Climate risk insurance in Pacific Small Island Developing States: possibilities, challenges and vulnerabilities—a comprehensive review

Abstract

For the Pacific Small Island Developing States (PSIDS), climate change will greatly exacerbate their vulnerability. The PSIDS have a high ranking in the Climate Risk Index and the World Risk Index. Financial losses due to climate-induced disasters, in terms of gross domestic product (GDP), are also high in the Pacific region. While climate risk insurance solutions could play a key role in the efficient distribution of recovery resources, there are many challenges to their successful implementation. Effective climate risk insurance products for the vulnerable sections of these societies are almost non-existent in this part of the world. Among the worst climate-induced disasters to affect the PSIDS are those related to cyclones and floods. These not only adversely impact the welfare of the households affected by these disasters, but they lower the long-term development potential of the countries involved. There is also evidence to suggest that climate-induced disasters are increasing in frequency and intensity over time due to climate change. It is against this background that an inquiry into the necessity for climate risk insurance products in the context of PSIDS should take place. This paper gives a comprehensive review of the literature addressing climate risk insurance as a risk mitigation or climate adaptation tool for managing the climate-induced financial vulnerabilities in the PSIDS. The paper explores the affordability of climate risk insurance, particularly among the vulnerable sections of society, and discusses the challenges of implementing an appropriate climate risk insurance model in the region. Finally, it examines recent climate risk insurance initiatives that have been attempted by multilateral agencies, such as the United Nations Development Programme (UNDP), the United Nations' Pacific Financial Inclusion Practice (UNCDF), Pacific Insurance and Climate Adaptation Programme (PICAP), and respective local governments.

Climate risk assessment in insurance: A USA and Africa Review

“…In the context of climate risk assessment, it is essential to consider the specific vulnerabilities and challenges faced by different regions. For instance, a comprehensive review of the literature addressing climate risk insurance as a risk mitigation or climate adaptation tool for managing the climate-induced financial vulnerabilities in the Pacific Small Island Developing States (PSIDS) highlights the unique challenges and possibilities in this region (Jain et al, 2022). Similarly, insights from a mandatory insurer climate risk disclosure survey in the United States emphasize the importance of understanding and managing climate-related risks at a national level (Lin et al, 2023).…”

“…Climate risk assessment in insurance is of paramount importance due to the increasing frequency and intensity of climate-related disasters. The insurance sector plays a crucial role in understanding and managing the financial vulnerability associated with climate-induced disasters (Jain et al, 2022). In the USA, there is a growing focus on climate change, leading to increased climate-related risk disclosure by insurers (Lin et al, 2023).…”

“…This trend reflects the industry's recognition of the need to assess and manage climate risks to ensure financial resilience (Collier et al, 2021). In Africa, the vulnerability to climate risks is particularly pronounced, and there is a need to explore the possibilities, challenges, and vulnerabilities associated with climate risk insurance in the region (Jain et al, 2022). The disparities in flood insurance affordability and uptake under climate change further underscore the significance of understanding regional inequalities in managing climate risks (Tesselaar et al, 2020).…”

“…By synthesizing insights from mandatory insurer climate risk disclosure surveys, the review aims to highlight the evolving landscape of climate risk assessment in the USA (Lin et al, 2023). Additionally, it seeks to explore the possibilities, challenges, and vulnerabilities associated with climate risk insurance in African countries, shedding light on the unique dynamics of climate risk management in the region (Jain et al, 2022). Furthermore, the review aims to address regional inequalities in flood insurance affordability and uptake under climate change, emphasizing the need for tailored approaches to climate risk assessment and management (Tesselaar et al, 2020).…”

“…This underscores the proactive approach of insurers in the USA towards understanding and managing climate risks. Conversely, in Africa, the focus is on exploring the possibilities, challenges, and vulnerabilities associated with climate risk insurance, highlighting the need for tailored strategies to address the unique climate risk dynamics in the region (Jain et al, 2022). Additionally, the disparities in flood insurance affordability and uptake under climate change underscore the complexities of climate risk management in Africa, necessitating a nuanced understanding of regional inequalities (Tesselaar et al, 2020).…”