Climate Change, Resilience and Finance

CLIMATE-CHANGE risks, such as extreme weather-related disasters as well as slow onset changes such as rising sea levels, threaten sustainable development and resilience, impair socio-economic development, and reinforce cycles of poverty across the globe.

According to Munich Re (2013) and Collier et.al (2008), climate impacts undermine resilience and the capacity to recover and absorb losses from these events, especially those of poorer countries and their citizens, by reducing their agricultural productivity; weakening water and food security; increasing the incidence of diseases, and threatening the existing infrastructure, economic productivity and value chains

Although more than one billion people have lifted themselves out of poverty over the past 15 years, climate and disaster risks threaten these achievements. According to a World Bank study, global economic losses from disasters are now reaching an average of more than US$300 billion annually, forcing millions into poverty.

Post-disaster response financing, including donor assistance and commercial insurance, covers only a fraction of disaster losses, which in turn creates a protection gap.

SwissRe (2016) indicates that over the last 10 years, an average of just about 30 per cent of catastrophic losses have been covered by insurance, which in turn, translates to about 70 per cent of catastrophe losses having to be borne directly by individuals, firms and governments.

Financial protection involves planning ahead to better manage the cost of disasters; ensuring predictable and timely access to much-needed resources, and ultimately mitigating long-term fiscal impacts. As such, in the intermediate aftermath of a disaster, being able to rapidly access financial resources is crucial for saving lives and livelihoods (World Bank, 2017).

Catastrophe risk pools are emerging as a cost-effective vehicle to help countries access rapid financing for disaster response. These allow countries to pool risks in a diversified portfolio; retain some amount of risk through joint reserves/ capital portfolio; and transfer excess risks to the reinsurance and capital markets. Twenty-six countries have joined the sovereign catastrophe risk pools in three regions, namely Africa, the Pacific, and the Caribbean and Central America, over the past 10 years or so. These countries have purchased parametric catastrophe risk insurance for an average aggregate coverage of US$870 million and an aggregate premium volume of US$56.6 million (2016/17), backed by more than 30 reinsurance companies.

This type of insurance solution (parametric) allows for rapid payouts in the event of a disaster by providing liquidity within a few weeks to finance rapid response. The success of this form of sovereign catastrophe risk pools, however, relies on a combination of technical assistance, significant financial support, and strong political commitment (World Bank, 2017). At the regional level, such catastrophe risk pools would require a regional partner organisation to facilitate the political and policy dialogue and coordination among participating governments.

Further, disaster risk financing solutions require that participating countries be committed to implementing necessary policy reforms (World Bank, 2017).

A systematic and thorough review of empirical studies on disaster risk financing and the impact of natural disasters in the Caribbean context, found that very limited evidence was uncovered to ascertain how disaster risk financing and insurance instruments have benefited the Caribbean.

This is not to say, however, that there is absolutely no benefit to such initiatives, but the evidence suggests that the cost of natural disasters, especially upon the vulnerable in the small Caribbean economies, far outweigh the benefits of financial support to rebuild in the aftermath. In fact, there is a wealth of literature and economic impact assessment studies quantifying the economic and social costs on economies vulnerable to, and most affected by natural disasters.

It is especially against this backdrop that further studies need to be done to mobilise, harmonise and coordinate, at the regional level, disaster risk financing and insurance instruments. More focus needs to be placed on the more vulnerable groups who are the victims suffering the most from the wrath of such catastrophes. This should not only be limited to sustainable development work to lift people out of poverty by economic empowerment through education, but countries also have to divert investment into building climate-resilient infrastructure.

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