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Public Private Partnerships Unlock Climate Cover for the Vulnerable

Escalating Cost of Natural Disasters Could Hit “One Trillion Dollar Year” Mark

Nairobi, 14 November 2006—New kinds of insurance and financing are urgently needed in developing countries to assist them in adapting to current and future climate change, a new report says.

Experts-- members of the United Nations Environment Programme’s Finance Initiative (UNEP FI)-- are warning that losses from extreme weather events linked to climate change are doubling every 12 years.

Over the next three to four decades the world could witness a year in which losses from droughts, storms surges, hurricanes and floods hit one trillion dollars.

This is according to one scenario, modeled by the firm Andlug Consulting, outlined by the initiative’s Climate Change Working Group in a report called Adaptation and Vulnerability to Climate Change: The Role of the Finance Sector launched during the final week of the climate convention talks in Nairobi.

Widespread insurance cover has been generally confined to developed countries where consumers, businesses and industry have in the past been able to pay for premiums.

However, the time has come to forge public private partnerships to bring new kinds of creative financial instruments to developing countries where the impacts of climate change are likely to hit hardest, insurers and banks argue.

Otherwise the costs of coping with a rising tide of full scale, climate-linked, natural disasters could outstrip current levels of humanitarian aid putting increasing strain on international aid budgets.

The report says some promising initiatives are already underway. It highlights one that is bringing cover to poor farmers in the Horn of Africa piloted by the UN’s World Food Programme.

The scheme, launched in Ethiopia, covered farmers during the March to October agricultural season and was designed to pay out if rainfall fell below a key threshold via a finance instrument known as a ‘weather derivative’.

The pilot, involving a UNEP FI member called AXA, the World Bank and the United States Government, was aimed at preventing communities spiraling into chronic poverty and aid dependency as a result of drought.

Other projects are being examined to assist pastoralists, with payments triggered when the condition and availability of forage for livestock deteriorate below a pre-determined point.

The new report also highlights how microfinance institutions in India, working with the re-insurer Swiss Re, are assisting farmers in Andhra Pradesh use ‘weather hedges’ against lower than expected monsoon rains.

Community-wide cover of around 150,000 dollars is in place for an annual premium of just 1,600 dollars.

Achim Steiner, UN Under-Secretary General and Executive Director of the United Nations Environment Programme (UNEP), said: “Adaptation to climate change is a wide ranging issue which is already touching on every facet of economic and development life. The finance, insurance and re-insurance industry is skilled in the management of risk. In the past, this creativity has been largely confined to covering people and populations in developed countries”.

“However, the reality of climate change is spawning new ideas which are now beginning to emerge. These make it possible to bring instruments to people and communities who have in the past been denied access to the formal insurance and finance markets. They also offer the UN and donors fresh and potentially lower cost avenues by which they can nip a climate-linked crisis in the bud before it develops into a full-scale and much more costly disaster,” he added.

Thomas Loster Chairman of the Munich Re Foundation, a not-for-profit body assisting developing countries, said: “Most insurance and re-insurance companies have no doubt that the rising tide of losses from weather-related disasters is linked with climate change. The possibility of a one trillion dollar loss year is one scenario out of many, but whatever the precise figures the losses are already large and set to increase”.

Latest figures from the NATCAT SERVICE, which has been tracking the insured and un-insured losses of natural disasters for more than 50 years, show that the costliest weather-related disaster so far this year was typhoon Kaemi. It struck China in July with overall losses estimated at 9 billion dollars.

Typhoon Shanshan, which hit Japan in September, caused overall losses of 2.5 billion dollars; followed by the tornadoes that struck the United States in March at 1.5 billion dollars and typhoon Saomai, which hit China and the Philippines in August with overall losses of 1.4 billion dollars.

In Africa, the on going drought and floods in Ethiopia and Somalia have been among the worst weather-related disaster leaving some 280,000 people homeless along with drought in Kenya. This actually began in late 2005 with the failure of the short rains at the end 2005 and which has affected an estimated three million people.

Mr Loster added: “These and loss figures from recent years show we need a step change in the way we manage relief for the poorer parts of the world including Africa. We must move from being reactive to being preventative. Through public private partnerships, that match seed money from public sources with the skills of the private sector, I believe we can do this by realizing new kinds of climate risk cover across large parts of the developing world”.

Notes to Editors

The report, Adaptation and Vulnerability to Climate Change: The Role of the Finance Sector is produced by UNEP’s Finance Initiative. www.unepfi.org

The working group consists of Aviva, AXA, Bank of America, Calvert Group, Development Bank of Japan, Allianz-Dresdner Bank, Garant, Grupo Santander, HSBC, Insurance Australia Group (IAG), Japan Bank for International Cooperation, NATCAT SERVICE, Sustainable Asset Management, Swiss Re and UBS.

The scenario of a one trillion dollar loss year has been modelled by Andlug Consulting on behalf of the UNEP FI Climate Change Working Group report

The scenario says long term trends indicate that losses as a result of wind storms, storm surges, droughts, floods and other extreme natural disaster events are doubling every 12 years.

The new scenario, modeled by Andlug Consulting on behalf of UNEP FI’s Climate Change Working Group, also takes into account other factors including the point that so called great disasters appear in clusters one in three years.

“Making allowance for such clusters, and for the inclusion of all costs, it seems likely that there will be a ‘peak year’ that will record losses of over one trillion USD before 2040. In fact, since so much development is taking place in coastal zones, the figure may arrive considerably before 2040,” says the report.

Weather Stations in Africa

The effectiveness of the WFP’s new weather derivative pilot hinges partly on Ethiopia having good historical rainfall records and a network of 26 working rainfall monitoring weather stations.

In order to replicate the pilot, urgent attention needs to be paid to Africa’s overall weather and climate monitoring network.

Last week a report on Africa’s vulnerability, commissioned by the United Nations Framework Convention on Climate Change using data from organizations including UNEP and the World Meteorological Organisation, was launched on the eve of the climate convention talks.

Overall it is estimated that Africa needs 200 automatic weather stations, a major effort to rescue historical data and improved training and capacity building on climate and weather reporting.

It also found that about 25 per cent out of the Global Climate Observing System surface stations in east and southern Africa are not working and most of the remaining stations are functioning in a less than desirable manner. Around a fifth of the 10 upper air network stations are in a similar state.

Details about the WFP Humanitarian Insurance Pilot Project in Ethiopia can be found at

http://www.wfp.org/eb/docs/2006/wfp105616~1.pdf

For More Information Please Contact Nick Nuttall, UNEP Spokesperson, on Tel: +254 20 7623084; Mobile: 0733-632 755; E-mail: nick.nuttall@unep.org

Peter Smerdon, WFP Spokesperson Africa, on Tel:

Industry Contacts Thomas Loster, Munich Re Foundation, on Mobile: +49 177 6969 100

Armin Sandhoevel, Allianz-Dresdner Bank, on Mobile” +49 174 329 0620

UNEP FI Contact Paul Clements-Hunt on Mobile: + 41 79 349 5486

For More Information on the WFP Ethiopia project please contact Peter Smerdon, WFP Spokesperson Africa, on Tel: 7622179, Mobile: 0733 528911, E-mail: peter.smerdon@wfp.org

UNEP News Release

 



 

 

Further Resources

UNEP Resources on UNFCCC Climate Conference

Adaptation and Vulnerability to Climate Change: The Role of the Finance Sector

UNEP Finance Initiative

WFP Humanitarian Insurance Pilot Project in Ethiopia

UNEP Economics & Trade Branch
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New Report Underlines Africa’s Vulnerability to Climate Change.
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