Investigating the feasibility of municipal risk pooling as an adaptation finance measure

 

Climate change-related insurance products have been commonly used to manage the risks from climate hazards over the last few years. However, traditional insurance has not been effective for low-frequency, high-severity events. Insurance can also be a costly solution because premiums are usually inflated above the expected losses to guard against the payment of claims in the event of large or multiple disasters. Moreover, insurance requires post-disaster economic loss assessments, which can delay the mobilization of relief funds and their distribution to households in need. For that reason, in recent years risk pooling has been considered as a potential financial instrument.

Risk pooling is a risk transfer instrument similar to traditional insurance, however, schemes consist of several individual risk holders who wish to aggregate their risks. Some risk pooling facilities are now operating, such as the African Risk Capacity and Caribbean Catastrophe Risk Insurance Facility. However, these risk pools face various barriers to country participation, including compromised sovereignty in terms of decision-making related to types of hazards covered and payout use, and an unwillingness to use domestic budgets for the benefit of other countries. A municipal risk pooling (MRP) facility is considered more appropriate, as it can avoid issues of compromised sovereignty.

Using the Western Cape province of South Africa as a case study, this project aims to assess the feasibility of a risk pooling facility at the municipal level targeted at managing flood risk. Project outputs include the flood event database of the Western Cape government, municipal risk profiles reports, peer-reviewed publications on topics related to municipal risk assessment and financing instruments, and a large network of insurance and reinsurance companies (interested in municipal risk pooling) to set the platform for a possible pilot supplemented by the findings of the prefeasibility study and scaling up. The main outcome of the research would be a pilot municipal risk pooling facility taken up by selected municipal governments for implementation. To ensure that the findings of this MRP are applicable in other contexts, the research will also develop a guidance framework outlining requirements and methodologies for MRP implementation. The development of a municipal risk pooling scheme would be the first of its kind and avoids barriers that have been experienced in sovereign risk pools.