21 November 2023 - New research from the University of Cambridge Institute for Sustainability Leadership (CISL), with risk analysis from global insurance group Howden, demonstrates the transformative economic efficiency of risk-sharing systems to provide vulnerable countries with financial security from climate related disasters.
The smallest and most vulnerable countries risk losing over 100% of their GDP from extreme climate shocks next year, according to the findings, which underlines the scale and severity of the risks faced by the Global South. Small Island Developing States (SIDS) and other vulnerable countries bear these overwhelming threats almost alone. This can be solved.
The report, which models Loss and Damage (L&D) implementation, reveals these risks are insurable and proposes a solution using the power of (re)insurance and capital markets to dramatically scale up the impact of L&D funding. The modelling shows that the intolerable financial risks faced by this group of countries could be reduced to just 10% of GDP.
The research, with input from public and private leaders from the Global South and developed economies, also outlines an action plan for L&D implementation across 100 less developed, climate vulnerable countries. It proposes leveraging donor funding to unlock vast sums from (re)insurance and capital markets to provide guaranteed financial protection to exposed communities now, and through to at least 2050.
As world leaders prepare for COP28 in Dubai, the report: ‘Risk sharing for Loss and Damage: scaling up protection for the Global South’, provides a clear pathway to L&D implementation to inform high-level discussions on the deployment of L&D funds.
Regardless of where negotiated outcomes on L&D settle at COP28, private sector innovation will be needed to apply donor funds in the most efficient, effective way to enable vulnerable nations to prepare financially for the future.
Key findings from the report:
- The research quantified the losses faced by small, climate vulnerable countries across the Pacific, Caribbean and Indian Ocean. Today, these countries face foreseeable losses of between 50% and over 100% of annual GDP from extreme climate events, such as severe droughts, tropical cyclones and floods. By 2050 losses are set to grow between 10-15% due to climate change alone, approximately 0.5% per year.
- Despite the growing risks, modelling by the researchers revealed that these economies remain insurable. Under the proposed plan, an estimated $1 billion of donor-supported annual pure premium could protect all 30 of the world’s smallest and most climate vulnerable countries with a population of less than one million from losing more than 10% of their GDP from climate shocks; through a risk sharing mechanism known as “Umbrella Stop-Loss Protection2”.
- Furthermore, despite growing risks from extreme climate events, the study reveals that this protection could be maintained through to 2050 and beyond, providing these countries with the necessary financial security to plan with confidence, attract investment, and make more informed decisions around resilient development and climate change adaptation.
- In a second application of the analysis, the results illustrate how risk sharing can be scaled up to form a key pillar of the L&D solution for all L&D recipient countries. A donor-supported annual pure premium of $10m per country equates to approximately $25bn of financial protection, contractually guaranteed, across 100 countries. This provides, for each of these countries, significant pre-arranged finance protection to support their highest priority needs.
Dr Mahmoud Mohieldin, UN Climate Change High-Level Champion, said:
“This innovative initiative has the potential to protect vulnerable countries from climate-related losses with pre-arranged financing at a large scale, unlocking the risk capital markets to multiply the impact of donor funds. Mobilising private finance alongside the new loss and damage fund is crucial in addressing these impacts, and more such initiatives are needed.”
Dr Youssef Nassef, Head of Adaptation, United Nations Framework Convention on Climate Change said:
“Umbrella Stop-Loss provides a practical concept to the L&D common stance that it is an international responsibility that countries and individuals should not suffer, due to climate change, above a certain limit.”
Dr Ana Gonzalez Pelaez, Fellow, CISL, and lead author comments:
“We have demonstrated how public-private finance can be combined to protect billions of people, now and in the decades ahead. We are calling on the international community to make risk-sharing systems a pillar of the Loss and Damage architecture for all countries and introduce umbrella stop-loss mechanisms to protect the economies of the world’s smallest and most climate-vulnerable countries.”
“The action plan presented in this study is ready and can be implemented using existing institutions to provide vulnerable countries with guaranteed payouts from the risk capital markets after a disaster. These funds could be used for critical priorities such as humanitarian assistance; rebuilding schools, hospitals and vital infrastructure; sovereign debt repayments; restoration of agriculture and ecosystems.”
Dr James Daniell, Natural Hazards Engineer, Risklayer GmbH; Centre for Disaster Management and Risk Reduction Technology (CEDIM) at Karlsruhe Institute of Technology and the University of Adelaide, and co-author explains:
“We have produced plausible, mid-range, estimates of climate risk for these countries using leading data sources and robust methodologies. This analysis frames Loss and Damage implementation within objective physical and economic realities, essential for effective outcomes. This pioneering research also opens up a vast global community of academic and professional expertise that stands ready to build on this work and support the urgent mission of bringing Loss & Damage protection to vulnerable countries worldwide.”
Rowan Douglas CBE, CEO, Climate, Risk and Resilience, Howden, and Chair, Operating Committee, Insurance Development Forum, and co-author adds:
“The pure maths and dispassionate economics in this analysis are clear. Risk sharing systems empower hard won Loss and Damage funds to provide structural financial security to the widest range of vulnerable countries. We can mobilise existing expertise, institutions and partnerships to put this essential protection in place quickly. With this groundbreaking research by CISL, world leaders are guided by an action plan based on a bedrock of open science, rigorous analysis, shared alignment, and collective purpose.
The research team was led by Dr Ana Gonzalez Pelaez, Fellow, CISL, University of Cambridge. Climate risk modelling of vulnerable countries was led by Dr James Daniell, CEDIM, Karlsruhe Institute of Technology, Germany. Risk sharing and transaction modelling was undertaken by the Howden Climate Parametrics team led by Man Wei Cheung FIA and Kapil Radia FIA, (Howden Tiger), Rowan Douglas, Charles Langdale and Adarsh Krishnan, (Howden Climate Risk and Resilience).