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Facing a call for climate reparations, wealthy nations propose an insurance scheme

Tensions at the United Nations climate change conference known as COP27 ran high, largely over the issue of what is called “loss and damage” – shorthand for the disproportionate suffering the developing world is already experiencing at the hands of climate change. In the most concrete response yet to the issue, a group of countries led by Germany announced Monday their commitment to develop “a global shield against climate risks” to better prepare people in the least developed countries for climate-driven disasters .

The Global Shield is a joint initiative by the G7, a political forum made up of the world’s most industrialized countries, and the V20, which is represented by the finance ministers of 58 of the countries most vulnerable to climate change. The German government has committed approximately $175 million to the effort, which aims to address loss and damage through insurance programs and social security schemes. Denmark, Ireland, Canada and France also contributed about $42 million to the initiative.

The world’s least industrialized countries have argued that they have done little to cause climate change but are most affected by climate-driven disasters, such as the recent floods in Pakistan that submerged a third of the country . (The V20’s website points out that it represents nearly 20 percent of the world’s population but only 5 percent of global emissions.) For this reason, developing countries have called on rich nations to establish a fund to pay for the loss and damage climate change has already caused and will cause in the future – in effect for a form of climate recovery. The success of COP27 may depend on whether rich nations, whose early industrialization is disproportionately responsible for the climate change that has occurred so far, answer the call.

“The Global Shield is long overdue,” Ken Ofori-Atta, Ghana’s finance minister, said at the press conference announcing the Global Shield’s launch at COP27 in Sharm el-Sheikh, Egypt. “It has never been a question of who pays for loss and damage, because we in the V20 are already paying for it.”

Given the lack of momentum on direct funding to address loss and damage, the Global Shield is the first systematic and substantive effort by wealthy nations to respond to the call for climate recovery. While proposals for a separate, formal UN mechanism that would provide direct loss and damage funding are still being negotiated, some countries such as Ireland, Austria and New Zealand have made symbolic pledges of several million dollars to show their support for the cause to show The United States, which has historically refused to recognize the issue, strongly opposed a separate fund for loss and damage. US climate envoy John Kerry said on Saturday that a financing mechanism for loss and damage was “just not happening.” However, the US is a member of the G7 and thus a part of the Global Shield consortium.

While there are still few details on exactly how the Global Shield will work, German Federal Development Minister Svenja Schulze said the program would include insurance programs, social security schemes, early warning systems and other financial assistance arranged in advance before disasters strike. Bangladesh, Costa Rica, Fiji, Ghana, Pakistan, the Philippines and Senegal will be the first recipients of “Global Shield packages,” according to a press release.

Loss and damage advocates have warned that insurance schemes such as those promised by Global Shield are an inadequate solution to loss and damage, and they worry that such programs will distract from the demand for separate direct funding. The Global Shield is an extension of the InsuResilience Global Partnership, a program led by the German government in 2015 that mainly provides insurance schemes to countries in the Global South.

InsuResilience and other insurance programs advocated by rich countries have been insufficient to deal with the scale of loss and damage facing people in climate-vulnerable countries, advocates told Grist. Asking people in the developing world to pay for insurance when they have done little to cause the climate crisis is fundamentally unfair, they said.

“If you’re a rich country on the hook for paying for this, it very cleverly shifts the responsibility for dealing with climate loss and damage to vulnerable people,” said Julie-Anne Richards, an independent consultant and expert on the Loss said. and Damage Collaboration, an advocacy group. “Rich countries can turn around and say, ‘Well, the problem is you didn’t prepare well enough. You don’t have insurance’.”

Harjeet Singh, head of global political strategy at the Climate Action Network, an international coalition of more than 1,800 environmental groups, said that in recent years rich nations have used insurance programs to divert attention from the demand for direct loss and damage financing. He is wary of the announcement, given the lack of more concrete details on how the Global Shield, floated at the G7 leaders’ summit earlier in June, will deliver financial support to those in need.

“The phrase is very fancy: ‘Global Shield,'” he said. “But what’s inside is unclear to many.”

Schulze was quick to address such concerns at the press conference Monday. “This is not some kind of tactic to avoid formal negotiations about loss and damage,” she said. “The Global Shield is also not the only solution to loss and damage – certainly not. We need a wide range of solutions and respective funding to tackle loss and damage.”

The international community has entertained the idea of ​​an insurance scheme to help countries vulnerable to climate change since at least the early 1990s, when island nations proposed an insurance pool to protect low-lying countries from sea-level rise. Over the years, the World Bank, the United Nations and various countries have created risk pool programs such as the Caribbean Catastrophe Risk Insurance Facility, the African Risk Capacity and the Pacific Catastrophe Risk Assessment and Financing Initiative. These programs are subsidized by wealthy nations and other donors and allow countries in the Caribbean, Africa and the Pacific to secure coverage for disasters such as drought, floods and hurricanes.

This type of insurance can be purchased by governments to protect their people from disasters, and by individuals to protect their property. Premiums are typically subsidized to make them affordable. There are two main types of climate disaster insurance: indemnity insurance and parametric insurance. The former involves the purchase of policies that cover specific perils over specific periods of time and are paid out depending on the extent of losses when a disaster strikes. This is similar to the insurance policies purchased by American homeowners.

In the case of parametric insurance, on the other hand, insurers identify specific climatic conditions that trigger payouts to policyholders. When specific predetermined thresholds describing the level of floods or drought or other disasters are reached, insurers pay out funds, regardless of the extent of the damage to the land. The result is that the long and cumbersome process of filing a claim and verifying the damage is avoided, resulting in faster payouts. But in countries in the global south, where historical climate and environmental data are not as readily available, insurers have struggled to define the best parameters – such as wind speed, rainfall or days without rain – that trigger payouts. As a result, even when a costly climate-driven disaster strikes, insurers sometimes do not pay because the parametric thresholds have not been met.

For example, the government of Malawi paid $4.7 million for drought insurance through the African Risk Capacity for the 2015-2016 agricultural season. But when erratic rains led to a prolonged drought and more than $350 million in damage, the insurance program found that the thresholds for the number of people affected by the drought had not been met, and that did not trigger a payout not. After sustained media coverage and outrage over the decision, the African Risk Capacity eventually reassessed its modeling and provided $8.1 million in payouts – a tiny fraction of the need. Similarly, after Hurricanes Irma and Maria struck Antigua and Barbuda in 2017 and caused $136 million in economic damage, the Caribbean Catastrophe Risk Insurance Facility paid out $6.8 million — 5 percent of the damage.

One research paper that studied the African, Caribbean and Pacific insurance programs concluded that while “it is possible to some extent to address the weaknesses of parametric risk pooling schemes, it seems equally clear that is impossible to fully correct.”

According to InsuResilience’s annual report, it has “enabled access to financial protection for more than 350 million people in vulnerable countries,” but it is unclear how the program counts those protected and whether post-disaster payouts have met their needs. Singh, the advocate for the Climate Action Network, said the program counts an entire family as protected if one member has insurance for even one of a host of climate hazards.

“The starting point should be whether people who are affected get adequate support or not,” said Singh. “If they don’t get it, then everything we have is inadequate.”

In an emailed statement in response to questions about InsuResilience’s effectiveness, a spokesperson for the German Federal Ministry for Economic Cooperation and Development confirmed that the number of policyholders is multiplied by the average household size to calculate beneficiaries. The spokesperson defended the estimate, saying that InsuResilience “sets strong qualitative standards” and that the program “ensures[s] that products are indeed fit for purpose to offer effective protection to an entire household.”

Even those working with InsuResilience were quick to acknowledge its shortcomings. Colin McQuistan, the head of climate resilience at Practical Action, a UK charity, has helped develop a pilot program in Nepal to insure farmers against flooding in collaboration with InsuResilience. The program only protects rice farmers during the monsoon season, even though rice is just one of multiple crops grown by farmers in the region.

“Trying to suggest that the insurance product protects those farmers is ridiculous because it’s pretty clear that it only protects that one crop to that one peril,” McQuistan said.

Currently, only 10 percent of the program’s budget can be used to subsidize the insurance premium, but McQuistan hopes that additional government subsidies in future years will lower the cost further. Securing useful climate data for the region has also been a challenge, McQuistan added. The group used rainfall and river flow data for the Karnali River to develop the product, but recently some of the farmers were affected by floods from another nearby river.

“There is still a lot of work needed to develop the thresholds and triggers for a parametric insurance product in rivers where we don’t have sufficient historical data,” he said.

Apart from overcoming such technical challenges, the Global Shield’s success will depend on the amount of money it can raise from rich nations and other donors. At the press conference, Schulze said the $175 million promised by Germany was “just a start, a kind of seed money” and that the initiative “will need significant additional funding over time.”

At a separate press conference, Rachel Cleetus, a policy director at the non-profit Union of Concerned Scientists, said that the range of funding for the Global Shield “is completely off.”

“Countries are putting money into the millions and the needs, they have admitted, are rising into the billions and trillions,” she said. “[The Global Shield] is not a substitute for a loss and damage financing facility.”

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