Page - 494 - in Loss and Damage from Climate Change - Concepts, Methods and Policy Options

494 J.Linnerooth-Bayeret al. 21.4 PreventativeResponse:Does InsuranceSupport theRisk-ReductionResponse to theWIM? Many analysts argue that insurance can go beyond enabling ex post relief, recon- structionandrecovery,tobeanexante toolforpromotingriskreduction(Kunreuther 1996;KunreutherandMichel-Kerjan2009;Crichton2008;Botzen2013).According to the chapter bySchäfer et al. (2018): “Insurance spurs transformationbyhelping countries reshape theway risks aremanaged. It does sobyencouraging risk reduc- tion,catalysingriskassessment,anddrivingmorestructureddecision-makingaround ex-ante risk”.Despite these claims, somecommentators, includingNGOsandpar- ties to theUNFCCC, remain sceptical that insurancegoesbeyond risk spreading to risk reduction, andworry that insurance can even lead to a false sense of security ormoral hazard if the insured, bynot bearing the full costs of riskydecisions, take onmore risk (Vellinga et al. 2001;UNFCCC2008).Moral hazard iswidely recog- nised, and insurers address it through the design of insurance products by using deductibles or parametric products; however, questions remainwhether insurance products lead directly to risk reduction.According to the Intergovernmental Panel onClimateChange (IPCC), insurancecan“directlyprovide incentives for reducing risk, yet theevidence isweakand thepresenceofmanycounteracting factorsoften leads todisincentives…”(Chambweraet al. 2014). BuildingonSurminski andEldridge (2015) andSurminski (2014),Lorant et al. (forthcoming) identifyways inwhich the contractual elements andancillarymech- anismsof insurance can (in concept) encourage risk reduction.After surveying the developed-country practices of flood insurers, the authors note the disappointing evidenceof a strong linkbetween insuranceandDRRandsuggestways that insur- ers cancontributemoreeffectively, for example,makingbetteruseofhazardmaps, monitoringhousehold risk improvements, rewarding riskmitigationwith premium discounts, insertingconditionsorwarrantiesintocontracts,anddevelopingprotocols thatwill better link risk inspections of large facilitieswith underwriting practices. Beyond these design changes, there is evidence that public insurers invest more inpreventative risk reduction than their private insurer counterparts (Schwarze and Croonenbroeck2017;Ungern-Sternberg1996).Theevidenceontheinsurance-DRR linkfortheon-goingworkundertheWIMisthatindemnity-based insuranceasprac- ticedinwealthycountriesmayneedadaptingif it is tobeappliedasan instrument to foster reductionof loss anddamage indeveloping countries.A similar conclusion was reachedby the IPCC,whereauthorsconfirmed that risk-financingmechanisms contribute to increasing resilience, but thatmajor design changeswouldbeneeded to avoidprovidingdisincentives forDRR(Chambwera et al. 2014).Aswewitness inwealthy countries, progresswill be slowand patchywithout public and private commitment to shaping insurance systems such that they foster practices that lead to investment indisaster risk reductionpractices.