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)

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

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

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

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

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)

Example – Caribbean Economics of Climate Adaptation study

Great variation in best adaptation strategy

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

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

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

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 RiskView is 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 RiskView estimates average and worst-case costs

– During a season it can monitor costs as the season progresses for every first-level administrative district

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

ContactFatima Kassam: fatima.kassam@wfp.orgAddis Ababa Tel. +251 (0)911 502267