Page - 331 - in Loss and Damage from Climate Change - Concepts, Methods and Policy Options

13 ExploringandManagingAdaptationFrontiers… 331 suchasrecurrentflooding.Resilience-buildingandpreventioninsuchinstancesmay becost-effectiveways toaddress these risks. InsuranceCannotCoverAll (Typesof)Losses Insurancecanonlycoverapercentageoflosses,andevenwhenpoliciesareinplaceto offercoverage,basisriskcanresultinfarmersbeinglessprotectedthantheyexpected tobe.Basisriskcanbeunderstoodastheriskthatinsuranceclaimsdonotadequately reflect the losses incurred; inotherwords, an individual suffers a loss anddoesnot receive a payment for it because the insurance thresholdwas not triggered. In this way, evenhouseholds that are fully insured endupbearing a significant amount of uninsured risk.This is particularly aproblemforweather index insuranceproducts (which currentlymake up the bulk of climate risk insurance schemes) as they pay basedon themeasureofweatheror areayields. Additionally, we have to note that not all types of losses and damages can be expressedinmonetaryterms.Insurancecannotaddress thesetypesofnon-economic lossesanddamages—context-dependent typesof lossesthatdon’thavemarketprice and cannot be easily given amonetary value. For example, there is no payout that could compensate for the loss of culture, identity or biodiversity, all ofwhichmay be resultsof climatechange relatedevents. ClimateChangeMayMakeSomeRisksUninsurable As climate change will increase the intensity and frequency of extreme weather events, theremaycomeatimewhensomerisksbecomesosevere that theyareunin- surable.Anincreasedriskforcurrently insurableperils, suchascropsandlivestock, willleadtohigherpremiums,whichmightultimatelymaketheproducttooexpensive for thepoorand theactorswhopaypremiumsonbehalfof them. Onedeterminant of increasing premiums is the rising uncertainty about climate related risks. To assess risks and calculate premiums, the insurance industry relies onweather datawhich are so far basedonhistorical records of hazardoccurrences (Herweijer et al. 2009). However, climate change projections include a high level of uncertainty as besides predicting impacts of future extreme events, anticipating futurevulnerability,socioeconomictrendsandthewaycomplexsystemsmightreact tonewstressors ischallenging(RangerandNiehoerster2012).This leads togreater uncertainties of insurers about the frequency andmagnitude of future claims. Sci- ence indicates that thegreater theuncertaintyof theprobabilityof anevent and the magnitudeof losses, thegreaterwillbe the insurancepremiumcharged(Kunreuther 1996).However, ifpremiums“necessarytocoveradisasterinaclimaticallychanged worldaregreater thanhomeownersandbusinessesarewillingorable topay, thepri- vate insurancemarketwill collapse” (CouskyandCook2009).On theother side, if insurers under-price risks, the accumulation of capitalmay be inadequate to cover lossesthreateningthesolvencyofinsurers(Herweijeretal.2009). Insurers therefore have to adjust in particular their underwriting practices that are mostly based on immediatepast experience. It is not known how the privatemarketswould react to rising risk levels in the future, particularly in developing countries. Cousky andCook (2009) point to the fact that “if risk is increasing over time, such that insurers do not believe they can