(introduction...)

Insurability of losses
Oil pollution
Nuclear damage
Implications
The insurance scheme proposed by AOSIS
The Climate Change Convention
Notes and references
Appendix: Scheme proposed by AOSIS for inclusion in the Climate Change Convention

Michael Wilford

The Reports of the Intergovernmental Panel on Climate Change (IPCC) recognize that the human settlements most vulnerable to climate change are those which are especially exposed to natural hazards, that is, to coastal or river flooding, severe drought, landslides, severe wind storms and tropical cyclones. The IPCC also recognized that the most vulnerable populations are in developing countries; and that in small island countries as well as in coastal lowlands, inundation due to sea level rise and storm surges are a particular hazard (see box on page 170).

The IPCC Working Group II (Impacts) used various scenarios based on a number of different scientific studies. The main scenario upon which Working Group II based its assessments was:

1 an effective doubling of CO₂ in the atmosphere between now and 20252050;
2 a consequent increase of global mean temperature in the range of 1.5C to 4-5C;
3 a sea level rise of about 30-50 cm by 2050 and of about 1 metre by 2100, with a rise in the temperature of the ocean surface layer of between 0.2C and 2.5C.

This scenario pre-dated, but is in line with, the assessments of IPCC Working Group I.

In assessing the effects of climate change on the oceans and coastal zones the IPCC reports point out that global warming would not only accelerate sea level rise, but would also modify ocean circulation and change marine ecosystems, with considerable socioeconomic consequences. These effects will add to the present trends of rising sea level and damage to coastal resources from pollution and over-harvesting. A 30 cm sea level rise will threaten low islands and coastal zones. A one metre rise would render some island countries uninhabitable. The Coastal Zone Management Subgroup also emphasized that:

Vulnerability of the Maldive Islands to sea level rise

The current environmental problems of the Maldives are in large part the result of the high density population (650/km2) which is aggregated onto relatively few islands within each atoll. The problems of the capital island, Male, have reached a critical level in several areas increasing the island's susceptibility to episodic events such as storm generated high waves. In other areas and atolls the problems are also locally severe increasing the susceptibility of such areas to future climatic change and sea level rise. This increased susceptibility is due to

• coral mining for construction and road surfacing;
• land reclamation, particularly on the seaward edges of islands;
• construction of coastal infrastructure including sea walls, breakwaters, jetties, piers, groynes and harbours;
• aquifer depletion and saline intrusion.

All of the current environmental problems are exacerbated by:

• high population growth;
• a lack of mechanisms within government for taking environmental problems into consideration in the planning process;
• a lack of guidelines and procedures for the evaluation of environmental issues;
• a lack of an adequate in-country data base covering many physical and biological parameters;
• a shortage of trained manpower at all levels.

The current, environmentally unsound, practices will increase the susceptibility of the Maldives to changes predicted to occur as a consequence of global warming and the greenhouse effect. Assuming a sea level rise of 12-18 cm by the year 2030 one might anticipate profound effects on those islands of the Maldives which have been structurally modified, since the normal processes of sand genesis, deposition, removal and flux between sinks have been altered by changes to the micro-climate and current regimes.

The impact of 'high waves' will be greater with greater mean sea level and such increases must be taken into consideration in planning future coastal infrastructure. Changes to aquifer volumes may be expected under higher sea levels; however, such changes will be less important on islands where the aquifer is not currently over-exploited. Saline intrusion will be exacerbated in those aquifers which are heavily used for human consumption.

Increased temperatures (of perhaps 1.5C by 2030) will affect the human environment, agricultural production, and marine ecosystems. Given the country's proximity to the equator, the Maldives can expect a lower than average temperature rise which may have little impact on the human environment but may be expected to result in some increased demand for air conditioning. Agricultural production and terrestrial ecosystems are likely to be less affected than marine organisms such as corals, many of which are currently growing at temperatures close to their upper thermal tolerance limits.

Perhaps the area of greatest current concern in the Maldives is the possibility of an increased frequency of storm-generated swells and high waves, particularly given the experiences of the country during 1987. Analysis of the meteorological patterns in the Indian Ocean is urgently required to predict the possibility of an increased frequency of such events.

Situations of high sea level at the coast of the atolls are caused by storm surges and waves setup. A degree of coastal flooding due to high tides has been experienced in the past at various places. Recent flooding has been made more noticeable by its impact on construction such as sea walls and houses near the shore and on low-lying reclaimed land. The July 1988 high water situation at Thulhadhoo (Malosmadulu Atoll) was caused by high southwesterly waves (5 m high, periods 12-15 seconds) in association with high spring tide and a southwesterly wind. The damage caused was enhanced by the absence of beaches and the presence of vertical low seawalls which magnified overtopping and flooding. These events are a reminder that occasional natural events of long distance swells and high water levels due to wave surge and/or high tides, would in themselves cause little damage to the Maldives atolls, were it not for the mismanagement that has taken place in recent years. This mismanagement includes stripping the islands of the natural defences afforded by the outer reefs, the reef flats and the beaches.

Social impacts arising from changes to island stability and/or habitability are likely to be extensive given the nature of Maldivian society which is characterized by generally low mobility and strong attachment to individual atolls and islands. Economic impacts will be most intensely felt if the tourist industry is adversely affected. The present structure of the tourist industry is based on 'resort islands' which are essentially self-contained and as a consequence pack considerable infrastructure on the land and coastline of very small islands. The present tourist industry is concentrated in the Central Maldives, hence increasing the risk to this sector of the economy.

Excerpt from J Pernetta and G Sestini, The Maldives and the Impact of Expected Climatic Changes, UNEP Regional Seas Report 104, UN Environment Programme, Nairobi, 1989, pp 27-8; 38.

Sea level rise could increase the severity of storm-related flooding. The higher base for storm surges would be an important additional threat in areas where hurricanes, tropical cyclones and typhoons are frequent, particularly for islands in the Caribbean Sea, the south eastern United States, the tropical Pacific and the Indian sub-continent ... Many small island States are ... particularly vulnerable. This is reflected in their very high ratios of coastline length to land area. The most seriously threatened island States would be those consisting solely, or mostly, of atolls with little or no land more than a few metres above sea level. Tropical storms further increase their vulnerability and, while less in magnitude than those experienced by some of the world's densely populated deltas, on a proportional basis such storms can have a much more devastating impact on island nations.

These predictions of the increasing impact of severe storms have not been lost upon the insurance industry.

In a review of the effect of climate change on insurance one of the world's largest reinsurers has recently written:

Detailed measurements in the Pacific show that the areas with water temperature at the surface above 27C have expanded by about one-sixth in the last two decades. While substantial fluctuations from one year to the next and additional factors such as El Niake it impossible so far to prove the effect of such higher temperatures on the frequency of tropical cyclones, super-hurricanes 'Gilbert' and 'Hugo' may certainly be regarded as a clear sign of an increase in hurricane intensity. According to estimates, hurricane activities in the Caribbean will increase considerably in the next two to three decades, the loss potential going up by more than 50%. Together with the rising level of the sea, this also means a much greater risk of storm surges in densely populated coastal regions in the tropics and sub-tropics.

These insurers predict that there will be a global increase in catastrophic losses from a current annual average of about US$20 billion to about US$100 billion per year in overall economic terms. And that, it may be assumed, does not take into account the potential longer term consequences of climate change.

Insurability of losses

In theory, any loss which is not inevitable is insurable under a commercial contract of insurance. A classic definition of the necessary legal elements of such a contract includes the requirement that the event insured against 'should be one which involves some amount of uncertainty'. The definition continues: 'There must be either uncertainty whether the event will ever happen or not, or if the event is one which must happen at some time there must be uncertainty as to the time at which it will happen. An element of uncertainty is therefore a necessary legal requirement for a loss to be insurable.

In commercial terms, more will be required if a risk is actually to be insurable on the world insurance markets. The requirements for the insurability of a flood or inundation risk commercially have been stated to be:

1 a sufficient demand for insurance of the risk and sufficient variation in the insurer's portfolio of such risks to ensure an adequate spread of risk;
2 the random occurrence of losses, but neither too often nor too seldom;
3 the ability to restrict accumulation of losses;
4 the traceability of the causes of a loss;
5 the availability of statistical records of losses from the risk, covering sufficiently long periods of time.

The randomness or uncertainty of the event to be insured against is here again an essential element. But for commercial insurers, it is also essential to be able to select the risks that they insure and to be able to calculate realistically what premium they should charge, in order to accumulate over the long term, sufficient funds to meet losses and to make a profit.

The IPCC Working Group I concluded that even if action is taken to limit emissions, there is enough momentum in the global climate system for a rate of accelerated sea-level rise to be inevitable. Gradual flooding and inundation which may be attributable to an inevitable rise in sea level will certainly not be capable of being insured on the world insurance markets.

Even in the sphere of catastrophe insurance (which in this context refers to insurance against damage caused by storm, windstorm, hurricane, tropical cyclone, typhoon, as well as flood and inundation) events that up to the present have been regarded as fortuitous, and therefore insurable, may cease to be so regarded in the future. One insurer, in considering the impact of global warming and climate change upon catastrophe insurance, has remarked: 'There should be further examination of what constitutes an "abnormal" loss, and we will have to alter our view of what is perceived as normal.

In considering the potential for heavy increases in catastrophe losses as a result of climate change, it is important to bear in mind that the current levels of catastrophe loss represent in turn a dramatic increase over the losses of two decades ago. Considering the major natural disasters over the last three decades and extrapolating figures to 1990 prices, it can be shown in the 1980s compared with the 1960s, that: overall economic loss from major natural disasters increased by a factor of 3.1; insured losses increased by a factor of 4.8; and major catastrophes increased by a factor of 5.0.

The world's insurance and reinsurance markets will find it difficult to cope with such rapid change in the incidence of natural hazards. For example, the reinsurers of first layer catastrophe insurance covers granted to United Kingdom companies for worldwide exposures paid out between 1979 and 1988 in claims resulting from 'abnormal' weather experienced in the UK alone, more than twice the total amount received by these reinsurers in premium.

In stable climatological conditions, an insurer or reinsurer can assess the probable 'return period' of a known catastrophe peril by reference to historical events and statistical records. The premium for the risk can then be calculated with some reasonable measure of accuracy. Rapid changes in climate make the calculation of premium for natural catastrophe risks a very much more difficult and uncertain exercise. In a 1963 study, for example, it was calculated on the basis of existing records that the return period for a flood which inundated over 800 square kilometres of the east coast of England in 1953 was I in 200 years. Yet between 1963 and 1989 (26 years), the 1 in 200 year storm surge level occurred eleven times.

Given the difficulties currently facing insurers and reinsurers in basing premium calculations on past climatological records and those posed by predictions of global warming and sea level rise, insurers and reinsurers will likely become more selective and restrictive in their offered cover.

Options for insurers

The options available to insurers and reinsurers in such circumstances include:

1 impose upon the insured, in the case of original insurances, substantial deductibles per policy or risk;
2 impose a limit figure on the amount of their liability;
3 charge sufficient premium to enable adequate reserves to be accumulated;
4 exclude particular risks (such as, for example, wind storm, flood, inundation) either absolutely or in particular localities;
5 avoid insuring any catastrophic risks in particular localities or limit overall catastrophe exposure in particular localities;
6 withdraw from the insurance or reinsurance of catastrophe risks altogether;
7 redefine categories of loss which in insurance terms are at present regarded as 'abnormal' or fortuitous, and therefore ordinarily insurable, and those which are regarded as 'normal' or non-fortuitous, and ordinarily not insurable.

Additionally, insurers and reinsurers can assist and encourage the adoption of loss-prevention measures either by advice or by the introduction of conditions into policies of insurance or reinsurance. But faced with the probability of heavy increases in catastrophic losses from so-called natural causes, insurers and reinsurers will be forced to take some, if not all, of the measures mentioned if they are to continue to provide an effective and responsible service to their insurers and if they are to remain in business as insurers.

This logic suggests strongly that insurers will not cover a substantial part possibly the most substantial part - of the potential loss and damage resulting from climate change and sea-level rise. In short, such risks will be uninsurable on the world's insurance and reinsurance markets. This outcome has indeed been recognized by the insurance industry itself. One company recently stated that:

On the level of direct insurance and reinsurance, the insurance industry fortunately has a wide range of 'tools' end instruments for supervising and controlling its exposure to catastrophe risks.

These underwriting facilities . . . must however be used in full and without delay if insurers are to bring the current adverse development to a halt. At the same time these activities must be accompanied by structural loss prevention measures and suitable precautions taken by the authorities.

Wherever the national insurance industry supported by worldwide reinsurance capacity (which, ultimately, is only available if premiums, terms and conditions are adequate) is not able to cover an extreme catastrophe risk, it may become necessary for the government to assume a share in catastrophe covers, at least for losses exceeding a certain level, or to guarantee indemnification in all events, as some governments already do in the case of the risk of flood and inundation.

It is evident that even in the case of fortuitous catastrophic losses, the world insurance industry will not be able to bear the burden of providing a global spread of compensation without state intervention. And in the case of those losses which the insurance industry will have to redefine as 'normal'- for example, flooding or inundation resulting from inevitable sea level rise State funding will be the only source of compensation of those who are affected by it. Since the least developed countries are those most vulnerable to future catastrophic loss and what may come to be regarded as the inevitable consequences of climate change, any state compensation regime will have to be internationally funded.

Two internationally funded compensation schemes operate at present. These deal with oil pollution and nuclear damage. Neither case, however, is analogous exactly with loss consequent upon climate change and sea level rise. On the contrary, the incidence of oil pollution or nuclear damage is more likely to be traceable to an identifiable source and referable to a discoverable cause.

Loss or damage of the nature associated with climate change, whether of a catastrophic or 'abnormal' nature or of a 'normal' or inevitable nature, is highly unlikely ever to be conclusively attributable to any legally definable source or cause. Thus, if a compensation scheme is to form any part of a Climate Change Convention, it could probably not be based upon ordinary legal criteria of liability or responsibility. Rather, it would have to be based on a criterion of responsibility in its broadest sense.

Oil pollution

Compensation for loss or damage resulting from the escape or discharge of oil from ships is governed by two conventions. The first lays down a regime of civil liability for oil pollution. The second sets up an international compensation fund to cater for those instances where the civil liability regime does not afford compensation to the injured party.

The first Convention, the International Convention on Civil Liability for Oil Pollution Damage 1969, contains uniform international rules and procedures under which shipowners are made strictly liable for certain types of oil pollution damage. It imposes upon the bulk carriers of persistent oils the obligation to effect insurance against the liabilities imposed by the Convention. The Civil Liability Convention came into force in 1975 and there were amendments to its financial provisions by Protocol in 1976.

The 1971 International Convention on the Establishment of an International Fund for Compensation for Oil Pollution Damage ('the IOPC Fund') provides for the payment of compensation to any person suffering oil pollution damage, as defined in the Civil Liability Convention, if that person is unable to obtain full and adequate compensation for one of the following reasons:

1 that no liability for the damage arises under the Civil Liability Convention, because the shipowner can invoke one of the exemptions from liability set out in that Convention;

2 the shipowner is financially incapable of meeting his obligations under the Civil Liability Convention and his insurance is insufficient to satisfy the compensation claims;

3 the damage exceeds the shipowner's limit of liability under the Civil Liability Convention.

The IOPC Fund also provides an indemnity to shipowners against a proportion of their liabilities under the Civil Liability Convention. It is financed by levies on oil importers. By Article 10 of the Fund Convention, contributions to the fund are levied on any person who has received 'contributing oil' (crude oil and heavy fuel oil) in a quantity exceeding 150,000 tonnes in one calendar year in a Contracting State.

Under Article 11 initial contributions are payable by such importers when a State becomes a member of the IOPC Fund. Annual contributions to the fund are levied to meet the anticipated payments of compensation and indemnity by the IOPC Fund in the ensuing year and to meet also the administrative expenses (Article 12).

The functioning of the IOPC Fund is controlled by an Assembly, an Executive Committee and a secretariat headed by a Director. The Assembly comprises representatives of the governments of all Member States. The Executive Committee is elected by the Assembly and must approve settlements of claims against the Fund. The amount of annual contributions to the Fund is decided annually by the Assembly.

Contributions are levied directly from and paid by the individual importers and not by the Contracting States, unless a Contracting State declares that it assumes that obligation (Article 14). The Contracting States are required to communicate annually to the Director of the IOPC Fund the name and address of any person in that State who is liable to contribute to the Fund as well as details of the quantities of 'contributing oil' received.

Contributing oil is counted for contribution purposes each time it is received at ports or terminal installations in a Contracting State after carriage by sea. The place of loading is irrelevant: the oil may be imported from abroad, carried from another port in the same State or transported by ship from an off-shore production rig. Oil received for transhipment to another port or received for further transport by pipeline is also considered as 'received' for contribution purposes. Fears expressed at the time the Fund Convention was adopted that the Secretariat would have difficulties in collecting contributions have proved to be unfounded.

In 1984 two Protocols were adopted amending the Civil Liability Convention and the Fund Convention. They increased the limits of the shipowners' liability and also increased the limit of compensation payable by the IOPC Fund in respect of any one incident from an aggregate amount of 60 million SDRs (Special Drawing Rights) to 135 million SDRs. This latter figure will be increased automatically to 200,000,000 SDR when there are three Member States of the 1984 Fund whose combined quantity of contributing oil received during a given year in their respective territories exceeds 600 million tonnes.

The Protocols also extend the scope of the Conventions to oil spills from unladen as well as laden tankers and redefined the term 'pollution damage'. The Protocols introduce the concept of compensation for impairment to the environment, although they provide that such compensation shall be limited to loss of profit and to costs to reasonable measures of reinstatement actually undertaken or to be undertaken.

The 1984 Protocols are not yet in force. The 1984 Protocol to the Fund Convention enters into force when ratified by at least eight States and when the total quantity of contributing oil received during a given calendar year in all the ratifying States is at least 600 million tonnes. As of 1 May 1991, forty-five States had ratified the Fund Convention.

Nuclear damage

A different approach from that adopted by the Oil Pollution Fund Convention has been adopted in the case of nuclear damage. The 1960 Paris Convention on Third Party Liability in the field of Nuclear Energy, concluded under the auspices of the OEEC (now OECD) was the first international convention to regulate the liability for risks arising out of the peaceful use of nuclear energy.

The purpose of the Paris Convention is to harmonize national legislation with regard to third party liability and insurance against atomic risks and to establish a regime for liability and compensation in the event of a nuclear incident. The Convention generally applies only to nuclear incidents occurring, and damage suffered, in the territory of Contracting States. In 1963, a supplementary convention to the Paris Convention was adopted ('the Brussels Supplementary Convention'.)

Article 3(b) of the Brussels Supplementary Convention (as amended by the subsequent 1964 Protocol) provides that the contracting parties undertake that compensation in respect of damage caused by a nuclear incident (other than one occurring entirely in a territory of a non-contracting State) shall be provided up to an amount of 120 million units of account per incident as follows:

1 up to an amount of at least 5 million units of account, out of funds provided by insurance or other financial security, such amount to be established by the legislation of the contracting party in whose territory the nuclear installation of the operator liable is situated;

2 between this amount and 70 million units of account, out of public funds to be made available by the Contracting Party in whose territory the nuclear installation is situated;

3 between 70 million and 120 million units of account, out of public funds to be made available by the Contracting Parties according to the formula for contributions specified in Article 12 of the Brussels Supplementary Convention.

Article 12(a) of the Brussels Supplementary Convention provides that:

The formula for contributions according to which the contracting party shall make available the public funds referred to in Article 3(b)(iii) shall be determined as follows

(i) as to 50%, on the basis of the ratio between the gross national product at current prices of each contracting party and the total of the gross national product's current prices of all Contracting Parties as shown by the official statistics published by the Organisation for Economic Co-operation and Development for the year preceding the year in which the nuclear incident occurs;

(ii) as to 50%, on the basis of the ratio between the thermal power of the reactors situated in the territory of each Contracting Party and the total thermal power of the reactors situated in the territories of all the Contracting Parties . . .

The Brussels Supplementary Convention therefore creates an international pool out of which the highest layer of compensation is payable in the event of damage from a nuclear incident, and levies contributions toward that pool from Contracting States according to a formula based upon GNP and total capacity of their nuclear reactors.

Unlike the Paris Convention, the 1963 Vienna Convention on Civil Liability for Nuclear Damage is potentially of worldwide geographical application. The Vienna Convention also establishes a regime for liability and compensation for nuclear incidents, but it permits the Contracting State within whose territory the installation is situated to limit the liability of the operator.

By Article VII, the installation State undertakes to require the operator to maintain insurance or other financial security covering his liability for nuclear damage in such amount as the State shall specify. But the installation State is bound to meet compensation claims up to the operator's limit of liability, if the operator's insurance or other financial security is inadequate to meet such claims. There is, however, no provision similar to the Brussels Supplementary Convention either in the Vienna Convention or elsewhere for any international pooling arrangement to pay compensation above the operator's limit of liability.

Implications

I conclude that the preceding analysis poses at least seven implications for the ongoing negotiations under the rubric of the Climate Change Convention.

First, it is clear that the consequences of inevitable gradual sea level rise due to climate change induced by global warming will not be insurable on the world's insurance markets. Second, even in the case of the 'abnormal' catastrophic consequences of climate change and sea level rise - floods, inundation, storms, windstorms, hurricanes, tropical cyclones, typhoons insurers already acknowledge that there will be a substantial shortfall in their coverage of losses in the future. Insurers are already forced to decline to insure certain risks in particular areas and increasingly they will be forced to refuse to insure risks in the geographical regions most prone to catastrophic loss. As a result they will have to impose deductibles, limit the total amounts of their liability on individual risks and limit their liabilities in the aggregate.

If as predicted the incidence of catastrophes resulting from the combination of sea level rise, severe storms and storm surges increases substantially, a large proportion of catastrophic losses will be uninsured and indeed uninsurable on the world's insurance markets. The insurance industry recognises that even in the case of catastrophe insurance, government intervention will be necessary.

Third, losses of such magnitude cannot be carried by the governments of those countries most vulnerable to these hazards - the small island and lowlying coastal developing countries. There is a need for an internationally funded insurance pool.

Fourth, the oil pollution and nuclear damage Conventions referred to in this paper provide examples of international insurance pools that have been set up in other contexts. One is funded by the oil industry, the other by States on a basis which takes account of gross national product and nuclear energy capacity.

Fifth, the basis for contribution to an internationally funded insurance pool in the present context, and the criteria to be satisfied in claiming from such a fund, should form part of the negotiations leading to the Climate Change Convention.

Sixth, such an international insurance pool might be funded by the developed countries on a contribution basis related to gross national product and/or greenhouse gas emission levels and/or by the industries of such countries responsible for such emissions.

Finally, the Ministerial Declaration at the Second World Climate Conference recommended, inter alia, that stepped-up financial contributions be provided by developed countries to address the particular problems and needs, including funding, of low-lying coastal and small vulnerable island countries. Such countries must be the principal beneficiaries of an internationally funded insurance pool set up to cover losses resulting from sea level rise and related catastrophic events stemming from climate change.

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.

The Climate Change Convention

As I noted above, the Insurance Annex proposed by AOSIS remained in the draft Convention text until the last negotiating meeting before it was signed in Rio. At that time, all annexes dealing with matters of substance were removed on the grounds that insufficient time remained to reach agreement on matters of detail before Rio; and the view of some countries (although not the AOSIS countries) that the Convention should not in any event be concerned with detailed mechanisms such as the Insurance Pool.

Nonetheless, the Climate Change Convention signed at Rio did refer to insurance. When it comes into force, the parties are bound by Article 4.8 to give 'furl consideration to what actions are necessary' in regard to insurance to meet the specific needs and concerns of the most vulnerable developing countries. Small island and low-lying coastal states head the list of vulnerable countries. Also, under Article 4.4, the developed country parties are obliged to assist the vulnerable developing country parties to meet the costs of implementing adaptation to those adverse effects. It is precisely to these adaptation costs that the AOSIS insurance proposal is directed.

The AOSIS countries therefore intend to develop the outline insurance proposal into a fully researched, viable insurance scheme and to put it before the parties to the Convention when protocols related to financial issues are negotiated.

Notes and references

1 The IPCC First Assessment Report, August 1990; see also R Warrick and A Rahman, 'Future Sea Level Rise, Environmental and Socio-Political Considerations,' in I Mintzer (ed), Confronting Climate Change, Risks, Implications, and Responses, Cambridge University Press, New York, 1992, pp 97-112

2 Report of IPCC Working Group II, Policymakers' Summary, June 1990

3 IPCC Working Group I, Scientific Assessment, Climate Change 1992, The Supplementary Report to the IPCC Scientific Assessment, Cambridge University Press, 1992, pp 5-19

4 IPCC First Assessment Report, Overview, August 1990, p 8

5 'Strategies for Adaptation to Sea Level Rise', Report of Coastal Zone Management Subgroup of IPCC Working Group II, June 1990, p 5

6 Munchener Ruckversicherungs-Gesellschaft,'Windstorm', Munich, 1990, p 111

7 ibid. p 4

8 Prudential Insurance v. IRC [1904] 2 KB 658 at p 613; see also Soya GmbH Kommanditgesellschaft v. White [1980] 1 Lloyd's Rep. 491,[1982] I Lloyd's Rep. 136, [1983] 1 Lloyd's Rep. 122

9 Munchener Ruckversicherungs-Gesellschaft, 'Flood Inundation', Munich, 1973, p 7 10 Report of IPCC Working Group I, Policymakers' Summary, p 23

11 J Hindle 'Warming Signals', The Review, March 1989, p 35

12 Munchener Ruckversicherungs-Gesellschaft, 'Windstorm', Munich, 1990 p 4 13 J Hindle, op. cit. (note 11)

14 G Dimmock, 'The Reinsurers' View', in 'The Greenhouse Effect - Implications for Insurers', Insurance and Reinsurance Research Group Limited, February 1989, p 119 and J Hindle, op. cit. citing C T Suthons, 'Frequency of Occurrence of Abnormally High Sea Levels on the East and South Coasts of England, 1963' 15 Munchener Ruckversicherungs-Gesellschaft, 'Windstorm' and 'Flood Inundation', op. cit.; J Hindle and G Dimmock, op. cit.; F Nierhaus and G Berz 'Natural Catastrophes - Elements of Risk', The Review, December 1989, p 17; A F Dlugolecki, 'Natural Catastrophes arising from the Greenhouse Effect', Journal of the Isurance Institute of London, 1990, vol. 78, p 49; S Hitchcock, 'Changing Weather Patterns and their Effect on Reinsurers', Paper to Insurance Institute of London, March 1989

16 Ibid.
17 Munchener Ruckversicherungs-Gesellschaft, 'Windstorm', op. cit. (note 6) p 11

18 Following disastrous floods in Queen Island, New South Wales and Victoria in 1990, the President of the Insurance Council of Australia was reported as stating that few householders in flood-prone areas could obtain insurance cover for flood damage and that the Australian Government should 're-think the question of catastrophe reinsurance'. The National Insurance Brokers' Association of Australia was also reported as having called upon the Federal Government to provide catastrophe reinsurance above whatever level is freely available in the private insurance market: The Re Report, London Issue 9019,17 September 1990

19 Mans Jacobsson, Director, International Oil Pollution Compensation Fund, 'The International Conventions on Liability and Compensation for Oil Pollution Damage' in Oil Pollution Claims and Liability, Legal Studies and Services Limited, London, November 1989; for a summary of the IOPC, see M Jacobson, 'The International Convention on Compensation for Oil Pollution Damage,' Siren, (UN Environment Programme, Nairobi), no 42, September 1989, pp 20-24

20 Ibid. p 8

21 Article 1.6 of the 1984 Protocol to the Civil Liability Convention
22 P Sands, Chernobyl: Law and Communication, Grotius Publications, Cambridge 1988, p 51
23 Ibid. where the text of the Convention is set out at p 53
24 Ibid. where the text of the Convention is set out at p 68
25 Ibid. p 96; the text of the Convention is set out at p 97

26 Ministerial Declaration at the Second World Climate Conference, Geneva, November 1990, paragraphs 26 and 27

Appendix: Scheme proposed by AOSIS for inclusion in the Climate Change Convention

I The Parties recognise that:

1 There should be established, as an integral part of the Framework Convention on Climate Change, an International Climate Fund to finance measures to counter the adverse consequences of climate change, and a separate International Insurance Pool to provide financial insurance against the consequences of sea level rise.

2 Revenue for the Insurance Pool should be drawn from mandatory sources, in particular, developed country assessments.

3 The financial resources of the Insurance Pool should be new, additional and adequate.

4 The Insurance Pool should be under the control and direction of the Conference of Parties.

5 The resources of the Insurance Pool should be used to compensate the most vulnerable small island and low-lying coastal developing countries for loss and damage arising from sea level rise.

II. The Parties further recognise that the formulation of an Insurance Pool scheme involves consideration of the following main questions:

• methods of funding an international insurance pool;
• classification of the types of loss to be covered by the Insurance Pool;
• criteria for establishing entitlement to claim against the Pool;
• methods of evaluating loss resulting from sea level rise;
• limitations on the amount of compensation payable by the Pool.

III The parties accordingly agree as follows:

1 The financial burden of loss and damage suffered by the most vulnerable small island and low-lying developing countries (Group 1 countries) as a result of sea level rise shall be distributed in an equitable manner amongst the industrialized developed countries (Group 2 countries) by means of an Insurance Pool.

2 The Insurance Pool shall be funded by contributions levied on Group 2 countries.

3 The administrating authority ('the Authority') for the scheme shall be a body controlled on an equitable basis by the Group 1 and Group 2 countries within the framework of the Conference of Parties.

4 The contributions referred to in paragraph 2 shall be calculated according to a formula modelled on the 1963 Brussels Supplementary Convention on Third Party Liability in the field of Nuclear Energy, as follows:

(a) As to 50%, on the basis of the ratio between the gross national product at current prices of each Group 2 country and the total of the gross national product of all Group 2 countries in the year prior to the year in which the contribution was levied ('the contribution year');

(b) As to 50%, on the basis of the ratio between the total emissions of CO₂ of each Group 2 country and the total CO₂ emissions of all Group 2 countries in the year prior to the contribution year.

5 Ten years from the date on which the Convention enters into force the Group 2 countries shall contribute to the Insurance Pool an agreed per centage of the total gross national product of all Group 2 countries in the year prior to the contribution year, apportioned as in paragraph 4, provided that over the 10year period the rate of global mean sea level rise will have reached an agreed figure. If the rate of global mean sea level rise has not reached the agreed figure by the end of the 10-year period, a review shall thereafter be carried out at five-yearly intervals and the obligation of the Group 2 countries to contribute to the Insurance Pool will not arise until the year following the review in which it is established to the satisfaction of the Authority that the rate of global mean sea level rise has reached the agreed figure or that absolute global mean sea level rise has reached an agreed figure.

6 The insurance fund so constituted shall be invested by the Authority in interest-bearing securities as determined by the Conference of Parties.

7 No right to claim against the Pool in respect of loss or damage in any area of a Group 1 country shall arise until:

(a) It shall have been established to the satisfaction of the Authority that the rate of global mean sea level rise and the absolute level of the global mean sea level rise has reached agreed figures;

(b) It shall have been established to the satisfaction of the Authority that the relative mean sea level rise for any insured area in a Group 1 country has reached an agreed level above base levels determined for each area insured (such relative mean level figures having been determined within 10 years of the Convention coming into force);

(c) One year shall have elapsed from the date upon which the figures referred to in sub-paragraph (a) shall have been established as having been reached (that date plus one year teeing 'tine inception date').

8 In the first instance those areas of Group 1 countries which would be directly affected by sea level rise to a level of an agreed number of centimetres above the base levels referred to in paragraph 7(b) shall be valued for insurance. Marketed assets shall be valued on the basis of gross domestic product for the insured area in question. Non-marketed interests shall be valued on the basis of formulae to be agreed.

9 The insured values covered shall be negotiated between the Authority and the Government of each Group 1 country in accordance with valuation principles to be agreed. The same 'policy conditions' shall be applicable to all Group 1 countries.

10 All assets and interests intended to be insured under the scheme shall be listed by Group 1 countries for registration with the Authority. Records of assets and interests registered for insurance shall be kept up to date. Valuations of assets and interests registered for insurance shall be carried out in accordance with the agreed formulae and shall be assessed as soon as possible after the setting-up of the Authority and in any event within 10 years of the Convention coming into force. Revaluations shall be carried out periodically as appropriate.

11 The first period of insurance shall commence on the inception date as defined in paragraph 7(c) and shall cover an agreed period following the inception date. Loss or damage occurring within the first and each following period of insurance, if accepted as a valid claim by the Authority, shall be paid out of the Insurance Pool as accumulated at the closing date of the period of insurance.

12 If the funds in the Pool are insufficient to meet all valid claims, the claims shall be paid out on an equitable basis. If, after payment out of all valid claims in full, any surplus shall remain in the Pool, the surplus shall be carried over to the credit of the following insurance period.

13 Prior to the closing date of the first period of insurance and of each subsequent period, the Conference of the Parties shall, after consultation with the Authority:

(a) fix the length of the next period of insurance;

(b) estimate the probable extent of claims on the Pool during the next insurance period;

(c) determine the level of contributions to be levied on Group 2 countries sufficient to meet the estimated claims after taking account of any surplus carried forward from the preceding period.

14 Claims against the Insurance Pool in respect of insured assets and interests shall be dealt with by the Authority. The Authority shall investigate the cause of any claimed loss, prepare estimates, determine whether the claim comes within the terms of the insurance, evaluate the extent of loss and assess the amount of the claim recoverable by reference to the insured value of the asset or interest and any applicable limits.

15 All assets in insured areas of Group 1 countries, whether commercially insured or not, shall in the first instance be valued for insurance, but no claims shall be accepted by the Pool in respect of property which at the time of loss or damage occurs is insured commercially, whether by a private insurance company or otherwise.

16 In assessing claims against the Pool, the Authority shall determine whether the loss or damage claimed could have been avoided or mitigated by measures which might reasonably have been taken at an earlier stage. In determining whether measures could or could not reasonably have been taken at an earlier stage, account shall be taken, amongst other things, of the availability of funds, both domestic and international, which would have enabled mitigating or preventative measures to have been taken, and the availability of commercial insurance on reasonable terms.

17 If differences of opinion arise between the Authority and the participating countries, every effort shall be made to negotiate a resolution, but if this is not achievable disputes shall be submitted to an [the] arbitration tribunal under a special arbitration scheme [the Convention].