Climate Risk Management and Risk Transfer: Utilizing Insurance Tools for Cost-Effective Adaptation

1. Climate Risk Management and Risk Transfer:Utilising insurance industry tools to underpin cost-effective adaptation Simon Young CEO, Caribbean Risk Managers Ltd Facility Supervisor, Caribbean Catastrophe Risk Insurance Facility (CCRIF)

2. Main themes • Sovereign risk pools can play a key role in climate change adaptation • Risk management tools from the re/insurance industry need to be deployed to develop cost-effective adaptation plans • Public-private partnerships nurture capacity development in the public sector and engagement with the private sector • Africa Risk Capacity: transitioning from managing crises to managing risks

3. 1. Sovereign risk pools can play a key role in climate change adaptation

4. Case Study - CCRIF • CCRIF is the first multi-national catastrophe risk pool, covering tropical cyclone and earthquake ‘liquidity’ risk for 16 nations • Also first pool to utilise parametric (index-based) insurance, enabling: • Quick payouts (14 days) and flexible coverage • Transparency and fairness in pricing • Certainty in loss and payout calculation • Works with, not against, risk reduction • CCRIF is public-private partnership – for-profit insurance company, 100% owned by a beneficial trust for the member Governments • Partners with private sector also in bringing new risks to the international markets

5. CCRIF works • CCRIF issued 29 annual policies to 16 CARICOM countries in 2010 (fourth policy year for all countries) • CCRIF initially raised capital to cover claims and operating costs from donors (~$65M) and from its participants (~$22M via a ‘Membership Fee’). Countries pay annual premium of ~$21M • Cost of coverage, due to pooling and capitalisation, is better than halved compared to individual country open market pricing (if it were available) due to diversification and capitalisation • Payouts so far total $20M to 5 different countries • Caribbean nations see the benefits of pooling with their neighbours (mutual security), while also not wishing to subsidise those same neighbours (enabled through risk-based pricing) • Desire now to expand CCRIF – new perils and more coverage

6. 2. Using risk management tools from the re/insurance industry to help access adaptation funds • Making the ‘business case’ for adaptation is critical in mobilising both committed public-sector funds and private-sector partnerships • Quantitative analysis required to identify which tools (e.g. risk reduction, risk transfer, etc) should be implemented to what extent and in which order • The re/insurance industry (and thus technical capacity within a regional risk pool) uses these tools daily to price risk and reward – both based on history and based on future climate change projections • These tools must be deployed to facilitate progress on adaptation action in the developing world (where adapting to the increasing climate crisis is vital to sustainable development)

7. Example – Caribbean Economics of Climate Adaptation study

8. Great variation in best adaptation strategy

9. 3. PPPs nurture capacity development in the public sector and engagement with the private sector • The CCRIF experience has highlighted the catalytic effect of developing risk management capacity and a funded pool • CCRIF is supporting developments of index-based insurance solutions in agriculture and to support micro-finance development • Farmers can hedge their climate risk, enabling them to invest in better seeds or technology • Private-sector lenders can hedge the exposure of their portfolio to climate risks • Credit is freed up to those with no collateral, if main risk (climate) is insured • All of these issues are becoming more critical to sustainable development in the changing climate

10. 4. Africa Risk Capacity: transitioning from managing crises to managing risks • African Union has endorsed implementation of a three-pronged approach developed by WFP to enabling more efficient climate risk management in its member States: • African Risk Capacity: Pan-African disaster risk pool: Efficient weather-related food security risk management through risk pooling and sharing across regions • Africa RiskView Software Platform: A financial management tool for decision makers • Climate Change Stress Tests: Stressing today’s risk by future climate scenarios

11. Pan-African disaster risk pool • Establishing an African-owned contingency fund for sovereign risk would provide participating governments with immediate cash in the event of an extreme drought, flood or cyclone • It is unlikely that extreme weather events will happen simultaneously in every country and in all regions on both sides of the equator • Early modelling results show climatic diversity across Africa creates a powerful portfolio affect of 50%, reducing the contingency funding requirement for drought by half (similar to CCRIF) • The AU is pursuing multiple strategies towards food security, climate change resilience and disaster risk reduction. The risk pool provides an elegant way to link the three in a cost-efficient and innovative manner • President Mutharika’s vision for a food-secure Africa in 5 years: The Risk Pool is outlined as part of the AUC strategy to support the President’s vision as a system to protect investments in agricultural productivity • CAADP Pillar III: Pillar III outlines the need for enhanced risk management and improved emergency response. Identifying, analysing, quantifying and financing risk are prerequisites for achievement of these objectives • AU Climate Change Adaptation Strategy: Ahead of CoP-16, the AUC is developing a continental strategy of which the risk pool will be part. Additionally, linkages are being explored with ClimDev Africa for building national capacities to use climate information effectively for decision-making • Many experiences from Caribbean can be used to assist in pool development and implementation

12. Africa RiskView: Quantifying and monitoring risk • Underpinning the risk pool is knowledge about how to manage risk, utilise ‘best-of-breed’ information and communication technology and well as earth observation tools • Hazard: Weather indicators • Vulnerability: Food security profiles • Exposure: response costs per person • Africa RiskViewis an open software platform that translates satellite-based rainfall information into near real-time needs and costs estimates so that decision makers can take action: • Before a season begins, Africa RiskViewestimates average and worst-case costs • During a season it can monitor costs as the season progresses for every first-level administrative district

13. Africa Risk Capacity – the way forward • Exploring integration with ClimDev • Enhanced engagement with interested Member States • Technical assistance and capacity building to governments leading to a critically aware informed decision to participate in a risk pool. This includes: • Refinement of underlying model with countries and their partners • Adapting each to the country’s weather risk profile, capacity and national disaster risk management plans and early warning processes • Development of defined contingency plans • Alignment with other country-level institutional processes • Pursuit of a formal mandate to establish the ARC by Heads of State at the January 2011 Summit • Negotiated participation of a group of national Governments in an initial risk pool for the June 2011- June 2012 agricultural risk season Contact Fatima Kassam: fatima.kassam@wfp.org Addis Ababa Tel. +251 (0)911 502267