Seite - 328 - in Loss and Damage from Climate Change - Concepts, Methods and Policy Options

328 L.Schäfer et al. Thegivenexamplesclearlyillustratehowquickandsufficientpayoutsarekeyfor insurance to realise its potential within a contingency strategy.A poorly designed insurance product that neither covers a sufficient amount of the damage nor pro- vides incentives for risk reductionbehaviourmight lead to perverse incentives and increases the risk of people slipping (back) into poverty or staying poor.Although wefindsufficientexamplesforquickpayouts, therearealsocases tobefoundwhere timelyfinancecouldnotbeprovidedbyinsuranceproductsdue todifferent reasons. Moreover,onthemacrolevel,afastpayout toagovernmentdoesn’tnecessarilycon- vert in timely support for the ultimate beneficiaries, being reliant on slowexternal processes, forexampleasedatehumanitariansystem.Hence,constantlymonitoring errors andchallenges aswell as learning fromthemto improveprocesses is crucial for the successof risk transfer tools like insuranceaspart of contingency strategies in the long-term. Insurance forLowFrequencyandModerate toHighSeverityRisks There are different layers of risks that riskmanagementmeasures need to respond to.Anefficient riskmanagement system involves assigning an instrument or set of instrumentstoeachlayer,consistentwiththeselectedstrategy(reduction,retentionor transfer). Financial instruments, in combinationwith riskprevention and reduction measures, should be selected on the basis of frequency and severity of disasters. Thissuggests that forweather-relatedriskswhichhappenoften(highfrequency)but whichare less serious (lowseverity), preventative and risk reductionactivitiesmay be themost cost-effective. The costs of preventing these events are typicallymuch lower than the losses thatwouldoccurwithout investments inpreventionmeasures. Alternatively,preventionmeasuresforhigh-impact, low-frequencyeventscanbefar costlier with respect to the losses prevented. Thesemore severe and less frequent risks, which cannot be reduced in a cost-effectivemanner, could be transferred to privateandpublic insurancemarkets.Evidencefromdevelopedcountriesshowsthat insurance instruments have been effective in providing financial compensation for losses from extreme events to avoid the distress caused by the financial aftermath withoutfinancialprotection(Arentetal.2014).However, it is important tonote that despite adaptation strategies, climate changemay bring some residual riskswhich cannot be transferred to the insurancemarket cost-efficiently (Warner et al. 2012). Governments also need to adopt approaches to address these residual risks, “the losses and damages that remain once all feasiblemeasures (especially adaptation andmitigation) have been implemented” (ibid). The followingFig. 13.3 illustrates a risk-layering strategyon the basis of the frequency and severity of the event (see alsochapterbySchinkoet al. 2018).