Throughout human history people have learnt – mostly through trial and error – to cope with extreme climate events. We can, however, no longer assume that the future climate can be predicted on the basis of past patterns.
Scientists and policy-makers should develop plans for achieving future sustainability using ‘climate proofing’ approaches. Climate proofing does not mean reducing climate-based risks to zero – an unrealistic goal for any country. The idea is to use hard infrastructure to reduce risks to a quantified level, acceptable to society and the economy.
Climate change continues to threaten sustainable development in Namibia. It is a continuing long-term process manifesting itself in gradual increases in temperature, greater variability in rainfall, a rising sea level and increased frequency, intensity and duration of extreme weather events, such as drought and floods.
Namibia is rated to be the 7th most at risk nation in the world with regard to climate change vulnerability. Reduction in rainfall, increase in extreme weather events and increase in temperature – which are already being felt – will have negative impacts on agricultural production with related impact on food security.
The volatility of agricultural production systems is highlighted by current national accounts developments and the difficulty the sector experiences in living up to the expectations as a driver of the economy for Vision 2030 are clear to see.
To narrow down in the agricultural sector, the Investment and Financial Flow report for Namibia, published in 2011, reveals that the incremental cost of crop and livestock production, as a result of climatic episodes during the next 15 years, will be about US$3.04 billion (or about N$40 billion).
Despite the seemingly harsh environment, 70 percent of Namibia’s population are rural subsistence farmers, who largely depend on cropping and livestock for their livelihoods. The agricultural sector is acknowledged as critical to the subsistence base of a large section of Namibian society. The government continues to take steps, such as extending irrigation facilities, promoting drought-resistant crops and breeds, and providing relief measures for farmers.
Recently, a comprehensive conservation agriculture programme for Namibia (2015-2019) was approved by Cabinet, with the overall goals of countering land degradation and adapting to the effects of climate change, while increasing crop production and improving food security.
Concerns over the sustainability and efficiency of relief measures have been a bone of contention around the world. With increases in the frequency and severity of natural disasters, the need for disaster relief will increase manifold. Governments, including Namibia, may find it difficult to finance economic losses out of government budget revenues in the aftermath of natural disasters.
The current drought requires an investment of at least N$555 million until March 2016 to feed 578 480 starving Namibians, who are adversely affected.
Many economists are of the view that without donor support, climate insurance is hardly affordable in climate-threatened countries, such as Namibia. This is because formal climate insurance markets are not adequately developed in Namibia due to asymmetric information, moral hazard, and adverse selection problems that give rise to high transaction and contract enforcement costs.
Thus, climate change may erode the insurability of many catastrophic risks. At the moment, climate change stands as a stress test for insurance, the world’s largest industry with US$4.6 trillion in revenues. Insurance models show that catastrophic risk increases premium, reduces farmer coverage levels, and under some conditions, leads to a complete breakdown of the crop insurance market.
We, therefore, need to create mutual understanding on the climate topic and be innovative with the kind of cover that entices the insurance industry to play a key role. Just as the insurance industry has historically asserted its leadership to minimise risks from building fires and earthquakes, insurers have a huge opportunity today to develop creative loss prevention solutions and products that would reduce climate change related losses for farmers, government and insurers, in the process providing a win-win result.
The prospect for climate insurance stands as an immense, but as yet largely untapped opportunity for the industry, farmers, and governments at large.
The most effective step would be to forge public-private partnerships and couple insurance schemes with explicit measures to prevent disasters. The government could capitalise a scheme to cover crop failure and provide buffering incentives for livestock production during low-price periods arising from climate episodes.
An insurance firm, African Risk Capacity (ARC), an African Union agency, entered into agreements with the governments of Niger, Senegal, Mauritania and Kenya for US$129 million climate cover in total losses, and paid out US$26.3 million after three West African states suffered low rainfall. Crop insurance schemes have become common in India as well, as a safety net to farmers.
The major objective of an insurance company is to reduce risk to the company, i.e. the variability in its income from insurance business. The insurer’s interest lies in the economic viability or profitability of the insurance product, whereas the insured is concerned with his ability to pay the premium and the affordability of the product.
Both the affordability and economic viability criteria need to be synergised to offer new insurance products in the climate change scenario. If a climate insurance scheme is to be successful, there is a need for the two sectors to understand each other, reach common ground, and redesign insurance products – not only as a risk transfer mechanism, but more importantly as a risk reducing and mitigation measure by inducing desirable proactive and reactive responses in the insurance users.
Therefore, innovative insurance products need to be designed so as to balance the interests of both the insurer and the insured (farmers). Reinsurance can increase participation, but it needs to be subsidised.
While climate change undermines the viability of the insurance industry, it also offers enormous opportunities to innovate new insurance products to minimise the causes and effects of climate change. Thus, where insurers tend to retreat in the face of climate change, insurance users will encounter acute affordability issues, restricting their access to this safety net.
The strategy should be to develop innovative products and systems for delivering insurance and the use of new technologies and techniques that reduce both vulnerability to disaster-related losses and support sustainable development. The most effective step is to forge public-private partnerships and couple insurance schemes with explicit measures to prevent disasters.
* Benedict Libanda is the chief executive officer of the Environmental Investment Fund of Namibia (EIF).