Page - 290 - in Loss and Damage from Climate Change - Concepts, Methods and Policy Options

290 W.J.WouterBotzenet al. Fig.12.1 Layereddisaster riskmanagement. SourceMechler et al. (2014a) Theeconomicefficiencyofactionshoweverdependsonthefrequencyandseverity ofimpacts.Forinstance,Mechleretal.(2014a)proposedanapproach(risk layering) where frequent (up to a return period of once in 200 years) events are avoided through risk reduction, while impacts from rare events would need to be covered by risk transferwhich includes natural disaster insurance and regional riskpooling mechanisms. Extremely rare losses may not be economically efficient to address with insurance, andmayneed topartly be compensatedby thepublic sector or the international community (seeFig.12.1; chapterbySchinkoet al. 2018). Alternatively,public-privatepartnershipsinfinancialcompensationarrangements maybeneededforcoveringsuchextremerisks(Kunreuther2015).Applied toL&D fromanthropogenicclimatechange,thismeansthatavoidingtheL&Dbygreenhouse gasmitigationoradaptationwilloftenbeapreferredapproach,atleasttoadegreethat thisiseconomicallyefficient,ratherthanhavingtoaddressL&D.Moreover,itshould be realised that important relations can exist between thewayL&Dmeasures are implementedandincentivesforadaptation.Forexample, ill-designedcompensation mechanisms that do not provide financial incentives for risk reductionmay result inmoral hazard effectswhen investments in natural risk reductiondecline because financial compensation for natural disasters from external parties is expected. On theotherhand, adequatefinancial incentives for risk reductionmaybe integrated in L&Dmeasures,forexample,whennaturaldisasterinsurancearrangementsstimulate