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Insuring the uninsurable: design options for a climate change funding mechanism

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  • Christoph Bals
  • Koko Warner
  • Sonja Butzengeiger

Abstract

There is growing interest in the potential role that insurance-related instruments can play in the implementation of climate-change adaptation, particularly for the areas most affected and least able to absorb the negative effects of extreme weather events. Sufficient climate adaptation efforts will require funding at two or three orders of magnitude above the current levels. For rapid-onset climate events, current ex-post disaster finance does not offer strong incentives for risk reduction. This article suggests that insurance-related instruments can be a tool to help in adapting to and ameliorating the negative impacts of climate change for those countries likely to be most negatively affected by climate change. One possibility for an insurance-related mechanism would be a scheme that allows countries (or regions in large developing countries) most affected by climate change to purchase insurance-like coverage for defined climate-related risks. This article refers to such a scheme as the Climate Change Finance Mechanism (CCFM). The attempt to design and implement such an insurance-related mechanism requires careful consideration of several issues, including technical and political challenges. We outline a way to indemnify countries that are likely to suffer most from global climate change and consider what the key design elements would be.

Suggested Citation

  • Christoph Bals & Koko Warner & Sonja Butzengeiger, 2006. "Insuring the uninsurable: design options for a climate change funding mechanism," Climate Policy, Taylor & Francis Journals, vol. 6(6), pages 637-647, November.
    • Handle: RePEc:taf:tcpoxx:v:6:y:2006:i:6:p:637-647
    DOI: 10.1080/14693062.2006.9685629
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    References listed on IDEAS

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    1. Torben Andersen, 2001. "Managing Economic Exposures of Natural Disasters: Exploring Alternative Financial Risk Management Opportunities and Instruments," IDB Publications (Working Papers) 8934, Inter-American Development Bank.
    2. Andersen, Torben, 2001. "Managing Economic Exposures of Natural Disasters: Exploring Alternative Financial Risk Management Opportunities and Instruments," IDB Publications (Working Papers) 2230, Inter-American Development Bank.
    3. Robert Holzmann & Steen Jørgensen, 2001. "Social Risk Management: A New Conceptual Framework for Social Protection, and Beyond," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 8(4), pages 529-556, August.
    4. Holzmann,Robert & Jorgensen,Steen Lau, 2000. "Social risk management : a new conceptual framework for social protection and beyond," Policy Research Working Paper Series 21314, The World Bank.
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    Cited by:

    1. Sun, Ji-Le & Tao, Ran & Wang, Jiao & Wang, Yi-Fei & Li, Jia-Yi, 2024. "Do farmers always choose agricultural insurance against climate change risks?," Economic Analysis and Policy, Elsevier, vol. 81(C), pages 617-628.
    2. Hochrainer, S. & Mechler, R. & Pflug, G. & Lotsch, A., 2008. "Investigating the Impact of climate change on the robustness of index-based microinsurance in Malawi," Policy Research Working Paper Series 4631, The World Bank.
    3. Henry He Huang & Joseph Kerstein & Chong Wang, 2018. "The impact of climate risk on firm performance and financing choices: An international comparison," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 49(5), pages 633-656, July.
    4. Oberlack, Christoph & Eisenack, Klaus, 2012. "Overcoming barriers to urban adaptation through international cooperation? Modes and design properties under the UNFCCC," The Constitutional Economics Network Working Papers 03-2012, University of Freiburg, Department of Economic Policy and Constitutional Economic Theory.
    5. Jeroen van der Heijden, 2017. "Eco-financing for low-carbon buildings and cities: Value and limits," Urban Studies, Urban Studies Journal Limited, vol. 54(12), pages 2894-2909, September.
    6. Stefan Hochrainer & Reinhard Mechler & Georg Pflug, 2009. "Climate change and financial adaptation in Africa. Investigating the impact of climate change on the robustness of index-based microinsurance in Malawi," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 14(3), pages 231-250, March.
    7. Vondolia, Godwin K. & Navrud, Ståle, 2019. "Are non-monetary payment modes more uncertain for stated preference elicitation in developing countries?," Journal of choice modelling, Elsevier, vol. 30(C), pages 73-87.

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