This week at the U.N. climate conference in Paris, President Obama announced that the United States would be contributing $30 million to climate risk insurance initiatives in the Pacific, the Caribbean, and Africa. The announcement — made during the President’s meeting with the leaders of the Alliance of Small Island States — marks a step forward toward meeting the Group of Seven’s (G7) goal of making such insurance available to an additional 400 million people in developing nations by 2020.
This is a worthwhile goal. Residents of the small pacific island states are contending with rising seas that threaten to submerge their homes. Caribbean nations are subject to severe storms that are expected to worsen as global warming heats the oceans. And agrarian communities in Africa are forced to confront the risks of drought and food insecurity. These threats are expected to increase costs borne by governments already struggling with poverty and economic vulnerability. Yet, from 1980 to 2006, the share of insured economic losses in developed countries grew from 20 percent to 40 percent, while in the developing world it held steady at 3 percent.
The U.S. contribution will specifically support parametric-risk insurance programs operated by the Pacific Catastrophic Risk Assessment and Financing Initiative (PCRAFI), the Caribbean Catastrophic Risk Insurance Facility (CCRIF), and the African Risk Capacity (ARC). Parametric risk insurance is a type of insurance that issues payout immediately when a specified condition — such as a certain wind speed or rainfall level — is met. These plans can be structured to insure nations against damages caused by extreme weather such as hurricanes, or financial costs associated with prolonged drought. Parametric risk insurance can help developing countries better prepare for the impacts of climate change, as the Center for American Progress discussed in a recent report.
These plans can provide much-needed resources in the wake of natural disasters for cleanup and recovery efforts. When Hurricane Thomas caused severe damage to Barbados in 2010, the country used CCRIF insurance funds to supplement its disaster recovery efforts by financing road repairs and resettlement programs.
Similarly, parametric insurance protection offered by the ARC can ameliorate the worst impacts of drought in countries where relief aid can be slow to arrive. When annual rainfall levels reach a specified minimum, ARC index insurance holders, including Kenya, Mauritania, Niger, and Senegal, are eligible to receive funding to import crops and alleviate food price spikes.
The CCRIF is currently expanding its successful insurance program into Central America. Nicaragua and Honduras have announced they will join the Facility, and Panama, Costa Rica, Guatemala, and El Salvador have also expressed interest. U.S. support can help subsidize initial premiums for interested countries, or finance other CCRIF operations.
In addition to the U.S. announcement on climate risk insurance, this week U.N. Secretary-General Ban Ki-Moon launched the Anticipate, Absorb, Reshape climate resilience and insurance initiative, which will provide $2 billion in weather-related coverage to 30 countries around the world. Climate risk insurance, if structured properly and scaled up adequately, can be an important new tool in helping countries to cope with the impacts of climate change that — regardless of what happens in Paris — it is already too late to avoid.
Pete Ogden is a Senior Fellow with the Energy Policy team at the Center for American Progress. Ben Bovarnick is a Research Assistant with the Energy Policy Team at the Center.