Insurance against loss and damage

AS countries start to think about the inevitable loss and damage from climate change in the future, one of the tools at their disposal is insurance to pay for the loss and damage that will occur in future from climatic shocks. Such insurance, for example for floods, cyclones and even droughts, is not new as insurance companies provide such insurance policies routinely all over the world.
However, there are two differences that climate change can, and indeed will, bring to this traditional insurance business. The first is the fact that the frequency of severe weather events such as floods, cyclones and droughts will increase with climate change. This realisation is causing many insurance companies to stop offering such insurance policies. Thus, for example, many households in floodplain areas in the United Kingdom can no longer get flood insurance.
The second element that is now being explored in many parts of the world is called Index Based Insurance (IBI) which is quite different from traditional insurance.
In traditional insurance, after a severe weather event, such as a flood, cyclone or drought, the insurance company’s agents will assess the damage and authorise a payment after that assessment. This can often be a time consuming process as well as being open to dispute between the insurance agent’s estimate and that of the policy holder.
With IBI there is no such post-disaster loss estimation process. Instead, the insurance policy is based on a pre-determined weather based index or threshold which, when exceeded, will automatically trigger a payout to the policy holder.
Thus for example if the pre-determined threshold for flood insurance is ten days of river water level above a set level at an agreed location, then the policy holders get paid the full insured amount (without any questions) on the tenth day that the water level is above the pre-determined level.
IBI is now being used around the world for example for drought in parts of Africa and for hurricanes in the Caribbean as well as for floods in India.
In Bangladesh, until now there have been some very tentative attempts in the past which were not very successful. Despite that earlier lack of success some new initiatives are being piloted again. These include IBI against floods by OXFAM together with Progoti Insurance with reinsurance provided by Swiss Re. Other schemes are in the pipeline by a number of other agencies.
One of the biggest hurdles in successful IBI schemes is getting accurate and reliable data about the weather related hazards in order to devise a robust index or threshold for triggering the payment.
Another issue for IBI, especially for poorer farmers, is their inability to pay the premiums. This is a particularly contentious issue in the context of weather extremes caused by climate change where many feel that it is immoral to expect the poor farmers to pay premiums to insure them against weather disasters that were caused by the greenhouse gas emissions of the rich.
However, using IBI as a means of delivering payments efficiently and quickly to the victims of climatic disasters in poor countries may be an effective channel for the rich countries to pay for the insurance premiums for the poorer countries.
These issues will be part of the negotiations at the nineteenth Conference of Parties (COP19) of the United Nations Framework Convention on Climate Change (UNFCCC) in November in Warsaw, Poland under the loss and damage negotiating track where a possible international mechanism on loss and damage will be discussed.