2018 FEMM: Pacific Islands Climate Change Insurance Facility

 

FORUM ECONOMIC MINISTERS MEETING

AND

FORUM ECONOMIC OFFICIALS MEETING

 

 

 

25-27 April 2018

Koror, Palau

PACIFIC ISLANDS CLIMATE CHANGE INSURANCE FACILITY

 

Summary of Issue
 

 This paper outlines the recent work undertaken to develop a new mechanism to manage financial vulnerability and risks to the impacts of climate change, and improve resilience through the development of a Pacific Islands Climate Change Insurance Facility. It seeks guidance and support from Ministers to continue the analysis.

The paper, developed in consultation with the PICCIF Taskforce:

➢ Proposes a specific Roadmap to continue analysis required; and

➢ Discusses the historical, political and economic issues for a new insurance mechanism.

 

  1. The Need for Action
    1. The Fifth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC) has indicated that there will be more intense natural disasters detrimental to human lives and infrastructure, severe droughts and flooding, issues with food and water security, and ocean acidification which may lead to coral reef damage and alteration to fisheries distribution and migratory patterns. With business as usual, the world is taking a path to global temperature increase of more than 3 degrees Celsius by 2100. While work continues to reduce emissions there must also be other efforts to reduce the effects of climate change through adaptation actions but at some point with continued rise in global temperatures there will be a limit to adaptation. Hence there is a need to consider financial mechanisms that can deal with the economic costs associated with current climate impacts and future climate change that can negatively affect human and natural systems.

 

  1. The size and impact of damage caused by recent cyclones indicate that FIC governments will face critical challenges for ensuring their financial resilience to climate change and natural disasters. Most FICs have restricted options for securing funds for recovery and reconstruction after the post-disaster emergency response without compromising their long-term fiscal balance. In addition, FICs are constrained by their size, borrowing capacity, and limited access to international (re)insurance markets. In the absence of easy access to debt and well-functioning (re)insurance markets, a large portion of the economic losses stemming from climate change events will be borne by governments, communities and households supported by development partners.

 

  1. The demands for financial products like insurance are not new, the 1992 UN Framework Convention on Climate Change includes a reference to insurance in Article 4.8. The Paris Agreement in Article 8 recognises the importance of averting, minimizing and addressing loss and damage associated with the adverse effects of climate change, including extreme weather events and slow onset events, and the role of sustainable development in reducing the risk of loss and damage. In particular, areas of cooperation and facilitation to enhance understanding, action and support may include: risk insurance facilities, climate risk pooling and other (re)insurance solutions. Lastly, the Framework for Resilient Development in the Pacific identified as a priority action to “[e]stablish a regional facility to assist governments in disaster and climate change risk financing, including insurance, in national sustainable development strategies and processes, and support their access to international financing and support.”
  2. Relevant Decisions by Leaders
  3. Economic Ministers have been requested by SIS Leaders to receive a report on the PICCIF which was also supported by Forum Leaders, in particular:

 

  1. SIS Leaders’ considered the need for a Pacific Island Climate Change Insurance Facility (PICCIF) and agreed to the concept for a PICCIF and the establishment of a taskforce to further elaborate on it.

 

  1. SIS Leaders further supported the idea that the taskforce should report to the Forum Economic Ministers Meeting (FEMM) in 2018 with the view to proposing a full proposal for endorsement by FEMM and later by the Pacific Island Forum Leaders in 2018 in Nauru.

 

  1. Forum Leaders considered the concept of a Pacific Island Climate Change Insurance Facility (PICCIF) to cover the impacts of Climate Change and noted a taskforce would be established to further elaborate it. Leaders further supported the idea that the taskforce would report to the Forum Economic Ministers Meeting in 2018 and later to the Leaders meeting.

 

  1. The effects of climate change are predicted to worsen in the coming years. For example, many scientists now consider that the intensity of cyclones in the region have increased due to global warming.[1] Beside cyclones there are a range of slow onset and extreme events that should also be considered, these include: droughts, heatwaves, floods, storm surges, loss of biodiversity, land and forest degradation, sea level rise, soil salinization, ocean acidification, rise in temperature and desertification.

 

  1. A Pacific Regional Dialogue on Financial Management of Climate Risks was held in Apia, Samoa from 26 to 28 June, 2017. It was organised by SPREP and UNDP in response to a request from Tuvalu, and was attended by various Pacific Island country representatives, regional and international agencies and international (re)insurance and finance experts. This meeting was able to refine the initial proposal developed by the Government of Tuvalu into a concept note that was shared with SIS and Pacific Islands Forum Leaders’ at their last meeting in Apia, Samoa (see paragraph 4 for the decisions).
  2. The Pacific Islands Climate Change Insurance Facility (PICCIF)
  3. The under-developed insurance industry in the Pacific is a major hurdle that should be overcome to ensure that appropriate insurance – or alternative protection mechanisms – can be made available to help offset the financial burden on individuals, communities, governments and donors in the post-loss recovery and reconstruction phases.

 

  1. The aim of the PICCIF is to help people, cultures and livelihoods rebuild after the impacts of climate change. It seeks to address a variety of slow onset and extreme weather events that are currently not covered in the Pacific region by insurance or other mechanisms. It aims to provide the necessary incentives and information to improve the ownership and actions on addressing climate change risks. An attached Roadmap document details more on the PICCIF and the specific process of its development through the Taskforce. It aims to work with existing mechanisms by filling observed gaps and to not duplicate or replace them.

 

  1. As the proposed PICCIF will aim to undertake a number of functions it is anticipated the PICCI Facility will consider the development of a wide range of arrangements, such as:
  • An index or parametric scheme, or similar product, including the establishment of appropriate and workable systems for the measurement and adjustment of losses and payment of financial compensation.
  • Traditional (re)insurance (indemnity-based) products could include coverage for property, land, infrastructure and/or food security.
  • A regional captive insurer, owned by the Pacific nations, managed by a specialist organization and protected by reinsurance.
  • A clearinghouse to evaluate suitable risk finance product options, to better address community needs on responding to climate change.
  • Industry monitoring tool to ensure that the insurance and reinsurance industry is investing in climate change friendly portfolios.
  • Cooperation and coordination though engagement with national governments, civil society, the scientific community, central banks, (re)insurers, multinational brokers and existing schemes. This will also enable greater understanding and ownership of risks by these partners.

 

  1. In response to the decision of SIS and Forum Leaders, a Taskforce was requested to be formed. The purpose of the Taskforce is to examine the viability of developing new climate risk products tailored to suit the specific needs of Smaller Island States. The Taskforce consists of invited FICs, experts and supporting regional and international agencies that met at PIFS, 20-21 March, 2018, to discuss the specific range of issues related to the development of additional risk management products to deal with climate change induced perils – and the associated hazards and risks – in Pacific island countries. Through the assistance of technical experts the Taskforce is seeking to progress work that will assist in exploring and understanding of the options, gaps and challenges in managing and mitigating risks and to advise on the value of a Pacific Island Climate Change Insurance Facility.
  2. The Value Proposition
  3. (Re)insurance and risk financing schemes are increasingly recognised as important tools for reducing and transferring the burden of disaster and climate-related risks in vulnerable Pacific island countries. As a result, a range of disaster and climate risk financing and (re)insurance products should be developed for individuals, as well as communities, governments, and regions. These instruments, products, and mechanisms can improve financial resilience through the pooling of resources, establishment of funds and transfer of risk.

 

  1. The PICCIF is additional to the Pacific Catastrophe Risk Assessment and Financing Initiative (PCRAFI) as it responds to climate change risks and will, build on the work of other insurance, social payment and index mechanisms that operate at the regional, national, community and individual level but address specific needs in the context of Pacific Island Countries that are not being met at the moment. There are opportunities to integrate innovative climate financing mechanisms into the Pacific’s disaster management and response tool box. In order to develop these initiatives at scale and alongside investment into risk reduction a strategic regional approach is required. By working with other insurance and financial mechanisms the PICCIF can improve financial resilience to the effects of climate change. However, it needs to have a clear value proposition for the facility with a central focus on people, culture and livelihoods.
  2. At this time there are no means to deal with “sudden onset adaptation events” where a community is forced to act in a permanent way because a threshold has been reached. Hence the PICCIF provides a means to consider the question “what will we do if climate change happens faster than expected or in ways we didn’t expect that force us to rapidly change our way of life”. Another aspect of value adding will be the development of national “triggers” for quite varied climate change risks (such as sudden and slow onset events). Lastly, traditional indemnity products do not cover most climate change risk but there is an opportunity under index – ‘hybrid indemnity’ products to development them. A lot of the events could be insured but there is difficulty in terms of data/modelling requirements and there needs to be additional work to provide the basis for further work. The PICCIF can act as a catalyst to seek additional work on climate change risks, hazards and vulnerabilities.
  3. The development of the PICCIF will take time to develop, for example, the PCRAFI began at the request of FICs at the 2006 World Bank /IMF Annual Meetings. Today after a decade of development and support, PCRAFI offers sovereign parametric insurance for climate and seismic hazards for five PICs, designed to pay-out within 10 days of a triggered event to provide governments with access to immediate liquidity for disaster response.
  4. Conclusion
  5. Pacific leaders have shown through the adoption of the Framework for Resilient Development in the Pacific, a strong commitment to the integration of climate and disaster risks into government decision making and financial planning. Through the FRDP, Forum members are committed to enhance collaboration around regional risk management. Ongoing political commitment and ‘regionalism’ will be increasingly required to develop policy needed to leverage additional resources and ‘risk pooling’ may be the most sustainable way to develop risk financing mechanisms that are fit for purpose and ‘needs based’.

 

  1. The PICCIF provides all Pacific island governments with a new opportunity to develop and refine policies through capacity building and planning to manage the growing risks and externalities associated with climate change. The work on the PICCIF represents an investment in innovative financial arrangements for managing current and future climate change risks.

 

 

 

Pacific Islands Forum Secretariat, Suva
9 April 2018

[1] Tropical Cyclone Evan, Samoa and Fiji in 2012, Samoa losses 204 million USD; Fiji losses 108 million USD.

Tropical Cyclone Ian, Ha’pai in Tonga, 2014, losses of USD48 million and a death toll of 1.

Tropical Cyclone Eta, Honiara, Solomon Islands, 2014, losses of USD 107 million death toll of 25 people.

Tropical Cyclone Pam, 2015, Total fatalities: 24, economic losses of USD 360.4 million.

Tropical Cyclone Winston, 2016, Losses US $1.4 billion and a Death toll: 43, 350,000 people affected, 65,000 in evacuation center at the peak.

Tropical Cyclone Gita, 2018, Samoa, Tonga, and Fiji, losses are still being accounted for.

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