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

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.