The insurance scheme proposed by AOSIS

It was in the light of these conclusions that a proposal for an insurance scheme was put forward by the members of the Alliance of Small Island States (AOSIS) in the negotiations for a Climate Change Convention. The proposal was outlined in an Insurance Annex which was introduced into the draft text in the course of the negotiations and remained in the draft until the last meeting of the International Negotiating Committee for a Framework Convention on Climate Change in New York in May 1992. It was not directly included in the Climate Change Convention, but was reflected in Articles 3 and 4 (see Chapter 1). The text of the proposed insurance scheme is set out in the appendix to this chapter.

The AOSIS Insurance Annex explained that under the insurance scheme, no contributions would become payable by the industrialized countries for at least ten years - the period within which many scientists believe that it may be possible to establish with more certainty the extent to which global warming and sea level rise will increase if greenhouse gas emissions remain unchanged. Further, no claims on the Insurance Pool would arise unless the rate and absolute increase of global mean sea level rise reach certain levels. These figures might be set to reflect a rate of increase beyond which the vulnerable ecosystems of the insured countries could not easily adapt and an absolute rise beyond which significant damage to small islands and low-lying coastal areas would occur.

The Insurance Annex adopted a funding method for the International Insurance Pool that is similar to that of the Nuclear Damage Convention, but recast in the context of global warming and sea level rise by reference to GNP and total CO₂ emission levels of the industrialized developed countries. The scheme would therefore offer incentives to the industrialized developed countries to limit their CO₂ emissions so as to mitigate the rate and extent of global warming and consequent sea level rise.

The scheme would also offer the possibility of building up a long term fund. After a minimum of ten years, a single contribution of a per centage of GNP (adjusted to reflect respective CO₂ emissions) would be made by the industrialized countries. Depending upon the rate and magnitude of global mean sea level rise, no claim on the Pool might arise for several decades, even if 'lousiness as usual' continues. A fund of US$1 billion established in 2003 and invested at a real interest rate of 5 per cent would produce a fund of $4.3 billion in thirty years, and $7 billion in forty years.

What losses would the Insurance Pool cover? The Working Group set up by the Intergovernmental Panel on Climate Change to consider response strategies (Working Group III), and in particular its Coastal Zone Management (CZM) Subgroup, categorized the responses to sea level rise in three groups: retreat; accommodation and protection. To quote the CZM report:

Retreat involves no effort to protect the land from the sea. The coastal zone is abandoned and ecosystems shift landward. This choice can be motivated by excessive economic or environmental impacts of protection. In the extreme case, the entire area may be abandoned.

Accommodation implies that people continue to use the land at risk but do not attempt to prevent the land from being flooded. This option includes erecting emergency flood shelters, elevating buildings on piles, converting agriculture to fish farming, or growing flood- or salt-tolerant crops.

Protection involves hard structures such as sea walls and dikes, as well as soft solutions such as dunes and vegetation, to protect the land from the sea so that existing land uses can continue.

In general, losses resulting from the retreat option would seem to fall naturally within the scope of the Insurance Pool, whilst expenditure incurred in implementing protection responses would fall under other mechanisms to provide resources to developing countries such as the proposed International Climate Fund. More difficult is the question of whether, and to what extent, losses or expenditure resulting from the adoption of implementation responses should be covered by the Insurance Pool, or whether these should be dealt with in another context. I suggest that much of this latter category of expenditure should be covered by the Pool. This approach accords with ordinary commercial insurance principles that expenditure incurred or loss suffered in responding to an immediate threat of the insured peril should be treated as a loss by that peril. Measures taken in advance of any immediate threat, even if taken on reasonable grounds, would not be covered by the Pool, but would be dealt with under other funding mechanisms.

In principle, the main criterion for entitlement to claim should be proved loss attributable to sea level rise. Apart from inundation and flooding, the most widely predicted consequences of climate change so far as small islands and low-lying coastal countries are concerned are increased incidence and intensity of hurricanes, typhoons, severe storm surges and coral bleaching. It may not be possible yet to prove conclusively that such events are attributable to climate change due to global warming. I suggest therefore that such claims against the Pool should include, at minimum, loss or damage resulting from sea level rise, together with expenditure incurred in connection with immediate accommodation responses, and that the criteria for entitlement to claim against the Pool should be set by reference to the rate of global mean sea level rise over a given period as well as to the total rise from a given date.

For many developing countries, traditional insurance definitions of physical and economic loss would not reflect the impact of sea level rise. The total inundation of a small island with a minimal economic life of its own would result in the inhabitants' loss of their homeland (quite apart from the costs of resettlement). It might also involve loss of development potential; and even loss of the potential economic benefit of its surrounding 200 mile Exclusive Economic Zone (which is defined with reference to terrestrial landmarks). Losses suffered by small island and low-lying coastal countries should be assessed therefore by reference to 'total economic value'- that is, values arrived at not only by reference to actual use value, but also to option and existence values.

The design of the Pool took into consideration the necessity for setting an overall limit to its liability and to structure an equitable system of distribution such that its resources would not be completely absorbed by a single massive loss suffered by one large country. Moreover, the question was also considered as to whether losses suffered which might otherwise be claimable against the Pool could have been mitigated by measures which reasonably could have been taken by the claimant at an earlier stage.

Loss or damage to commercially insured property would not be recoverable under the scheme. I do not expect that this exclusion would discourage insured countries from arranging commercial insurance where available at reasonable rates for two reasons:

1 claims would not be recoverable in full where the totality of claims against the Pool in any one insurance period exceeded the funds in the pool;

2 in assessing claims, the authority administering the Pool would take into account whether steps could have been taken earlier to avoid or mitigate the loss, including taking out commercial insurance if it could have been obtained at reasonable premiums.

I consider that these factors would encourage also the insured countries to take preventative or mitigating measures where possible, even where no commercial insurance was available.