Page - 499 - in Loss and Damage from Climate Change - Concepts, Methods and Policy Options

21 InsuranceasaResponse toLossandDamage? 499 21.5.1 EquityPrinciples in theCompensationofLoss andDamage The essential question for theL&Ddiscussions is then “who pays the premium?” Toaddress thisquestion inBox21.2wedistinguish threeprinciplesof fundamental importance fororganising insurancearrangements, eachprinciplebuildingonadif- ferent viewof equity. Privatemarket-based insurance, unless it is subsidised from outsideorwithin thepool, operates on theprinciple ofmutuality and thusdoesnot sharelossesbeyondtheat-riskinsuredcommunity.Privateinsurersmaydeviatefrom themutualityprinciplewithpremiumcross-subsidies,e.g.,bychargingtheirwealthy, lower-riskclientshigherpremiumstomakepoliciesaffordabletolow-incomeclients inhigh-risk locations.Sometimes thismeansaflatorundifferentiatedpremiumthat helpshighrisk(andoftenlesswealthy)clientsandavoidsthecostsandadministrative burdensassociatedwithdifferentiatedpremiums. In somecases, regulationdictates howprivate insurers can set premiums, usually to safeguard affordability. In India, for example, commercial insurers are required to offer ‘pro-poor’ policies, which theyfinancebycharging theirwealthyclients ahigher rate.Without these formsof subsidy in amutuality-based system the policyholders, themselves, can expect (in the long term) topaypremiums that are approximately equivalent to their received claimpayments (actuarially fair premiums), plus significant additional costs (loads shown in Fig. 21.2).Thus, in an insurance system based onmutuality, there is no reimbursement to the victims of disasters (on average) outside ofwhat they, them- selves, contribute in premiums; in otherwords, the at-risk community finances its owncurativemeasures.This isan importantandoftenmisunderstoodfeatureof the insurancemechanism,andarguablydisqualifiescommercial insuranceasacurative measureas intendedby theWIM. Solidarity can take many forms, including subsidised or cross-subsidised pre- miums, reinsurance or other forms of assistance that reduce premiumspaid by the most vulnerable. It is the fundamental principle underlying pre-disaster assistance and post-disaster humanitarian relief and reconstruction (see Schinko et al. 2018). Support can come from, among others, governments, NGOs, financial institutions or internationaldevelopmentorganisations. Indeed,almostallmicro-insurancepro- gramsandmacro-levelpoolsoperatingindevelopingcountries receivesometypeof donororgovernmentsupport (VividEconomicsetal.2016). Importantly, solidarity, in contrast to accountability, need not appeal to a causal relationship between his- torical greenhousegas emissionsand loss anddamage, or culpabilityon thepart of thoseprovidingsupport for insurance instruments.