Climate change threats to smaller economies
Source: Middle East Insurance Review | Jan 2024
Small island developing states and other vulnerable countries are facing overwhelming threats from extreme climate events such as droughts, tropical cyclones and floods, according to a new study.
The new 38-page Risk Sharing for Loss and Damage Scaling Up Protection for the Global South, a study by University of Cambridge Institute for Sustainability Leadership and Howden, said that the small island developing states and other vulnerable countries are facing foreseeable losses of between 50% and more than 100% of annual GDP from extreme climate events such as droughts, tropical cyclones and floods.
The report warns that by 2050, these losses are set to grow by between 10% and 15% due to climate change alone – approximately 0.5% per year.
The research, which models loss and damage (L&D) funding – under which governments provide financial help to nations most impacted by climate change – says insurance and capital markets could ‘dramatically scale up’ their assistance. It proposes leveraging donor funding to unlock money from insurance, reinsurance and capital markets and provide financial protection to exposed communities until at least 2050.
The analytical study that includes a diverse sample of countries illustrates approaches relevant to all countries in the L&D domain, including small island developing states, least developed countries and Vulnerable Twenty. It provides three new contributions:
- Quantification of current and future climate risks across national economies to 2050 using the methods and metrics of risk capital markets, so that climate financial risks from the Global South can be shared internationally.
- Quantification of the estimated costs of securing national economies and design of a strategic vision for action: an umbrella stop-loss to protect vulnerable countries from the impact of climate shocks on their GDP, so that losses above a defined level are protected by pre-arranged financing.
- Evaluation of how an initial allocation of $10m donor funds per country could generate immediate protection for vulnerable countries, at scale, through the risk capital markets.
The modelling shows that around $1bn of donor-supported annual pure premium could prevent all 30 small and climate-vulnerable countries with populations of less than 1m from losing more than 10% of GDP due to climate shocks.