Insurance for Climate Disasters: 'Act of God' or Global Warming?

BONN, GERMANY: “Every single extreme weather event from now on can be attributable to human induced causes”, Dr. Saleemul Huq, Senior Fellow(Climate Change), International Institute for Environment and Development saidwhile speaking at a panel on loss and damage in the India Pavilion at the COP23 of the United Nations Framework Convention on Climate Change (UNFCCC) currently underway in Bonn late last week.

This year the COP is being presided by Fiji, a Small Island State which is of significance considering that Small Island States (SIDS) are most vulnerable to the harshest consequences of climate change, such as submergence of territory, extreme weather events and loss of livelihoods and property.

For some islands, their very existence and statehood depends on limiting the increase in global temperatures to under 1.5 degrees from pre-industrial times. In this context, one of the foremost debates in this year’s conference has been the discussion on finance for “loss and damage”.

Loss and damage refers to the loss of lives, species and habitats and damage refers to the damage to infrastructure and property due to climate change, which countries can no longer adapt to. Under L&D, developed nations who have historically contributed to global greenhouse emissions leading to climate change, are to be financially liable for the consequences of that climate change, disproportionately faced by developing or least developed nations who have contributed negligibly to the current climate crisis.

The concept of L&D was initiated in 1991, by Vanuatu on behalf of the Association of Small Island States (AOSIS), to address climate change impact, and create insurance mechanisms against the rise in sea levels; the phrase “loss and damge” was formally included in the Article 1c of Decision 1/C. P 13 at the COP13 in Bali, in 2007. In 2013, at the COP19 in Warsaw, the “Warsaw International Mechanism” (WIM) for loss and damage associated with climate change impacts was formally established.

The WIM’s Executive Committee is responsible for monitoring and improving the L&D regime within the UNFCCC, especially considering that L&D was included under Article 8 of the Paris Agreement in 2015, which states that “Parties recognize the importance of averting, minimizing and addressing loss and damage associated with the adverse effects of climate change, including extreme weather events and slow onset events, and the role of sustainable development in reducing the risk of loss and damage.”

The recommended approaches under Article 8 include early warning systems, emergency preparedness, comprehensive risk assessment and management and risk insurance facilities, climate risk pooling and other insurance solutions. This COP, the European Union and Australia especially have refused to discuss finance and financial liability for L&D, saying that it not every disaster can be attributed to climate change.

COP 23 is especially important for L&D because for this COP, the UNFCCC has introduced the Clearing House for Risk Transfer, which is meant to be “a repository for information on insurance and risk transfer, in order to facilitate the efforts of Parties to develop and implement comprehensive risk management strategies.” The Clearing House currently exists as an online platform, which will be formally launched this Tuesday at the Conference. The Platform is menat to connect peoples and Nations at the risk of climate disasters with a variety of insurance and risk management option and information. However, this system has already drawn significant criticism from civil society.

Harjeet Singh, Global Lead on Climate Change for ActionAid International said that the Clearing House was in its current from merely a website meant for connecting people and industry players together, “a matchmaking website for private players and their clients”, lamenting that it would achieve very little in the next couple of years.

Singh said that developed nations continue to emphasize insurance as the primary solution for loss and damage, possibly due to the presence of most insurance industry players being domiciled in these nations, whereas in practice we have seen no successful models of insurance for the poor, due to a combination of factors such as the simple lack of affordability of insurance premiums, lack of financial literacy and the lack of feasibility for the company’s business model itself. He mentioned that while insurance companies continue to advertise their vast customer base, the percentage of successful claims is negligible.

This brings us to the fundamental paradox of the viability of the insurance industry as an effective player to ensure liquidity in the face of the rising number of climate disasters. A basic principle of insurance law especially in common law legal regimes, is that you protect yourself against reasonably foreseeable events, and natural disasters or an “Act of God” (vis major) is usually exempted from being claimed under standard insurance contracts. Which is why most victims if earthquakes, floods, tsunami and the like cannot successfully claim for insurance payments if they suffer loss. However, as there in an exponential rise globally in extreme weather events, the question is whether they are natural disasters in the first place, and whether they constitute an ‘Act of God’.

There is increasing scientific evidence supporting the contention that these extreme weather events are linked with human-induced global warming, calling into question whether these events can be reasonably foreseen, and thereby successfully insured against. If climate disasters were to be insured against, just like the possibility of robbery or accident, the revenue model of the insurance industry as it stands today would falter, given the sheer magnitude of economic loss.

The push to limit the L&D discussion to being primarily linked with an insurance regime is extremely problematic and dangerous for developing nations where poverty is high and financial literacy is still considerably low. It provides too much leeway for private market forces to control crises which are essentially humanitarian in nature.

Instead, the WIM and the UNFCCC should be focussing on increasing the flow of funds towards strengthening domestic disaster relief funds, humanitarian response mechanisms, compensation and social protection schemes so that local bodies with experience in disaster relief have resources at their disposal to aid and rebuild local communities.

Moreover, as pointed out by Dr. Huq, “the time has come to seriously apply the polluter pays principle”, through L&D levies in countries where the couple of dozens of the world’s biggest polluting companies are domiciled, so that we actually have the funds to pay for the L&D caused due to the pollution by these very companies.

However, the EU, Australia and other developed nations continue to avoid discussing finance for L&D at COP23 owing to the lack of conclusive evidence that all natural disasters are induced by climate change. While that may be true, it would be foolish to expose millions of people to the scourge of these disasters, waiting around for said evidence.

To put it in insurance terms, our planet did not suffer from a pre-existing condition, so it is not exempt from rightful payments for its protection.

(Mrinalini Shinde is Researcher in Comparative Environmental Law at the University of Cologne and a Former Advocate at the National Green Tribunal in India)