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21 InsuranceasaResponse toLossandDamage? 491
21.3 TheBenefitsandCostsof Insurance
21.3.1 Benefitsof Insurance
The central feature of insurance is its risk-pooling capacity.Bypooling risks from
a sufficiently large and independent number of individual households, farms, busi-
nessesandevensovereignstates,insurancecollectivelyreduceslossvolatility(math-
ematically speaking, the variance of losses) and in this way can guarantee post-
disaster liquidity to those individuals at risk (Kunreuther 1998). The assurance
of post-disaster liquidity, in turn, can reduce impacts, including disaster-induced
bankruptcy,hunger, sellingofproductivefinancialassetsor takingkinoutofschool
with long-termimpactsonhumancapital formation. Ifcorrectly implementedinsur-
ance thusdelivers riskpoolingover spaceand time; fasterandmoreefficient recon-
struction; certainty about post-disaster support; and can reduce immediatewelfare
lossesandconsumption reductions (Brainard2008;vonPeter et al. 2012).
An important advantage of insurance overmanyother types of riskfinancing is
the timelinessof thepost-disasterpayments.AstudybyClarkeandHill (2013)sug-
gests thatrapidpayoutsandpromptassistancetoaffectedpopulationscanreducethe
impactofdisasters andenablepoor andvulnerablepeople to recovermorequickly.
Examiningexperienceofpro-poor insurance instrumentsshows that theyhavebeen
aneffective riskmanagement tool in termsofproviding timelypaymentspost-event
(Arentetal.2017).Moreover,aninsurancecontractcanbeamoresecureandtimely
means of copingwith disasters thandependencyon adhoc andoften delayedgen-
erosity of governments and donors. To add to these benefits, insurance can render
clientsmorecreditworthy,and insodoingpromote investments inproductiveassets
andhigher-risk/higher-yieldactivities, inturnreducingdisaster-relatedpovertytraps
(Hallegatte et al. 2016).
Turning togovernments, sovereigndisaster riskfinancing instruments including
insurancepoolsaimatprotectingpublicbudgetsinthewakeofdisasters.Duetolim-
ited taxbases,high indebtednessandlowuptakeof insurance,manyhighlyexposed
developingcountriescannotfullyrecoverbysimplyrelyingonlimitedexternaldonor
aid.Expost liquidity throughinsuranceenablesgovernments toproviderelief to the
most vulnerable and to invest in reconstruction and recovery, thus reducing long-
term losses and development setbacks fromdisasters. Sovereign risk transfers can
also indirectly benefit households and other victims of disasters.With internation-
ally backed risk-transfer programs, developing country governmentswill rely less
ondebtfinancingand internationaldonations, andassured funds for repairingcriti-
cal infrastructurecanattract foreign investment.Finally, and importantly, insurance
instrumentsmayprovide incentives to reduce risk (Newshamet al. 2011;Heltberg
et al. 2009a, b), but only if theydonot encouragebehaviour that neglects to reduce
risks in a cost-effective way, a common concern in insurance applications often
referred toas ‘moral hazard.’Thepreventative capacityof insurance instruments is
the topicofSect. 3,whereweexamine their risk-reductionpotential inpractice.
Loss and Damage from Climate Change
Concepts, Methods and Policy Options
- Titel
- Loss and Damage from Climate Change
- Untertitel
- Concepts, Methods and Policy Options
- Autoren
- Reinhard Mechler
- Laurens M. Bouwer
- Thomas Schinko
- Swenja Surminski
- JoAnne Linnerooth-Bayer
- Verlag
- Springer Open
- Datum
- 2019
- Sprache
- englisch
- Lizenz
- CC BY 4.0
- ISBN
- 978-3-319-72026-5
- Abmessungen
- 16.0 x 24.0 cm
- Seiten
- 580
- Schlagwörter
- Environment, Climate change, Environmental law, Environmental policy, Risk management
- Kategorien
- International
- Naturwissenschaften Umwelt und Klima