1. RISK REDUCTION, RISK
FINANCING, AND THEIR
LINKAGES
Michael Mullan, OECD Environment Directorate
Takayoshi Kato, OECD Environment Directorate
Task Team on Climate Change and Development Co-operation, 20-21 April 2015, Paris

2. 2
Mounting (recorded) costs of climate-
related disasters
0
50
100
150
200
250
300
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
BillionUSD*
Year
Damage costs from climatological, meteorological, and
hydrological disasters 1980-2014
OECD
• Socio-economic trends and the changing climate are
expected to increase disaster losses over time
• Impacts will also arise from trend changes
Source: OECD (forthcoming) based on data from EM-DAT (Emergency Event Database) (n.d.),
*In the value of year of occurrence

3. • Costs are higher in a relative-term in developing
countries:
– GDP on average 2% lower in developing countries five
years after a natural disaster (by e.g. low insurance coverage);
while no sustained effect on growth in OECD
countries
– 95% of casualties directly caused by natural disasters*
were in developing countries between 1970 & 2008
(*not limited to extreme weather)
3
Unequal distribution of costs of weather
extreme events
(Source: Handmer et al., 2012; Hochrainer, 2009; Lis and Nickel, 2010)

4. • Ex-ante and ex-post mechanisms used to address
risks that remain after adaptation
4
Climate risks cannot be completely
eliminated…
Level of risk
transfer
Examples of ex-ante
measures
Examples of ex-post
responses
National
institutions
 Insurance pools
 Contingent credit
 Catastrophe bonds
 Budget reallocation
 Debt financing or borrowing
 Humanitarian relief
Domestic
financial
institutions
 Diversification
 Capital reserves
 Re-insurance
 Insolvency / bail-out
 Reduction in credit
Community/
household
 Savings and credit
 Informal risk sharing
 Microinsurance
 Selling productive assets
 Reducing food consumption
 Borrowing money / Migrating
Source:RevisedfromOECD/G20(2012).
• Interrelationships between choices made at
different levels

5. • Insurance pools
– The African Risk Capacity (ARC): capitalises on the natural
diversification of weather across the African continent.
– The Caribbean Catastrophe Risk Insurance Facility (CCRIF):
uses a parametric trigger and pay-outs are proportional to the
estimated impact of an event.
• Contingent credit facilities
– Colombia’s Catastrophe Deferred Drawdown Option (Cat
DDO):provides quick liquidity after natural disasters
• Catastrophe bonds
– Mexico launched a USD 315 million catastrophe bond that covers
earthquakes and hurricanes
5
What have been done?
- Examples of risk transfer mechanisms
National institutions

6. • Insurance pool
– Munich Climate Insurance Initiative’s Loan
Portfolio Cover
…transfers risks to international risk pooling markets
• Micro-insurance
– Sahel Crop Insurance
– Malawi Index-based Drought Risk Insurance,
etc.
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What have been done?
- Examples of risk transfer mechanisms
Private finance institutions
Community/households

7. • A lack of knowledge and demand, limited
infrastructure and ‘missing markets’
• Lack of data on risks, which prevents risk-
based pricing.
• Reluctance on insurers to cover
catastrophic events (likely to increase with
climate change, but difficult to predict how
much)
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Lessons from risk-transfer mechanisms
–Knowledge, infrastructure & evidence base
(Poole, 2014; Lynnerooth-Bayer & Stigler 2014)

8. • High relative cost of operation and need for
significant subsidisation
– India’s weather-based crop insurance;
• Insured value per farmer: USD 350
• Annual premiums: USD 29
(Source: WB IEG, 2011)
• Need to increase scalability, affordability,
and perceived benefit for those most at risk.
8
Lessons from risk-transfer mechanisms
– Challenges with transaction costs

9. 9
Lessons from risk-transfer mechanisms
- Linking risk reduction and risk transfer
• Risk reduction and risk
transfer inherently
linked:
– Capacity building,
incentives, affordability
• Yet links not always realised
in practice
– Flood insurance in MICs
and LDCs where risk
transfer has association
(direct or indirect) to risk
reduction
Source: Surminski, S., & Oramas-Dorta, D. (2014). Flood insurance
schemes and climate adaptation in developing countries. International
Journal of Disaster Risk Reduction, 7, 154-164.

10. • Lack of suitable risk transfer mechanisms poses
high social and economic costs
• Significant challenges:
– Achieving scale and affordability
– Coherent integration of spectrum of risk transfer risk
sharing and risk management.
• Strong push on resilience agenda: Sendai, SDGs
and COP21. Vital to build on lessons learned to
date
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Conclusions

11. THANK YOU!
Michael.Mullan@oecd.org
Takayoshi.Kato@oecd.org
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