Page - 490 - in Loss and Damage from Climate Change - Concepts, Methods and Policy Options

490 J.Linnerooth-Bayeret al. of alternative instruments, suchas reinsurancesidecars,where investorsactdirectly as reinsurers, and risk swaps, options and losswarranties.Most of these alternative instrumentsprovideanopportunityforinvestorsinthecapitalmarketstotakeamore direct role inproviding insuranceand reinsuranceprotection. 21.2.4 Typesof Insurance Insurance,whetherforhealth,unemploymentorclimate-relateddisasters,isacentral featureofmostwealthycountries; yet, institutional arrangements candiffer signifi- cantlydependingparticularlyon thedegreeofprivate-market responsibility. In this discussion,we distinguish between private-market insurance, public-private insur- ance arrangements, and public assistance. Private-market insurers underwrite the risks, and clients are asked to pay their full or close-to-full risk-based premium, albeitoftenwithcross-subsidies fromlow-risk tohigh-riskclients thatkeep thepre- miumsaffordable (e.g., flood insurance inGermany,Norwayand theU.K.).At the other endof the spectrum is public assistance,which can take the formof a catas- trophe reserve fundfinanced fromgeneral taxes (e.g., inAustria) fromwhich loss reimbursementcanbelegallybinding(e.g.,earthquakerelief inItaly)ornon-legally binding and ad hoc (e.g., inHungary). In between these two ends of the spectrum aremanypublic-privatearrangements.Public institutionsareactive, for instance, in underwriting insurance (e.g., theUSNationalFlood InsuranceProgram),providing subsidies and other support to private insurance programs (e.g., theAustrian crop insurancesystem),orsupportingcommercialinsurerswithreinsurancearrangements (e.g., theFrenchall-hazard insurancesystem). Insurance can be indemnity-based, where products are written against actual losses, or parametric, where products are written against a physical index (e.g., soil moisture), that is, against events that cause loss, not against the loss itself. A parametric instrument disburses funds based on a triggering event that reaches a pre-determined threshold of a quantifiablemeasure (for example,wind speed or precipitation), which importantly is not conditional on an on-site loss assessment. Semi-parametric schemes are alsowritten,where the trigger is a combination of a hazard and its calculated/modelled impact basedonknownexposures andvulnera- bilities (Molini et al. 2007). Becausetheytargetthemostvulnerableinthedevelopingworldandhavefeatured prominently in theL&Ddiscussions, two typesof insurance arehighlighted in this chapter: (1)micro-insurance that offers cover tohouseholds, farmsandSMEs, and (2) regional sovereign risk pools providing support for national governments. The intentofmicro-insurance is tomake insuranceaccessiblebyavoiding thehighcosts oftraditionalinsuranceinordertoserviceresource-poormarkets,usuallybyoffering limitedcoverandgreatlyreducingtransactioncosts(Mechleretal.2006).Theintent of regional sovereign risk insurance pools, including those already formed in the Caribbean,Pacific IslandsandAfrica, is toensureneededand timely liquiditypost- disaster.