Weathering climate change

Innovative insurance solutions are key to making local communities more resilient to climate risks, says new Swiss Re report

An estimated 3.4 billion people are threatened by storms, floods, drought and other natural hazards, most of them in the developing world. Climate change could put at risk many more. A new Swiss Re report shows how innovative insurance solutions can strengthen local adaptation strategies and protect communities against the rising costs of climate change.

Economic losses from climate-related disasters are already substantial, and they are on the rise. Insured losses alone have jumped from an annual USD 5 billion to 27 billion over the last 40 years. Without further investments in adaptation, climate risks could cost some countries up to 19 percent of annual GDP by 2030 and set back years of development gains. While cost-effective measures could avert a large part of this damage, funds earmarked for adaptation fall far short of what is actually needed globally. The United Nations estimates that by 2030 the world should be spending an additional USD 36 to 135 billion each year to address the effects of climate change.

Swiss Re’s new report “Weathering climate change: insurance solutions for more resilient communities” (see right) says that innovative forms of risk transfer can boost adaptation financing and make societies more climate-resilient by protecting them against the costs of the most severe weather impacts. It documents the facts that decision-makers must consider when devising a risk management strategy and highlights the role of insurance in making it both affordable and effective.

“Efficient allocation of financial resources is essential to manage the growing threats of climate change, and insurance is a powerful tool in achieving this,” says David Bresch, Swiss Re’s Division Head Sustainability. “It protects communities against catastrophic losses and, by putting a price tag on risks, provides a strong incentive to invest in adaptation measures that promise to yield net economic rewards.”

Many of Swiss Re’s climate risk solutions involve close collaboration with public and private sector partners and take the form of index insurance or parametric covers. With low administrative costs and fast payouts, they offer an attractive alternative to traditional insurance policies. Their benefits could be particularly far-reaching in developing countries where financial resources are scarce and the effects of natural disasters fierce.

Says Andreas Spiegel, Swiss Re’s Senior Climate Change Adviser, “Studies on the economics of climate adaptation in different regions exemplify how climate adaptation works in action. Emerging countries can reduce local climate risks by combining prevention and risk transfer measures. Swiss Re's solutions show how climate risks can be transferred away from public budgets to the commercial insurance market, thus pre-financing disaster recovery efforts.”

Published 20 September 2010

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