RISK REDUCTION, RISK FINANCING, AND THEIR LINKAGES

Michael Mullan, Environment Directorate Gisela Campillo, Development Co-operation Directorate

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• Understand how financial protection is being integrated with climate change adaptation in Colombia;

• Stimulate discussion between key actors, including:– Central government– Local government– Private sector

Workshop objectives

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Mounting (recorded) costs of climate-related disasters

050

100150200250300

Damage costs from climatological, meteorological, and hydrological disasters 1980-2014 OECD

World

Year

Bill

ion

USD

(20

14)

• Socio-economic trends and the changing climate are expected to make losses larger and less predictable

• Figures above only show a fraction of the full costSource: OECD (2015) based on data from EM-DAT (Emergency Event Database) (n.d.),

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• Costs are higher in a relative-term in developing countries:

– GDP on average 2% lower in developing countries five years after a natural disaster (by e.g. low insurance coverage);

while no sustained effect on growth in OECD countries

– 95% of casualties directly caused by natural disasters* were in developing countries between 1970 & 2008

(*not limited to extreme weather)

Unequal distribution of costs of weather-related extreme events

(Source: Handmer et al., 2012; Hochrainer, 2009; Lis and Nickel, 2010)

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Bilateral donors provided USD 12.3 bn related to Climate Adaptation in 2014 – but have also committed to having their entire ODA portfolio (USD 133 bn) support adaptation

Increasing integration of adaptation into bilateral ODA

Climate-related ODA:• 2005 – 5%• 2014 – 19%

Adaptation-related ODA:• 2010 – 7%• 2014 – 10%

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Increasing momentum to tackle this problem:• Sendai framework, Sustainable Development

Goals and COP21• G7 InsuResilience initiative

OECD aims to be support this process by:

• Sharing experience from policy practice on adaptation;

• Promoting better adaptation in partner countries (e.g., alignment and harmonisation, climate finance statistics);

• Identify, agreeing and communicating ways to improve development co-operation for adaptation;

• Producing guidance (e.g., Integrating Climate Change Adaptation into Development Co-operation, OECD 2009).

… but need to take an integrated approach to managing climate risk

Ex-ante and ex-post mechanisms used to address risks that remain after adaptation 7

Financial protection measures

Sou

rce:

Rev

ised

from

OE

CD

/G20

(201

2).

Ex-post /Ex-ante

Risk sharing or transfer

measures

Level of risk coverage

National / Regional

Private sector (incl. FIs)

Household / Community level

Ex-ante    

Insurance mechanisms

(e.g. insurance pools, weather

derivatives)

(e.g. Credit insurance)

(e.g. micro-insurance)

Catastrophe bonds    

Post-disaster credit / Contingent credit

   

Savings and credit   Ex-ante social safety nets    

Ex-postCoping strategies     Ex-post public funding    

Remittances    

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• Insurance pools– The African Risk Capacity (ARC): capitalises on the natural

diversification of weather across the African continent. – The Caribbean Catastrophe Risk Insurance Facility

(CCRIF): uses a parametric trigger and pay-outs are proportional to the estimated impact of an event.

• Contingent credit facilities– Colombia’s Catastrophe Deferred Drawdown Option (Cat

DDO):provides quick liquidity after natural disasters

• Catastrophe bonds– Mexico launched a USD 315 million catastrophe bond that

covers earthquakes and hurricanes

What has been done? - Examples of risk transfer mechanisms

National institutions

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• Insurance pool– Munich Climate Insurance Initiative’s Loan

Portfolio Cover …transfers risks to international risk pooling markets

• Micro-insurance– Sahel Crop Insurance– Malawi Index-based Drought Risk Insurance,

What has been done? - Examples of risk transfer mechanisms

Private finance institutions

Community/households

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• Increase coverage of financial risk management tools – particularly for vulnerable groups

• Address the underlying drivers of climate risks (e.g. development in high-risk areas)

• Link processes: financial protection and adaptation – reduce risks and costs

• Improve data quality on risk of disasters and impact of climate change

• Strengthen capacity for response, particularly at the sub-national level

• Allocate sufficient resources for ex-ante risk reduction• Strengthen private sector engagement

What are the main challenges?

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COLOMBIA CASE STUDY

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• Adaptation accounts for 10% of bilateral ODA in 2014 (from 2% in 2010)

• Relevant experiences:– Contingent finance (CAT DDO)– Insurance for infrastructure– Legal framework integrating adaptation

into decision making– Well-developed DRM systems at national

and subnational levels

Why Colombia?

Source: OECD CRS database 13

Evolution of adaptation finance in Colombia

2010 2011 2012 2013 20140

20,000,000

40,000,000

60,000,000

80,000,000

100,000,000

120,000,000

140,000,000

2%

1%

7%

3%

10%

Adaptation-related ODA (DAC members)

Principal Significant Share of adaptation of total ODA

Source: OECD CRS database 14

Sectoral distribution of adaptation projects

2010 2011 2012 2013 20140

20000

40000

60000

80000

100000

120000

140000

Water Supply and SanitationMulti sectorIndustry, Mining, Construction, Trade Policy and TourismHumanitarian aid and Devel-opmental Food AidGovernment and Civil SocietyGeneral environmental protectionAgriculture, Forestry and Fishing

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• Increasing coordination among actors, but different systems for DRM and climate change

• Clear link between climate impact (e.g. La Nina) and disasters recognised

• Targeted financial products available (CAT DDO, Bonds, Adaptation Fund)

• Increasing role of private sector in managing risk in public and PPP assets

• Implementation relies upon sub-national level, but serious resource constraints

• Scope to increase the incentives for reducing climate risks

Preliminary findings

THANK YOU!Michael.Mullan@oecd.orgGisela.Campillo@oecd.org

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• How well are climate risks embedded into national and subnational planning, including development strategies? Are they standalone initiatives or are they part of other programs or strategies?

• How strong are the links (explicit or implicit) between risk transfer and other policy mechanisms to support adaptation, for example broad resilience-building efforts and/or disaster risk management interventions?

• Based on experience to date, what does the evidence suggest are the key results, factors driving success and remaining challenges for the effective integration of risk transfer and sharing mechanisms?

• How can the private sector best be engaged to support managing the risks from climate change, as part of an integrated approach to adaptation?

• What is the most appropriate way to ensure that the poorest and most vulnerable groups can be reached, for example by combining insurance and social protection?

• What evidence has emerged on the role of donors in developing, financing and implementing these measures?

Key questions

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• A lack of knowledge and demand, limited infrastructure and ‘missing markets’

• Lack of data on risks, which prevents risk-based pricing.

• Reluctance on insurers to cover catastrophic events (likely to increase with climate change, but difficult to predict how much)

Lessons from risk-transfer mechanisms –Knowledge, infrastructure & evidence base

(Poole, 2014; Lynnerooth-Bayer & Stigler 2014)

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• High relative cost of operation and need for significant subsidisation– India’s weather-based crop insurance;

• Insured value per farmer: USD 350 • Annual premiums: USD 29 (Source: WB IEG, 2011)

• Need to increase scalability, affordability, and perceived benefit for those most at risk.

Lessons from risk-transfer mechanisms – Challenges with transaction costs

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Lessons from risk-transfer mechanisms - Linking risk reduction and risk transfer

• Risk reduction and risk transfer inherently linked:– Capacity building,

incentives, affordability• Yet links not always

realised in practice– Flood insurance in MICs

and LDCs where risk transfer has association (direct or indirect) to risk reduction

Source: Surminski, S., & Oramas-Dorta, D. (2014). Flood insurance schemes and climate adaptation in developing countries. International Journal of Disaster Risk Reduction, 7, 154-164.

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• Lack of suitable risk transfer mechanisms poses high social and economic costs

• Significant challenges:– Achieving scale and affordability– Coherent integration of spectrum of risk

transfer risk sharing and risk management.• Strong push on resilience agenda: Sendai,

SDGs and COP21. Vital to build on lessons learned to date

Conclusions

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• What are the enabling conditions for successful implementation of risk sharing, transfer and financing ?

• How can the enabling conditions be achieved in developing countries?

• What are the key entry points for selecting and implementing risk-transfer and risk-sharing tools at the national and sub-national level?

• How can risk transfer and sharing tools be incorporated into the NAP process?

Questions

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BACKGROUND

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• Handmer et al., 2012; • Hochrainer, 2009; • Lis and Nickel, 2010 • Lynnerooth-Bayer & Stigler 2014 • Poole. L (2014), A Calculated Risk How Donors Should Engage with

Risk Financing and Transfer Mechanisms, OECD DEVELOPMENT CO-OPERATION WORKING PAPER 17, www.oecd.org/dac/A%20calculated%20risk.pdf

• Suarez. P. and J. Linnerooth-Bayer, Insurance-related instruments for disaster risk reduction, Global Assessment Report on Disaster Risk Reduction, Geneva, 2011. http://www.preventionweb.net/english/hyogo/gar/2011/en/bgdocs/Suarez_&_LinneroothBayer_2011.pdf

• Surminski, S., & Oramas-Dorta, D. (2013). Flood insurance schemes and climate adaptation in developing countries. International Journal of Disaster Risk Reduction, 7, 154-164.

References –to update

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• Uptake of risk transfer mechanisms greatly vary by country.– Example. Insurance coverage:

3 % in developing countries vs 40 % in developed countries

(Warner and Spiegel, 2009)

– Failure of risk reduction and transfer can lead to greater reliance on erosive coping strategies(e.g. selling productive livestock, reducing food consumption, mortgaging or selling land)

Low uptake of risk transfer and its consequence

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… reliance on erosive coping strategies

Erosive Non-ErosiveSelling productive livestock Selling excess livestock (and

other animals)Reducing food consumption Consuming less-expensive or

less-preferred food; gathering wild foods

Selling agricultural or fishing equipment

Drawing on kinship transfers of food or money; reciprocal labour exchange

Mortgaging or selling land Migration and remittancesBorrowing money at very high interest rates

Casual local work or temporary migration

Over-exploitation of natural resources (or commonly-held goods)

Drawing on existent savings