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Managing climate risks through public-private partnerships and risk financing instruments
1. Managing climate risks
The role of economic instruments for
Public-Private Partnerships
Session on „Public-private
partnerships to build disaster and
climate resilience”
OECD
18.6.2014
Reinhard Mechler
2. Key points for discussion
• IPCC 2014 climate risk perspective
• Role of economic instruments for
incentivizing adaptation
• Risk financing instruments
• Considering equity and efficiency
4. IPCC risk perspective: Dealing with climate variability
and change
Example: Losses from coastal and riverine flooding in
Europe
IPCC, 2014
5. Economic instruments in DRR and CCCA
Instrument category Instruments
Subsidies Grants; tax reductions; price supports
Taxes and fees Land taxes and fees; energy taxes
Licences, permits and
variations
Tradable units; project based offsets; advance market commitment
Other Market Based
Instruments
Payments for ecosystem services; water markets; habitat banking
Risk Financing
Instruments (RFIs)
Risk Pool; insurance; catastrophe bonds; weather derivatives
MBI
RFI
6. Economic instruments in DRR and CCCA
1. Helping to directly manage impacts
• Risk financing
good evidence
2. Helping to indirectly manage risks
• by providing incentives (all instruments)
mixed and limited evidence
3. Managing risk and promoting growth
• RFI manage systemic risk and thus allow higher return-
higher risk activities
Limited evidence
7. Economic instruments in DRR and CCCA
- IPCC AR5 WG II
• Economic instruments have high potential as flexible tools
because they directly and indirectly provide incentives for
anticipating and reducing impacts and can have lower costs to the
public budget.
• Instruments offer some useful possibilities for addressing climate
change but they also have problems of effective implementation
that need to be addressed.
• Risk financing mechanisms at local, national, regional, and global
scales contribute to increasing resilience to climate extremes
and climate variability, but involve major design challenges so as to
avoid providing disincentives, causing market failure and
worsening equity situations (medium confidence).
9. Flood risk in Europe - only a third insured,
and risk increasing
Total annual average flood risk: 3.4 billion Euro
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DK
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UK
Total annual uninsured average flood risk: 2.3 billion
Euro
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UK
Bräuninger et al., 2011
10. Commercial
insurance
UK
Netherlands
(loss compensation)
France all hazards
system
Commercial
sovereign
insurance
Caribbean
Catastrophe
Risk
Insurance
Facility
EU Solidarity Fund
(loss compensation)
Public Private
Central
European
Catastrophe Risk
Insurance
Facility
National/provincial flood property insurance
International sovereign risk pools
US NFIP
Insurance markets: public-private
partnerships are omnipresent
11. • Inform clients about available risk prevention measures and associated costs
enabling to evaluate potential risks, benefits of the insurance contract on
offer, and the cost of risk prevention measures
reward risk reduction by premium discounts
• But: Insurance often provides disincentive and leads to moral hazard (i.e.
inaction due to inappropriate incentives)
• Insurers can require risk reduction as a contractual condition: e.g. fire safety
measures as a condition for insuring a home or business
• Also: insurers can work jointly and invest in risk reduction
Example Switzerland: cantonal public monopoly insurers contribute to risk
reduction, including building codes and land-use planning, and also financing of
the Fire Service and Cantonal Civil Defense Services
Incentivizing risk management and climate adaptation
Opportunities and challenges of risk financing
instruments
12. Assessment of the risk financing
instruments based on multiple criteria
Bräuninger et al., 2011
13. The European Solidarity Fund (EUSF)
EUSF under risk of depletion due to large scale flood events
Jongman et al. (2014)
1/3 climate
2/3 socioeconomics