Most climate-vulnerable nations at risk of losing more than 100% of GDP in insurable disasters

A recent study conducted by the University of Cambridge Institute for Sustainability Leadership (CISL) in collaboration with Howden, a global insurance group, has highlighted the potential for total GDP loss in some of the world's smallest and most vulnerable nations due to extreme climate events. These risks are particularly pronounced in Small Island Developing States (SIDS) and similar susceptible countries, underscoring the urgent need for effective financial solutions to mitigate these impacts. The study underscores the importance of implementing risk-sharing systems to provide financial security to countries at high risk of climate-related disasters.

By focusing on the economic viability of such systems, the report aims to reduce the financial burden on vulnerable nations and ensure their resilience in the face of adverse climate events. According to the report, the proposed model for implementing loss and damage (L&D) mechanisms suggests that insurance and capital markets can play a significant role in minimizing the financial risks faced by vulnerable countries, potentially limiting losses to 10% of GDP. Drawing insights from leaders in developed economies and the Global South, the research outlines a strategic plan for L&D implementation across 100 climate-vulnerable, less developed countries.

The report recommends leveraging donor funds to access substantial resources from insurance and capital markets, providing immediate and sustained financial protection until 2050. As preparations for COP28 in Dubai gain momentum, the report titled "Risk sharing for Loss and Damage: scaling up protection for the Global South" offers a roadmap for L&D implementation. The discussions at COP28 are expected to focus on utilizing L&D funds irrespective of the final negotiation outcomes.

The study also quantifies the current losses suffered by small, climate-vulnerable countries in regions such as the Pacific, Caribbean, and Indian Ocean, projecting losses ranging from 50% to over 100% of annual GDP due to severe weather events. With an anticipated annual increase in losses of 0.5%, these countries could face losses of 10-15% of GDP by 2050 solely due to climate change.

Despite the escalating risks, the report suggests that these economies can still be insured under the proposed plan. With an estimated $1 billion in annual premiums supported by donors, the 30 smallest and most climate-vulnerable countries globally could be protected from losing over 10% of their GDP due to climate shocks, utilizing "Umbrella Stop-Loss Protection." The analysis indicates that this financial protection can be sustained until 2050, providing these countries with the necessary financial stability for long-term planning, attracting investments, and making informed decisions on resilient development and climate adaptation.

Risk-sharing is deemed a crucial element of the L&D solution for all recipient countries. With an annual pure premium of $10 million per country supported by donors, approximately $25 billion in guaranteed financial protection could be extended to 100 countries, ensuring substantial support for their most critical needs. Rowan Douglas CBE, the CEO of Howden's climate, risk, and resilience division, emphasized the significance of risk-sharing systems in offering structural financial security to vulnerable countries.

By leveraging existing expertise, institutions, and partnerships, he believes that essential protection can be swiftly established to safeguard these nations. The groundbreaking research conducted by CISL provides world leaders with an actionable plan based on open science, rigorous analysis, shared alignment, and collective purpose.