policy mixes across PICTs. The analysis demonstrates that investment in fisheries management can effectively encourage economic development and create employment opportunities, and compare this strategy to others such as selling access permits and investing in processing capacity. While many benefits of fisheries management are widely recognized, its ability to create high-quality employment opportunities is often overlooked. For many PICTs, this may represent the lowest cost strategy for jobs creation and, coupled with selling fishery access to foreign vessels, can form a strong basis for economic development plans.

The Role of Microinsurance as a Safety Net Against Environmental Risks in Bangladesh
Sonia Akter
Abstract: The Intergovernmental Panel on Climate Change (IPCC) identifies Bangladesh as one of the countries that will be hardest hit by the anticipated effects of climate change. The poorest people are the most vulnerable, as they do not have sufficient means to cope with environmental risks. In the absence of effective safety nets, poor people become trapped in chronic poverty due to the recurrent damage caused by natural disasters. Recently, there has been growing optimism among policy makers and practitioners about the role of microinsurance as a safety net against weather risks for the poorest and most vulnerable people of Bangladesh. This article sheds light on this issue by synthesizing the findings of half a decade of research on the prospects of weather microinsurance in Bangladesh. Three key conclusions are drawn from the synthesis. First, the market for a standard, stand-alone weather microinsurance in Bangladesh is characterized by low demand, poor governance, and lack of prospects for commercial viability. Second, although the index-based flood insurance model has theoretical appeal (i.e., no moral hazard or adverse selection and low transaction cost), high economic cost might be associated with its highly complex practical implementation. Finally, the current (un)regulatory arrangement of microinsurance supply in Bangladesh, which does not guarantee accountability and protect clients’ rights, is likely to increase rather than decrease poor people’s vulnerability. The study makes two key recommendations: (1) exploring options for nontraditional insurance models (e.g., group-based and ex-post premium-based models), and (2) considering regulatory reforms to ensure good governance and to foster market efficiency through low-cost delivery and product innovation.

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Table of Contents Alert: The Geneva Papers on Risk and Insurance: Issues and Practice 37 (2)

See below for some of the articles that is published in the latest edition of The Geneva Papers on Risk and Insurance: Issues and Practice Special Issue: CLIMATE RISK AND INSURANCE

Explaining the Failure to Insure Catastrophic Risks

Carolyn Kousky and Roger Cooke

Abstract: It has often been observed that homeowners fail to purchase disaster insurance. Explanations have ranged from behavioural biases to information search costs. We show that the decision to forego disaster insurance may be quite rational. Solvency-constrained insurers are required to have access to enough capital to cover a particular percentile of their aggregate loss distribution. When insuring risks with loss distributions characterised by fat tails, micro-correlations or tail dependence, insurers need to charge a price that is many times the expected loss in order to meet their solvency constraint. Homeowners, facing a budget constraint and a constraint that their utility with insurance exceeds that without it, may find the required loadings too high to make insurance purchase an optimal decision.

Disasters and Decentralisation

Jason Scott Johnston

Abstract: Climate change may potentially increase the magnitude of losses from natural hazards, but the United States experience shows that the primary reason for escalating losses is policy failure. It is well known that centralised, taxpayer-funded ex post disaster relief has actually encouraged development in risky jurisdictions and also weakened incentives for ex ante precautions in such jurisdictions (moral or “charity” hazard). Less well known and analysed is the role played by centralised ex ante development subsidies—often masquerading as protective investment—in distorting incentives. This paper develops a simple three jurisdiction model in which homogeneous jurisdictions decide by majority vote in a centralised legislature on the centralised (federal) share of ex post loss and centralised spending an ex ante development in a Beneficiary jurisdiction, taking into account how these decisions about centralised spending impact local Beneficiary jurisdiction incentives for precautions against ex post loss. The model shows that the marginal cost of ex ante federal development spending may be greater for a Beneficiary jurisdiction than for a Contractor jurisdiction. This somewhat technical result has an observable implication: evidence that a small fraction of ex post loss in a Beneficiary jurisdiction is centrally compensated (shared across jurisdictions) is evidence that ex ante development subsidies there may be truly precautionary on net; conversely, evidence that a Beneficiary jurisdiction has a large share of its ex post hazard loss compensated by centralised disaster relief suggests that the ex ante development subsidies received by that jurisdiction did more to encourage new development and increase the amount at risk than they did to protect existing development. The model is extended to consider how ex post loss sharing impacts the demand for federally subsidised disaster insurance and other related issues.

A Comparative Study of Public—Private Catastrophe Insurance Systems: Lessons from Current Practices

Youbaraj Paudel

Abstract: Natural disasters risk is increasing in several regions around the world as a result of socio-economic development and climate change. This indicates the importance of establishing affordable and sustainable natural disaster risk management and compensation arrangements. Given the complexity of insuring extreme risks, insurers and governments often cooperate in catastrophe insurance systems. This paper presents a comparative study of the main components and a broad range of indicators of fully private and fully public, as well as public-private (PP) insurance systems, for extreme events, in ten countries. This analysis results in the following nine main recommendations for policymakers who aim to establish new, or improve existing, insurance arrangements for natural disasters: (1) mandatory participation requirements are advisable to achieve a high market penetration rate; (2) adequate monitoring and enforcement mechanisms need to be put in place to ensure compliance with these requirements; (3) the government needs to take responsibility for part of the (extreme) damage in order to keep an insurance system financially viable and affordable; (4) private insurance companies should participate in a PP insurance scheme by selling and administering policies and by covering medium-sized losses; (5) the integration in systems of risk transferring mechanisms is advisable; (6) it is advisable that governments stimulate the building-up of insurers’ reserves by providing tax exemptions; (7) risk mitigation policies should be carefully integrated in a natural disaster insurance system; (8) a detailed assessment and mapping of risk provides the basis for an effective mitigation policy; (9) insurance should provide financial incentives for policyholders to take risk mitigation measures.

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New Report: ‘Extreme Events and Insurance: 2011 Annus Horribilis’

Summary: 2011 has been the most expensive year in recorded history both for the national economies and the insurance sector, with an estimated direct economic cost of US$380bn and original insured losses of approximately US$105bn.

It also showed an increasing severity arising from natural catastrophes, with a series of extreme events including the 11 March Japanese earthquake, the Australian and Thai floods, the New Zealand earthquakes, and the U,S, tornadoes.

These extreme events entail huge consequence in terms of human and economic losses but they also have important repercussions for the insurance industry.

This report presents the insurance’s role in managing extreme events and the mechanisms that make these insurable, both by the public and private sectors. In this context, it provides a detailed picture of the main extreme events that occurred in 2011 and analyse their impact on local insurance markets and well as the lessons learnt to efficiently manage these risks.

To download report click here

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