The most climate vulnerable countries could lose 100%+ of GDP from insurable cats – Cambridge, Howden study

The smallest and most vulnerable countries risk losing over 100% of their GDP from extreme climate shocks next year, according to the findings of a new study released by re/insurance broker Howden Group and the University of Cambridge. 

The research from the University of Cambridge Institute for Sustainability Leadership (CISL), with Howden contributing risk analysis, is focused on demonstrating the transformative economic efficiency of risk-sharing systems to provide vulnerable countries with financial security from climate related disasters.

The paper underlines the scale and severity of the risks faced by the so-called Global South, Small Island Developing States (SIDS) and other vulnerable countries that bear overwhelming threats.

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. The modelling shows that the intolerable financial risks faced by this group of countries could be reduced to just 10% of GDP.

The research included input from public and private leaders from the Global South and developed economies, also outlines an action plan for L&D implementation across 100 less developed, climate vulnerable countries. It proposes leveraging donor funding to unlock vast sums from re/insurance and capital markets to provide guaranteed financial protection to exposed communities now, and through to at least 2050.

The report, named Risk sharing for Loss and Damage: scaling up protection for the Global South, has been released as world leaders prepare for the COP28 event in Dubai, starting 30 November.

Youssef Nassef, head of adaptation of the UN framework convention on climate change, said: “Umbrella Stop-Loss provides a practical concept to the L&D common stance that it is an international responsibility that countries and individuals should not suffer, due to climate change, above a certain limit.”

The paper provides a pathway to L&D implementation to inform high-level discussions on the deployment of L&D funds. Regardless of where negotiated outcomes on L&D settle at COP28, the report argues, private sector innovation will be needed to apply donor funds in the most efficient, effective way to enable vulnerable nations to prepare financially for the future.

“The pure maths and dispassionate economics in this analysis are clear,” said Rowan Douglas, CEO, climate, risk and resilience, Howden, and chair, of the Insurance Development Forum’s operating committee, and co-author of the report.

“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.”

Four key findings

• The research quantified the losses faced by small, climate vulnerable countries across the Pacific, Caribbean and Indian Ocean. 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. By 2050 losses are set to grow between 10-15% due to climate change alone, approximately 0.5% per year.
• Despite the growing risks, modelling by the researchers revealed that these economies remain insurable. Under the proposed plan, an estimated $1bn 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”.
• 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.
• In a second application of the analysis, the results illustrate how risk sharing can be scaled up to form a key pillar of the L&D solution for all L&D recipient countries. A donor-supported annual pure premium of $10m per country equates to approximately $25bn of financial protection, contractually guaranteed, across 100 countries. This provides, for each of these countries, significant pre-arranged finance protection to support their highest priority needs.

“We have demonstrated how public-private finance can be combined to protect billions of people, now and in the decades ahead,” said Ana Gonzalez Pelaez, lead author of the report and fellow, CISL.

“We are calling on the international community to make risk-sharing systems a pillar of the Loss and Damage architecture for all countries and introduce umbrella stop-loss mechanisms to protect the economies of the world’s smallest and most climate-vulnerable countries,” she said.

“The action plan presented in this study is ready and can be implemented using existing institutions to provide vulnerable countries with guaranteed payouts from the risk capital markets after a disaster. These funds could be used for critical priorities such as humanitarian assistance; rebuilding schools, hospitals and vital infrastructure; sovereign debt repayments; restoration of agriculture and ecosystems.”