Page - 485 - in Loss and Damage from Climate Change - Concepts, Methods and Policy Options

21 InsuranceasaResponse toLossandDamage? 485 Insimpleterms, insuranceallowsoneparty(theinsuredorpolicyholder) totrans- fer the riskof future economic losses to a secondparty (the insurer)willing tobear this risk for the payment of a premium.By transferring the risk ex ante, insurance clientsareguaranteedpaymentsfor theagreeduponlossesanddamagesfromevents expost. In thiswayinsurance,asoneofanumberofriskfinancing instruments,pro- vides reimbursement in return for thepayment of apremiumsuch that households, businesses, governments andwhole regions can recover in a timelyway from the damages fromextremeevents. In addition,manyargue that insurancegoesbeyond post-disaster reimbursement to pro-actively prevent damages from occurring (see chapter by Schäfer et al. 2018). By ‘pricing’ risk and requiring preventativemea- sures, insurance provides (in theory) incentives or conditions for clients to adopt damage-reducingbehaviourandmake investments to reduce their risks. Insurance thusappears toserve thegoalsofdisaster riskreduction(DRR)aswell as post-disaster reimbursement. If insurance payouts are viewed as compensation for losses anddamages, insurance serves as apreventative andcurative instrument, therefore responding toWIMaspirations as (differently) voiced by developed and developing countryparties (see chapter byCalliari et al. 2018). It is not surprising, then, that insurance has figured so prominently in the L&Ddiscussions andwork plan.However,while these insurancecharacteristicshavemotivated thediscussions on insurance as a tool to address climate-attributed losses and damages, they raise questions essential to theWIM deliberations.Most fundamentally, can insurance beviewedasanequitable curativemeasure for climate-attributed impacts and risks incurredbypoorcommunities invulnerablecountries?This in turn raisesquestions concerning burden sharing: How are premiums determined and who pays them? Another central question concerns the disaster-risk-reduction (DRR) potential of insurance. Are insurance instruments, as they are currently practiced, effective in encouragingprevention and risk reduction by incentivising or requiring adaptation and resilience investments? Byexaminingtheseandotherquestions, thischapterexplores theextent towhich insurance—provided through privatemarkets or public institutions—canmeet the differentiatedWIM ambitions of reducing and compensating for Loss and Dam- age.Thediscussion focuses on recent evidence frommicro-insurance and regional sovereign insurancepoolsas theseare themostcommontypesofcatastrophe insur- ancecurrentlyoperating indevelopingcountries,whichhasgiven themaparticular standing theL&Ddiscussions. After an overview of catastrophe insurance and its role for loss and damage from climate change (Sect. 21.2), the discussion turns to the benefits and costs of insurance (Sect. 21.3), before it examines insurance as a tool for preventing the economic impacts from extremeweather events (Sect. 21.3) and for reimbursing the residual loss anddamage (the curative aspect) (Sect. 21.4)with examples from micro-insuranceprogramsand regional insurancepools.The chapter concludes (in Sect.21.5) that insurance instrumentsbasedonthe‘mutualityprinciple’ (premiums reflect risk plusmarkupor ‘load’)will fall short ofmeeting the ‘preventative’ and ‘curative’aspirationsunderlyingtheWIMandParisAgreement;however,insurance