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Financial instruments for disaster risk management and climate change adaptation


  • Joanne Linnerooth-Bayer


  • Stefan Hochrainer-Stigler



The International Panel on Climate Change (IPCC) has called for a new balance between reducing the risks from climate extremes and transferring them (for example, through insurance) as means for effectively preparing for and managing disaster impacts in a changing climate. This paper elaborates on this balance with an overview of disaster risk financing mechanisms and how they contribute to disaster risk reduction and climate change adaptation in developing countries. We suggest a risk management approach that targets risk reduction and risk financing to different layers of risk, including a layer that represents a possible limit to adaptation. By reviewing traditional post-disaster financial arrangements, such as government compensation, and non-traditional pre-disaster instruments, such as index-based insurance, we show how risk financing can complement and stimulate risk reduction. We discuss the benefits of financial instruments, including the provision of post-disaster finances for recovery and pre-disaster security necessary for climate adaptation and poverty reduction. These benefits come at a cost, and we discuss the risks, challenges, and future prospects of risk financing in developing countries. Copyright Springer Science+Business Media Dordrecht 2015

Suggested Citation

  • Joanne Linnerooth-Bayer & Stefan Hochrainer-Stigler, 2015. "Financial instruments for disaster risk management and climate change adaptation," Climatic Change, Springer, vol. 133(1), pages 85-100, November.
  • Handle: RePEc:spr:climat:v:133:y:2015:i:1:p:85-100
    DOI: 10.1007/s10584-013-1035-6

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    References listed on IDEAS

    1. Lelys Bravo Guenni & Susan J. Simmons & Stefan Hochrainer‐Stigler & Georg Pflug, 2012. "Risk management against extremes in a changing environment: a risk‐layer approach using copulas," Environmetrics, John Wiley & Sons, Ltd., vol. 23(8), pages 663-672, December.
    2. Oscar Becerra & Eduardo Cavallo & Ilan Noy, 2014. "Foreign Aid in the Aftermath of Large Natural Disasters," Review of Development Economics, Wiley Blackwell, vol. 18(3), pages 445-460, August.
    3. Barnett, Barry J. & Barrett, Christopher B. & Skees, Jerry R., 2008. "Poverty Traps and Index-Based Risk Transfer Products," World Development, Elsevier, vol. 36(10), pages 1766-1785, October.
    4. Skees, Jerry R. & Collier, Benjamin, 2010. "New approaches for index insurance," 2020 vision briefs 18(11), International Food Policy Research Institute (IFPRI).
    5. Davies, Simon, 2007. "Remittances as insurance for idiosyncratic and covariate shocks in Malawi: The importance of distance and relationship," MPRA Paper 4463, University Library of Munich, Germany.
    6. J. David Cummins, 2008. "CAT Bonds and Other Risk-Linked Securities: State of the Market and Recent Developments," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 11(1), pages 23-47, March.
    7. Evan Mills, 2009. "A Global Review of Insurance Industry Responses to Climate Change," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 34(3), pages 323-359, July.
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    Cited by:

    1. Connor P. Spreng & Benjamin K. Sovacool & Daniel Spreng, 2016. "All hands on deck: polycentric governance for climate change insurance," Climatic Change, Springer, vol. 139(2), pages 129-140, November.

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