Page - 325 - in Loss and Damage from Climate Change - Concepts, Methods and Policy Options

13 ExploringandManagingAdaptationFrontiers… 325 likely cost of that claim.Through the technical risk pricing of contracts, insurance canprovidevaluable information for societal andeconomicactors inunderstanding the risks andhowriskcostmaybechanging.When the risk ispricedcorrectly “the price itself indicates the risk level, which can help people and firmsmake better- informeddecisions about risk taking and riskmitigation investments” (Ranger and Fisher 2012). In an ideal scenario, insurance thereby incentivises risk reduction behaviour, e.g. bymaking it a prerequisite for reducingpremiumsor providing the option for people to work for their insurance cover by engaging in community- identifiedprojects to reduce riskandbuildclimate resilience. In thisway, insurance couldcontributetopreventinglossesanddamages.Inatheoreticalexample, thehigh costsof insuranceagainstfloodwouldprovidean incentive for anactor,wanting to buyahouse inafloodpronearea,not tobuy. Instead, if investing intoriskreduction measures directly, this leads to a reduction in premiumprice and insurancemight provide a strong incentive for the actor to invest into risk reduction activities. In thisway “insurance can create powerful incentives for people tomanage their risk betterandreducelosses”(ibid.).However, theevidenceonactual insuranceschemes incentivising risk reduction is weak. Surminski and Oramas-Dorta (2013) found that only a few already existing schemes show an operational link between risk transfer and risk reduction (Surminski andOramas-Dorta 2013).Chambwera et al. (2014)moreover show that local and state regulationsmight undermine incentives todecrease risks, for examplebyprohibiting fully riskadequate insurance rates. ASpaceofCertaintyAllowingforImprovedEx-AntePlanningandDecisionMaking Insurance-related approaches, in combinationwith awide range of others at local, national, regional and international levels, cancontribute tocreatinga spaceof cer- taintywithinwhichimprovedex-antedecisionmakingispossible(Skeesetal.2008; HoppeandGurenko2006).Bycreatingasecure investmentenvironment, insurance instrumentscanenableproductive risk-takingonthepartof individualsandgovern- ments, and in thisway contribute tomitigating disaster-induced poverty traps and foster climate-resilientdevelopment. To limit their exposure, poorhouseholdsoften try toavoid risks.Therefore, they choose activitieswith lower risk, but also lower returns, and forego incomeoppor- tunities (Cole et al. 2012). Researchers observed in Tanzania that poorer farmers grewmore sweet potatoes (which is a lower-risk, lower-return crop) than richer farmers—resulting ina reductionofup to25%averageearnings (Dercon1996).To be prepared in the event of a shock, the poor also tend to diversify their income- generating activities, assets or choiceof cropor accumulate precautionary savings. Whilethis iscertainlyasensiblemeasuretodecreaserisk, itcanalsoleadtoalossof profitsaspeoplecannotaffordtospecialiseinthemoreprofitableoptions.Ingeneral, these informal strategies tomanage climate riskusually cover only a small propor- tion of the loss, so “the poor have to patch together support fromvarious sources” (Churchill 2006). By reducing the residual risk that could not be reduced bymea- sures already taken, insurance can help lessen financial repercussions of volatility and, in the longer-term,helppeople toadapt toclimatechange. Insurancerepresents predictable andmanageable costs—the insured party does only pay the insurance