Seite - 491 - in Loss and Damage from Climate Change - Concepts, Methods and Policy Options

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.