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Risk sharing systems can scale up L&D funds to support climate vulnerable countries: report

21st November 2023 - Author: Kassandra Jimenez-Sanchez

The world’s most vulnerable countries could lose over 100% of GDP in 2024 from climate related disasters that are insurable, according to research from the Cambridge Institute for Sustainability Leadership (CISL) and broking group Howden, which also demonstrated the transformative economic efficiency of risk-sharing systems to provide these countries with financial security from disasters.

According to the report, the GDP loss for climate vulnerable countries across the Pacific, Caribbean and Indian Ocean underlines the scale and severity of the risks faced by the Global South.

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, the report revealed.

By 2050, losses are set to grow between 10-15% due to climate change alone, approximately 0.5% per year.

The research highlighted how Small Island Developing States (SIDS) and other vulnerable countries bear these overwhelming threats almost alone, which is an issue that can be solved.

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The report, which models Loss and Damage (L&D) implementation, revealed 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.

“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 Protection’,” explains the research.

Adding: “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.”

Moreover, the research also outlines an action plan for L&D implementation across 100 less developed, climate vulnerable countries. Something that could be achieved with input from public and private leaders from the Global South and developed economies.

Rowan Douglas CBE, CEO, Climate, Risk and Resilience, Howden, and Chair, Operating Committee, Insurance Development Forum, and co-author said: “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.”

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