The financial security against droughts, floods, tropical cyclones and other forms of weather extremes, and insurance instruments present an opportunity for developing countries in their concurrent efforts to reduce poverty and adapt to climate change. By pricing risk, insurance provides incentives for reducing risks and adapting to climate change; if these premiums are not affordable to the most vulnerable, donors can combine premium support with risk-reduction measures. In this paper, we examine the costs, benefits and risks of public-private (and donor-supported) insurance programs that offer affordable economic security to vulnerable communities and governments. Insurance mechanisms are of particular interest to climate negotiators seeking strategies that help vulnerable countries adapt to the increasing severity and frequency of weather disasters, and we examine the case for including insurance mechanisms in a climate adaptation strategy expected to be agreed in Copenhagen in 2009. We present a proposal for this purpose that has been recently put forward by the Munich Climate Insurance Initiative (MCII), which calls for international solidarity for very low probability and high consequence weather-related events (high-risk layer).

For middle-layer risks the MCII proposal calls for international support to promote sustainable, affordable and incentive-compatible insurance programs that serve the poor without crowding out private sector involvement. More than three-quarters of recent economic losses caused by natural hazards can be attributed to windstorms, floods, droughts and other climate-related hazards,1 which appear to be increasing at a greater rate than geophysical disasters.2 This trend can be largely attributed to changes in land use and increasing concentration of people and capital in vulnerable areas, for example, in coastal regions exposed to windstorms and in fertile river basins exposed to floods.3 As indicated by the greater increase in weather-related disasters compared to geophysical disasters, climate change also appears to be a factor in increased disaster losses. The Intergovernmental Panel on Climate Change4 has predicted that climate change will increase weather variability as well as the intensity and frequency of weather-related extremes. There is also mounting evidence that climate change is contributing to increasing current risks.