Page 86 - India Insurance Report 2023- BIMTECH

74 India Insurance Report - Series II

Developing Insurance Markets

for Climate Risk Financing

- Arup Chatterjee
9 Principal Financial Sector Specialist, Finance Sector Office, Asian Development Bank

1. Introduction

Climate change is a defining challenge of our time. And as disasters in Asia and the Pacific become
more frequent and costlier, governments must expand responses beyond rescuing lives, providing relief,
and restoring income-generation opportunities for households and businesses.

This paper explores ways in which developing countries in this region can boost risk resilience
through cost-effective climate change mitigation and adaption strategies and building structural resilience
to climate risks. With support for resilient infrastructure, fiscal buffers and insurance schemes greater
economic diversification to reduce excessive reliance on climate-sensitive sectors, the government can
ease the strain of climate change on public finances and reduce the cost of borrowing associated with
lower credit ratings.

Climate risk manifests in two ways. The first, physical risk, can cause enormous losses to businesses
and economies by damaging properties and disrupting supply chains, exacerbated by the lack of adaptive
capacity such as climate risk mitigation infrastructure.

In the second, risk arises from the overall shift through changes in policy, technology, and market
sentiment in the form of rising costs, declining incomes, and stranded assets due to technological
breakthroughs and transition requirements to a low-carbon economy. Depletion of natural capital and
biodiversity loss, a decline in ecosystem services, and overall environmental degradation can hit economies
through multiple channels and pose sovereign risk. Loss of natural capital lowers crop yields, reduces
fish catches, hurts corporate supply chains, and exacerbates flooding, among other natural calamities.

All these risks may threaten different economic sectors and alter macroeconomic conditions, creating
systemic risks. This is because crossing specific environmental tipping points could gradually or abruptly
cause irreversible impacts and lead to catastrophic outcomes for the climate and economy, entrenching
existing inequities. In other words, it is a significant source of risk for sovereigns through increasing
contingent liabilities and their impact on the financial system and the real economy. One can observe
the immediate material impact on public finances through the increased cost of capital of climate-vulnerable
countries, which can threaten debt sustainability. Governments must, therefore, climate-proof their
public finances to avoid an ever-worsening spiral of climate vulnerability and unsustainable debt burdens.