“New ways for climate insurance”: how we can quantify the cost and benefits of risk transfer measures to facilitate decision making.
Interview with Dr. Maxime Souvignet (ACRI+ Project Manager)
Question 1: Why do we need decision making support tools for risk transfer? How does it link to MCII’s agenda of advancing insurance linked approaches for communities impacted by climate change?
MS: There is a growing consensus that climate change impacts should be considered in the development of adaptation strategies by decision makers at all levels. We see this outlined in the big global policy dialogues including the Paris Agreement, the SDGs and the Sendai Framework on Disaster Risk Reduction. This requires identifying cost-efficient adaptation measures, including risk transfer, resulting from a structured risk management approach.
However, there are many limitations on how these measures are accepted by decision makers and stakeholders. Quantifying the benefits of adaptation measures, or risk transfer is key. For the particular case of risk transfer, it is often critical to decision makers and stakeholders to know what might be the specific premium and payoffs for a particular climate insurance product. And it is critical to compare the benefits of insurance with other adaptation measures in order to make documented decisions.
In the context of our work at MCII, we realise that to date there is no quantitative tool providing the “cost” and “benefit” of implementing a risk transfer product. This is especially needed when advocating for a “smart mix approach”. By smart mix approach I mean combining adaptation measures and risk transfer in order to maximize resilience. It helps us showcase the benefits of climate insurance, especially towards advancing climate insurance for vulnerable populations.
The Economics of Climate Change Adaptation (ECA) is unique in the sense that it offers a flexible quantification of cost-effective climate adaptation measures for a variety of projects and sectors. In the context of international financial and technical cooperation, specific adaptation measures combined with risk transfer are ensuring investments that are more sustainable, while promoting assets and economic activities that are more resilient to the impacts and consequences of current and projected future climatic conditions. This tool can also provide orientation for governments and initiatives when considering how to best protect especially the poor and vulnerable people from different climatic hazards.
Question 2: You have extensive experience with the ECA methodology: Could you quickly talk us through the process of applying ECA? What are the advantages?
MS: The ECA approach has been developed by SwissRe and ETH Zurich. UNU-EHS has also produced a step-by-step guidebook on how to apply it in real conditions (available here) – it bridges a gap between traditional cost benefit analysis, vulnerability assessment and impact assessment. ECA fully integrates all three. It allows therefore the flexible identification of cost-effective adaptation measures for a variety of projects and sectors. It addresses following questions such as:
First: What is the potential climate-related damage over the coming decades?
Second: How much of that damage can be averted, using what type of adaptation measures?
Third: What investments will be required to fund these measures, and will the benefits of these investment outweigh the costs?
The advantages are several:
- ECA offers a systematic and transparent approach that fosters trust and initiates in-depth inter-sectoral stakeholder discussions.
- The methodology can also be flexibly applied from the national down to local level to different sectors and different hazards.
- It provides key information for programme-based approaches, insurance approaches and has potential to support National Adaption Plans’ (NAPs) development.
- Last but not least, it is open source and has been used in different developing countries with a focus on vulnerable populations.
Question 3: Could you please introduce us to the ACRI+ project? Which role does ECA play in the project?
A collaboration between GIZ and MCII, ACRI+ (Advancing Climate Risk Insurance Plus) is developing integrated solutions for climate risk management (ICRM). The goal is to enable people and their governments to better deal with the consequences of climate change. ACRI+ even goes one step further – that is the plus in the acronym – by planning for residual risk as a separate step in the climate risk management approach. The project is focusing on four different sectors (agriculture, urban areas, renewable energies and SMEs) in four different countries, where the ICRM approach is currently developed and tested.
The ACRI+ approach strives to explore new ways of how to apply climate insurance: Together with local authorities and private sector partners, insurance solutions that are linked to all of the phases of the disaster risk management cycle should be developed. Using the ICRM approach, we create the opportunity to prepare long-term for climate change and its serious consequences.
The second key focus of ACRI+ is to gather the experiences of different international organizations in the application of climate risk insurance and strategic climate risk planning and channel them to the international dialogues on climate change. This is one of our main roles at COP 23.
The ECA approach plays a key role in three of the 5 (five) phases of the ICRM disaster management cycle. The approach, in combination with its integrated tool climada (additional information available here) offers a comprehensive risk analysis of extreme weather events and their direct and indirect effects on people, the environment, and the economy. A ranking of measures including risk transfer can also inform about the benefits of solutions such as build-back-better.
Question 4: What developments do you see in the field of decision making support instruments for climate risk management?
There is already a plethora of decision support system designed, which are not necessarily resulting in better decisions, or in decisions that are not applied or implemented. In my opinion, it is because these tools do not fully integrate concepts relevant for climate risk management, and because most of these tools offer only a technical solution. The upcoming challenges are how to allocate investments for climate risk management and how to embed these decisions in the political process.
In terms of risk transfer, there is a need to quantify the benefits of a particular product. It would certainly raise the acceptance of climate insurance if beneficiaries could place a dollar value on it and compare it to other options.
There is also the question of uncertainty. Few decision making tools address it explicitly. In the context of climate change, and socio-economic scenarios, it is crucial to include the concept of uncertainty in the decisions we make. However, in my opinion, uncertainties remain extremely difficult to communicate, because they convey the message that decisions are based on poor bases. Nevertheless, more effort should be made in this direction.