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Münchener RückName des Vortragenden
MCII
Insurance Instruments for Adapting to Climate Risks: Moving towards Copenhagen
Presented by Christoph Bals, Peter Hoeppe, and Koko WarnerMedia Workshop at the April Climate Talks in Bonn7 April 2009
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Münchener RückName des Vortragenden
MCIIMunich Climate Insurance Initiative
The Munich Climate Insurance Initiative
Why? The Munich Climate Insurance Initiative (MCII) was launched by Munich Re in April 2005 in response to the growing realisation that insurance-related solutions can support the adaptation to climate change advocated in the Framework Convention and Kyoto Protocol.
Who? This initiative brings together insurers, experts on climate change and adaptation, NGOs and policy researchers intent on finding solutions to the risks posed by climate change. MCII provides a forum and gathering point for insurance-related expertise on climate-change impact issues.
What? MCII is a registered non-profit association concerned with international frameworks (UNFCCC, World Bank, international development goals, etc.) and public-private insurance mechanisms for those particularly affected by global climate change
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Münchener RückName des Vortragenden
MCIIMunich Climate Insurance Initiative
Climate Change: Management of Increasing Natural Hazard Risks
! Risks for losses caused by climate-related natural hazards are rising! 95 per cent of deaths from natural disasters in the
last 25 years occurred in developing countries! Currently US$100 billion economic losses / annum! Limited allocation of financial resources so far to
support adaptation
! Developing countries! Have lowest coping capacity, higher vulnerability
(majority of fatalities)
! Management of climate risks! Need to reduce risk and transfer risk in ways
conducive to climate change adaptation
! Two issues:! Link insurance with incentives to prevent losses! Deliver climate insurance solutions to benefit those
most vulnerable to the adverse impacts of climate changeDrought in Yemen, Munich Re
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Münchener RückName des Vortragenden
MCIIMunich Climate Insurance Initiative
Munich Re NatCatSERVICEOne of the world�s most comprehensive databases on natural catastrophes
From 1980 until today all loss events
For USA and selected countries in Europe all loss events since 1970
Retrospectively all Great Natural Catastrophes since 1950
In addition all major historical events starting from 79 AD � eruption of Mt.Vesuvio (3,000 historical data sets)
Currently more than 26,000 events documented
© 2009 Münchener Rückversicherungs-Gesellschaft, Geo Risk Research, NatCatSERVICE As at January 2009
Great natural catastrophes:
Hurricane Ike Cyclone Nargis
Earthquake China
Winter damage China
Extreme temperature
(heat wave, forest fires)
Flood
Storm
Earthquake, tsunami,volcanic eruption
Natural catastrophes 2008
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Devastating Natural Catastrophes 1980 � 2008(Kat 5: > US$ 500 Mio, 500 fatalities) � Number of Events and Trend Line
5
10
15
20
25
30
35
40
45
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Num
ber
© 2009 Münchener Rückversicherungs-Gesellschaft, GeoRisikoForschung, NatCatSERVICE
Temperature extremes,drought, wild fires
FloodsStormsGeophysical events
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Münchener RückName des Vortragenden
Global natural disasters 1980 � 2008Geophysical, meteorological, hydrological events
© 2009 Münchener Rückversicherungs-Gesellschaft, Geo Risk Research, NatCatSERVICE
50
100
150
200
250
300
350
400
450
500
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Hydrological events(Flood, mass movement)
Meteorological events(Storm)
Geophysical events(Earthquake, tsunami,volcanic eruption)
----- Trend line
Num
ber
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Münchener RückName des Vortragenden
Great weather catastrophes 1950 � 2008Overall and insured losses with trend
US$
bn
© 2009 Münchener Rückversicherungs-Gesellschaft, Geo Risk Research, NatCatSERVICE
Overall losses (in 2008 values) Insured losses (in 2008 values)
Trend insured lossesTrend overall losses
50
100
150
200
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
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MCIIMunich Climate Insurance Initiative
Observed changes in sea surfacetemperatures
NATL = North Atlantic WPAC = West PacificSPAC = South PacificEPAC = East PacificNIO = Northern IndicSIO = Southern Indic
Source: Webster et al. (2005),Science, 309
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Münchener RückName des Vortragenden
MCIIMunich Climate Insurance Initiative
Munich Re Study: Typhoons and Climate ChangeIncrease in Intensity
Share of world-wide tropical storm intensities with increasing Cat 4-5 portion
Source: Webster et al. (2005), Science.
Cat 4-5 storms
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Münchener RückName des Vortragenden
MCIIMunich Climate Insurance Initiative
Mean annual normalized US hurricane losses in dependence on SST-anomalies
Yellow bars: mean annual losses according to R. Pielke�s loss figures; Orange bars: similar as above, but since 1954 Munich Re�s annual loss figures were used Blue triangles: number of data points per class (right-hand axis). Source: Faust, Munich Re 2006.
5
10
15
20
25
class -0.45°C to -0.15°C class -0.15°C to 0.15°C class 0.15°C to 0.45°Csea surface temperature anomaly
annu
al lo
ss [U
S$
bn]
0
5
10
15
20
25
30
35
40
coun
t of
dat
a po
ints
per
cla
ss
(0.3
°C in
wid
th)
2004, 2005 and 2006 were beyond the +0.45°C anomaly.
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Münchener RückName des Vortragenden
MCIIMunich Climate Insurance Initiative
Climate Change and Extreme Weather Events (IPCC, 2007)
very likely > 90% likely >66% more likely than not > 50%
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MCIIMunich Climate Insurance Initiative
Trends of Heavy Precipitation Events during Summer Monsoons in India
Source: Goswami, B. N. et al. (2006), Science 314
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Münchener RückName des Vortragenden
MCIIMunich Climate Insurance Initiative
Climate Change Index
Source: Baettig et al., GA Climate Change Index: where climate change may bemost prominent in the 21st century
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Münchener RückName des Vortragenden
MCIIMunich Climate Insurance Initiative
Property insurance premiums(non-life including health) per person and per year
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Münchener RückName des Vortragenden
MCIIMunich Climate Insurance Initiative
Donor aid has been a major source of risk financing for most disaster-prone developing countries. Reliance on this source of funding has major risks:
Limitation for Donor Aid
! Donor aid is not a contractual obligation -> subject to considerable political uncertainty
! The amount of overall donor aid remained rather stable overtime as a percentage of donor countries� GDP, economic losses caused by natural disasters have grown at a much more rapid pace compared to the increase of the donors� GDP (donor fatigue, dependence on TV cameras
! The ratio of development funding, which had to be used for emergency relief by the developing countries has risen from 2% at the end of the 1980s to 9% in the last years (source OECD, 2005).
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Münchener RückName des Vortragenden
MCIIMunich Climate Insurance Initiative
MCII proposal at COP 14The webcast of the risk management workshop can be viewed at http://copportal1.man.poznan.pl/Archive.aspx?EventID=30&Lang=english
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MCIIMunich Climate Insurance Initiative
The MCII Proposal
Prevention Pillar
High LayerRISK
Middle LayerRISK
Low LayerRISK
TIER 1Climate Insurance
Pool
TIER 2 Support for micro and
macro insurance systems
InsurancePillar
RIS
K M
ANAG
EMEN
T M
OD
ULE
The two-tiered insurance pillar
� Meets the principles set out by the UNFCCC
� Provides assistance to the most vulnerable, and
� Includes private market participation.
Premiums paid by AF
($5 bn)
Support financed by AF ($2 bn)
Support financed by AF ($3 bn)
Rough estimated
annual costs: $ 10 bn
RIS
K M
ANAG
EMEN
T M
OD
ULE
Prevention Pillar
InsurancePillar
Low LayerRISKmainlymainly
TIER 1Climate Insurance
Pool
TIER 2 Support for micro and
macro insurance systems
High LayerRISK
Middle LayerRISK
RIS
K M
ANAG
EMEN
T M
OD
ULE
Prevention Pillar
InsurancePillar
Low LayerRISK
mainly
TIER 1Climate Insurance
Pool
TIER 2 Support for micro and
macro insurance systems
High LayerRISK
Middle LayerRISK
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MCIIMunich Climate Insurance Initiative
Experience with Insurance Tools to Manage Climate Risks in Developing Countries
Meso-scale solutions like microinsurance! Index-based drought insurance in Malawi, or
government supported herder insurance in Mongolia
Country-level insurance schemes! Successful or promising sovereign schemes such as
the parametric weather derivative in Ethiopia to helpgovernment protect rural poor
! Mexico´s FONDEN! Risk layers and partnership approach
Regional (multi-country) insurance pools! Caribbean Catastrophe Reinsurance Facility
(CCRIF)
Disaster insurance � with international support �has great potential for providing security to thepoor. The market acting alone cannot provide this security.
Hurricane Gustav , Haiti , August 27, 2008
Cyclone Nargis, Myanmar , May 4, 2008
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MCIIMunich Climate Insurance Initiative
! Dom. Republik: 1.9 %! Bahamas: 10.5 %! Jamaica: 8.0 %! Grenada: 212.0 %! Cayman Islands: 183.0 %
Losses in different countries in the Caribbean due to the 2004 hurricane season compared to the annual GDP
Source: UN/ECLAC Study http://www.reliefweb.int/rw/RWB.NSF/db900SID/EVIU-68QEKZ?OpenDocument
Losses compared to annual GDP
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MCIIMunich Climate Insurance Initiative
Key Questions about Insurance and Adaptation
UNF C C C pos t‐2012 Adaptation S trateg y
Risk mgt module
Pre
ven
tio
n
Insu
ran
ce
Tie
r 2
Tie
r 1
Other facets of adaptation strategy
UNF C C C pos t‐2012 Adaptation S trateg y
Risk mgt module
Pre
ven
tio
n
Insu
ran
ce
Tie
r 2
Tie
r 1
Other facets of adaptation strategy
Can climate insurance be designed in a way that contributes to adaptation instead of mal-adaptation?
! Eligibility, risk based pricing, index based insurance, in kind premium
What role might insurance instruments play in a climate-adaptation regime?
� In the context of adaptation framework five risk management elements: risk assessment, early warning systems, disaster preparedness, climate risk insurance, sectoral risk reduction plan.
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MCIIMunich Climate Insurance Initiative
Who pays for Prevention Pillar? International community and private sector
Guiding principles:
! The COP /COP-MOP decides about criteria based on the UNFCCC criteria such as responsibility and capability.
! Option one: criteria based (like Swiss or Mexican proposal)
! Option two: only Annex I (like Norwegian proposal)
Prevention Pillar
! International Community in cooperation with countries
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MCIIMunich Climate Insurance Initiative
Who pays for Insurance Pillar? International community and private sector
Insurance Pillar
! Climate Insurance Assistance Facility (Tier 2)
! International community creates enabling conditions (regional centers, etc) and reinsurance, maybe non-risk part of insurancepremium
! Private sector: premium (e.g. new insurance markets)
! Climate Insurance Pool (Tier 1)
! International community pays for fund including reinsurancepremium
! Climate Insurance Pool reinsured by private insurers and financial market instruments
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MCIIMunich Climate Insurance Initiative
07/04/2009
Climate Insurance, high risk level tier: How much money needed?*
Level of current annual total economic losses caused byweather related natural catastrophes: US$ 100 bn (0,2% of global GDP of US$ 48 trn)
Ratio of losses in developing countries: 7% of global losses = US$ 7 bn
Ratio of global warming attribution: rough estimate 30%
Average annual economic loss per year: 100 US$ bn x 7% x 30% = 2.1 US$ bn
A very rough estimate!!!
*Peter Hoeppe, GeoRiskResearch/Corporate Climate Centre
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MCIIMunich Climate Insurance Initiative
07/04/2009
Climate Insurance: How much Money Needed?
The loss ratio to be indemnified has to be negotiated by the international community; ultimately it should be linked to an estimated attribution of globalwarming to the losses covered.
The requisite funding for a Climate Insurance Pool (CIP) covering the top 30%of losses arising from the most extreme climate events (return period of 1 in
100 years) in eligible developing countries can be assessed as:
Indemnification of the top 30% of the total direct economic losses (both publicand private) would range between USD 2.7 bn -USD 3.6 bn, with the maximuminsured losses to be capped between 10 and 50 billion depending upon theavailability of premium income for the pool.
The gross annual costs of the suggested insurance scheme including capitaland administration costs of reinsurance would range between USD 3.2 bn andUSD 5.1 bn for the range of the above
A very rough estimate!!!
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MCIIMunich Climate Insurance Initiative
The Insurance Sector�s Role
The role of insurance industry in partnership with society
Provision of data on weather-related losses to scientists, political decisionmakers and the public
Transparency of risks via risk measurement & risk adequate premiums" Insurance industry gives risks a price tag
Products promoting emissions reduction goals and adaptation to the changes
25
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MCIIMunich Climate Insurance Initiative
What Needs to be Done for the CAO (Copenhagen Agreed Outcome)
1. Establish a risk management framework and request the COP to elaborate its operationalization in the context of two (three?) pillars:
! Prevention Pillar
! Insurance Pillar:
! Tier 1: Climate Insurance Pool
! Tier 2: Climate Insurance Assistance Facility
2. Include, under the financial provisions of the CAO, provisions for a fund or funding window for the two pillars - prevention and insurance
! Prevention pillar and insurance pillar work hand-in-hand to facilitate vulnerability reduction and adaptation
3. Request COP to identify suitable operating entity and detail the operation of the two pillars between 2009 and 2012
� Slow Onset Risk Transfer Pillar
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MCIIMunich Climate Insurance Initiative
MCII will report back to the UNFCCC in June 2009:
! Technical paper with ISDR system (risk reduction, insurance, adaptation)
! Submission with operational options, designalternatives
! Insurance symposium where Parties can talk withinsurance experts
www.climate-insurance.org
Thank you!