Download Steps towards an insurance based climate compensation scheme

Steps towards an insurance based
climate compensation scheme
Munich, May 10th, 2004
Christoph Bals
Campaign Director
Germanwatch
Sonja Butzengeiger
Climate Advisor
Germanwatch
Germanwatch e.V.
Objective: changing structures in the „North“ to improve
living conditions for people in developing countries
• founded in 1991
• about 500 members, sponsors and „campaigners“
• Staff of 15 in offices in Bonn and Berlin
• Work focus / programmes:
 RioKonkret: climate protection, - policy and - responsibility,
emissions trading, transport, sustainable investment
 TradeWatch: security of food supply, agricultural trade,
principles for multinational companies
 Development policy: information and „lobbying“ in
traditional development co-operation and global structural
policy
Structure of presentation
Insurance-based climate compensation scheme (IBCS)
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Legal background
Objectives
Potential barriers
Major questions / design options
– What damages should be covered?
– Which countries/regions should be "recipients"?
– What goods should be included?
• Some general aspects
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Why should potential victims contribute?
What premiums should potential victims pay?
How to prevent moral hazard?
Contribution of GHG-emitters
Contribution of World Bank / Development Banks
• Options for financing (second presentation)
Legal Background
of insurance-based climate compensation
• Rio Declaration, Art. 13 (compensation)
• UNFCCC, Art. 4.4 (adaptation)
• UNFCCC, Art. 4.8
(particularly vulnerable countries)
• Kyoto, Art. 3.14
Objectives of an
insurance-based climate compensation scheme
• Offer insurance/compensation for damages of
climate change induced catastrophes
• Financially involve both insured and emitters of
GHGs
 Prevent moral hazard
 Give incentives to reduce GHG-emissions and risk
exposure (conduct adaptation measures)
Potential barriers against an
insurance-based climate compensation scheme
• Quantification of the contribution of climate change
to a damage event
• Interrelation with other financing/ compensation
schemes (prevention of double-compensation)
• Avoidance of moral hazard
• Reaching potential insured/policy holders
• Insuring the uninsurables
Major questions / design options
Insurance-based climate compensation scheme
• What damage events are to be covered?
– Types of catastrophes
– Connection to climate change
Proportional-approach: global or local probability?
• Which countries/regions should be recipients?
• What damages/goods should be covered?
• How should the system be financed?
(second presentation)
What damage events should be covered?
Initial approach: global probability
• System covers damage categories that will
increase with > 90 % likelihood due to climate
change
 IPCC estimates or
 analysis conducted by insurance companies
• Share of damages will be covered proportional
to contribution of climate change
 existing data
 future research
What damage events should be covered?
Future approach: regional analysis
• If analysis predicts an increase of damage
events of a certain type, the system covers
additional damage
 e.g. prediction of increase of storm surges by 15%
leads to a coverage of 15% of damages by IBCS
• Basis: independent vulnerability analysis
What countries/regions should be
"recipients"?
Option 1
• Only highly vulnerable regions
 basis: vulnerability maps
• Only persons from countries whose governments
have conducted pre-defined adaptation measures
eligible ??
Option 2
• All Non-Annex-B countries
 further allocation by selection of covered damage
events, see above
Which goods have to be covered?
• Private infrastructure - Yes
– Major objective of IBCS to support poor people which
do not have access to (inter-) national capital market
• Public infrastructure – ??
– Overlapping with international catastrophe/
reconstruction aid
– Limited willingness of donor countries to contribute
twice
– misuse of (WB) credits
– independence of public awareness
General aspects
of an insurance based climate
change compensation scheme
How should the system be financed?
• Contribution of insured
• Contribution of GHG-emitters
• Contribution of other institutions (e.g.
Word Bank / Development Banks)
Detailed proposals in second presentation
Why should potential climate victims
contribute to premiums?
• Not all climate disasters result from global
climate change
• To prevent moral hazard
• To raise awareness
• To create an incentive system for adaptation
What premiums should potential
climate victims pay?
Premiums should depend both on:
• ability to pay
 per capita income or GDP or purchasing power
parities of the relevant region (not necessarily
country)
• level of adaptation activity
 on state- or individual level
How to prevent moral hazard of
potential climate victims?
• Insurance coverage only if certain adaptation
requirements are met
– state and/or regional level
• Deductibles are based on risk reducing
adaptation measures
– Level of policy holders
 also sets an incentive for adaptation measures
Why should GHG emitters pay?
• Polluter pays principle
• To set an incentive to reduce emissions
• Emitters from vulnerable regions: for the own
(financial) protection/insurance
• ability to pay
How should emitters pay?
Responsibility of states e.g. to put a levy on:
 climate change insurance levy for fuels (CO2
emissions outside the EU emissions trading
system)
 emission trading (like CDM adaptation fee)
 aviation levy
Why should the World Bank and
development banks contribute?
• they profit from insurance, as their infrastructure
credits are not "mis-used" for disaster support
• they would only pay a share of the funds needed
– Layer-system: only pay for third layer (very big
catastrophes). In these cases they are also heavily
effected by disasters.
How should the system be financed?
• Contribution of insured
• Contribution of GHG-emitters
• Contribution of other institutions
Layer-system and premium-based system
How should the system be financed?
Option 1 – Layer concept
• First layer: potential climate victims
• Second layer: greenhouse gas
emitters (states or GHG-emitting
entities included by aviation levy,
climate change fee on ET, ...).
• Third layer: financial institutions,
which profit from insurance system:
World Bank etc.
First tier
• Private Insurance
• premiums risk-based, can be
reduced through adaptation
measures
Second tier
• contribution of GHG-emitters
Third tier
• Financial institutions which
Second and third layer pay, if damage passes
defined threshold in physical damages and/ or $
indirectly profit from IBCS
How should the system be financed?
Option 2 – premium-based concept
policy holder
Regular
premium =
risk * potential loss
multiple-layer system
primary insurer
premium =
risk * potential loss
re-insurer
natural disaster
How should the system be financed?
natural disaster
Premium-based IBCS
Objective: reduction of
premiums
policy holder
Premium =
risk * potential loss
primary insurer
Premium =
risk * potential loss
re-insurer
IBCS
Institutional design
• Local/regional insurance companies
 explain both threats of climate change and benefits of an
insurance scheme
 reach people
• Re-Insurance companies
 offer their regular services to insurance companies
• Independent authority (UN)
 regular analysis of regional risk profiles
 regular analysis of additional impact by cc
 derivation of contribution of international community to insurance
premiums
 collection and administration of finances of IBCS-fund
Isn‘t it impossible to identify "climate change
born disasters"?
Layer-concept:
• emitters only pay for losses which are very likely to be
increased by CC;
• only the contribution of the second layer will be paid by
polluters
• size of second layer:
 in the beginning: pragmatical judgement;
 later probability based
Premium-based concept:
• only pay for additional damage due to climate change