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21 InsuranceasaResponse toLossandDamage? 493
The ratio of the premiumpaid versus the coverage obtained gives an indication
of the insurancecost,particularlywhencomparing insurance toother riskfinancing
tools.Using this ratio,GhesquiereandMahul (2010) found that risk transfer isvery
costly compared tomost other financial instruments (Ghesquiere andMahul 2010;
ClarkeandDercon2016).Asacaseinpoint,intheCaribbeanregionannualinsurance
premiums (paidmostly by businesses) were estimated to represent about 1.5%of
GDP during the period 1970–1999, while average losses per annum (insured and
uninsured)accounted foronlyabout0.5%ofGDP(Auffret2003).
If insurancepremiumscost clientsonaveragemore than their anticipated losses,
and in the case of co-variant catastrophic events significantly so, why do house-
holds, businesses and governments insure? This question is particularly pertinent
for resource-poorhouseholdsandgovernments,wherepremiumpaymentscanhave
highopportunitycosts.The textbookrationale forpurchasing insurance,verifiedby
evidenceon insurancepenetration, isbasedon theconceptof“riskaversion”.Risk-
aversepersonsandentities (generallypeoplewhocannotcopewith large losses)are
willing topaymore than theyexpect to loseonaverage toavoidcatastrophic losses.
Householdsandfarmsindevelopingcountriesarelikelytobehighlyriskaversesince
large lossescan threaten livelihoodsand lives (and thushave severecosts andother
implications beyond the sheer financial loss). The sameholds for the public sector
sincedisasters can significantly affect development if governments donot have the
means for rapid reconstructionand relief efforts (Mechler2004).
For middle- to high-income earners in developed as well as developing coun-
tries an insurancevaluepropositioncanoftenbediscernedas shownbysubstantial
insurance demand, yet it is pertinent to ask how insurancemechanisms can serve
resource-poorclients facinghigh risk?Ascurrentprogramsdemonstrate, insurance
premiums are made affordable by targeting higher income clients, implementing
cross subsidies, limiting coverage, providing outside support and forming partner-
ships (Linnerooth-Bayer et al. 2010).Whereasmost discussions focus largely on
making insurance affordable, it should be recognised that itmay not be advisable
from a benefit-cost perspective. Indeed, reliance on alternative financial arrange-
ments, likedonorsolidarity,savings,creditandremittances,canbeconsiderablyless
costlythaninsurance,andthesearrangementscanworkreasonablywellfor low-loss
events(CohenandSebstad2003).However,theycanbeunreliableandinadequatefor
covariate and catastrophic shocks that place a significant financial strain onwhole
communities, regions and governments. Insurance theory and recent cost-benefit
assessments indicate that insuranceandother riskfinancinginstrumentsaremainly
advisable,andviable, forlargeandresidualrisksthatcannotbereducedorretained
otherwise.
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