Parametric loss and damage insurance schemes as a means to enhance climate change resilience in developing countries

Abstract

ABSTRACT Article 8 of the 2015 Paris Agreement calls on the parties to cooperate to address ‘loss and damage’ associated with the adverse effects of climate change. Insurance is one of the solutions that the provision points to in this respect. This paper examines whether so-called parametric risk pooling may provide a useful tool to this end by examining lessons from three multi-country parametric risk pooling schemes. The examination shows that parametric risk pooling schemes require careful design in order to work optimally and that even then, they do not represent a miracle solution. In particular, the paper points out that the three schemes only provide a limited response in the period directly after a devastating hazard has struck. Therefore, the ensuing support required must come from other sources. The paper concludes that parametric risk pooling may provide a valuable tool for addressing loss and damage, but must be complemented by a range of other tools to comprehensively address the loss and damage challenges posed by climate change. Key policy insights Parametric insurance schemes can provide a useful tool to respond to natural hazards caused by climate change in developing countries. Parametric insurance schemes require careful design and only provide interim coverage between the time when a natural hazard occurs and when classic humanitarian aid arrives. Due to continued financial limitations on the part of the insurance-takers, parametric insurance in developing countries is dependent upon donor assistance.