Scientific and economic rationales for innovative climate insurance solutions

The scientific and economic rationales for climate insurance solutions are provided in the context of global adaptation to climate change. Drawing on the growing body of scientific evidence on the increasing frequency and severity of climate-related natural disasters, we argue that climate change is already taking place. The mounting and highly unpredictable losses from natural disasters make the traditional disaster-funding approaches obsolete, as even large economies have problems financing economic recovery from their own budget revenues or special government disaster funds. This is particularly the case in low-income developing countries, where limited tax bases and high indebtedness prevent them from relying on debt financing of reconstruction efforts. Using OECD and World Bank statistics, we demonstrate that despite the commonly held belief, disaster-related external donor aid to developing countries accounts for only a small fraction of the total economic loss caused by catastrophic events. According to our estimate, on average over 90% of the economic loss from natural disasters is borne by households, businesses and government. This suggests a need for insurance-based climate risk financing mechanisms at the country level. By paying a fixed insurance premium that can be a small fraction of the potential economic loss, countries can cap the amount of their fiscal loss, greatly reduce the uncertainty of national budgetary outcomes due to natural disasters, and increase the speed of their post-disaster economic recovery.