As scientists have warned humanity for years, we are witnessing an increase in the frequency of extreme climate events and natural disasters caused by climate change. Moreover, the harm left behind by these disasters is increasing exponentially day by day, leaving irreparable damage to societies and economies.

As a result of these events, small island states with inadequate infrastructure and financial resources, and developing countries, especially the least developed ones, suffer the most. In addition to these countries where climate transformation is a matter of life and death, the recent disasters in developed countries, such as extreme heat waves, fires, and floods, draw attention to their extremely high financial dimensions. For example, the number of forest fires in the European Union has been almost four times the 15-year average since the beginning of 2022, according to the latest data. As a result of these fires, thousands of hectares of land were lost in Spain, Italy, Portugal, Greece, France and Germany.

As a result of climate-related disasters, in addition to economically calculable losses, losses that cannot be measured financially also occur. This issue, which is described as loss and damage, is dealt with in international climate negotiations carried out under the United Nations Framework Convention on Climate Change (UNFCCC) since it has a devastating nature that concerns all countries. Despite all the demands of developing countries during the negotiations, due to the reservations of the developed countries, the issue has not been discussed in terms of financing and is still ongoing.

Therefore, in this current conjuncture, where countries are alone with their insurance systems and capacities to compensate for the losses they face, it will be an eye-opener in terms of understanding these discussions to reveal the loss and loss theme, which is expected to be discussed frequently in the coming period, and the financing dimension of the issue and the climate-related risks for the insurance sector.

Loss and damage

In addition to the economic damage caused by climate-induced extreme weather disasters to infrastructure, there are also crucial harms that cannot be calculated economically, such as the loss of life, deterioration of health, restricted mobility due to damage to transportation means and the cultural loss as a result of damage to natural and historical assets, etc.

There is not yet a common definition accepted for the expression of loss and damage on the international platform. On the other hand, it seems possible to talk about a general acceptance that the loss term refers to the lost and irreparable elements such as human life, living species, and cultural values, while damage means deterioration but repairable assets such as buildings, roads, and dams. Especially if the damages caused by disasters cannot be covered despite the climate change adaptation policies, losses and damages occur. Even if it is possible to avoid situations where loss and damage occur, the financial costs of taking the necessary measures and reducing the risks cannot be met with current national and international financing opportunities. The effects and frequency of climate change-induced disasters increase due to the inability to make reductions at the required level on a global scale, and countries have economic, social and technological barriers. Serious damages occur due to many reasons, such as their instability against external shocks.

Therefore, it is critical for all countries to act collectively and show a common will to minimize and compensate for the losses and damages within the scope of both mitigation, adaptation and financing opportunities with climate change.

The theme of loss and damage in the margins of U.N. climate negotiations was first included in the Bali Action Plan, which was put forward as a result of the UNFCCC 13th Conference of the Parties (COP13) held in 2007, and in this text, it is particularly vulnerable to the negative effects of climate change. Emphasis has been placed on disaster reduction strategies and tools within the framework of adaptation actions to address climate change-related losses and damages in developing countries.

In COP19, held in Warsaw, Poland, in November 2013, the Warsaw International Mechanism for Loss and Damage was established. The main purpose of this mechanism is to prevent natural disasters such as hurricanes and heat waves and to address the loss and damage associated with extreme weather events and desertification. This mechanism is aimed at sharing information about risk management within the framework of loss and damage, strengthening coordination among relevant stakeholders and increasing actions and support for loss and damage, including finance, technology, and capacity building.

The Warsaw Mechanism has been criticized by developing countries for focusing on more abstract works, such as increasing inter-country coordination and cooperation, rather than producing support and action for countries in urgent need of assistance. For this reason, developing countries demanded that the mechanism be strengthened at the COP25 held at the end of 2019.

As a result of these meetings, the Santiago Loss and Damage Network, which will carry out work on preventing, minimizing and dealing with loss and damage, was established as an important output of COP25. This network is aimed to advance the work of the loss and damage mechanism by coordinating access to technical assistance and this support for developing countries that are sensitive to the negative effects of climate change.

Since the implementation of the UNFCCC in terms of financing, the issue has been voiced by the fragile developing countries, and developed countries are demanded to provide financial assistance that can help these countries meet their losses and damages. Despite the time that has passed, developing countries do not seem to have achieved any gains, while developed countries prefer to consider loss and damage as a sub-component of adaptation to climate change instead of establishing a separate financial mechanism.

Is insurance alone enough?

As can be seen, due to the attitudes of developed countries, covering the losses and damages caused by climate change-induced disasters and extreme weather events on a global scale within the scope of climate finance facilities is currently largely dependent on the capacities of the countries' public resources and insurance sectors.

According to data released by German reinsurer Munich Re, in the first half of 2022, extreme weather events due to climate change caused a total loss of approximately $65 billion. It is worth noting that while insured losses reach approximately $34 billion, about half of the total losses occurred in uninsured assets. Considering that there are no factors such as drought, forest fires, and water scarcity caused by the extreme heat wave Europe has faced recently, it is possible to expect this picture to be even more frightening by the end of 2022.

As a matter of fact, in the Allianz Risk Barometer published annually as of 2022 by the Allianz company, climate change has risen to sixth place, its highest ever, and risks due to natural disasters are in third place. This picture shows that climate change and natural disasters are being perceived as a bigger risk in the insurance sector all over the world.

Climate-related risks faced by insurance, which is an important pillar of the financial sector, make the traditional insurance approach challenging. The complex nature of climate change's effects can become a grueling process for insurance companies to manage.

According to the data, the global insurance industry reached a value of $5 trillion in 2021, which is close to the entire budget of the United States. The figures make a lot of sense given that in 2020, policyholders of property and accident insurance, which are the most climate-related insurance types that cover residences, vehicles and personal belongings, receive premium payments of $1.6 trillion.

It is safe to say that disasters with great material damage have started to occur more frequently over the years. As shown in a study conducted in the U.S., between 1980 and 2015, an average of five disasters in a year caused damage of $1 billion or more, whereas this number increased to 15 between 2016 and 2018. According to the research of the firm AIR Worldwide, which works on climate models, it was previously calculated that a natural phenomenon such as Hurricane Harvey, one of the costliest hurricanes the U.S. has ever seen, would occur once in 2000 years, but today this figure has decreased to once every 300 years.

Although insurance is considered a tool to finance damage from climate events such as floods, storms, and droughts; it is not suitable for managing damage caused by overtime or gradual changes such as rising sea levels, desertification, habitat loss, and biodiversity loss. For this reason, insurance companies have started to prefer to make annual policies and review their premium payments every year in order to protect themselves against long-term risks. In addition, globally, more than 30% of insurance companies have restricted investment in unsustainable companies, and more than 20% have restricted the coverage of insurance granted to unsustainable companies.

The Financial Stability Board (FSB), an international institution engaged in activities for the global financial system, estimates that global economic losses from weather-related disasters have increased from $214 billion in in the 1980s to $1.62 trillion over the past decade. These losses are covered by the insurance sector but are expected to be reflected to customers through higher premiums over time.

As stated, it is not possible to expect the insurance industry to fully undertake all these losses and damages. For instance, according to a report published by the Australian Climate Council, insurance of vehicles will become unusable in large parts of Australia due to worsening extreme weather events in the near future, approximately 520,000 buildings will be considered high risk due to climate-related conditions, and one in 25 of all residential and commercial buildings in the country will become uninsurable by 2030. While there is an expectation that 80% of the properties that are expected to be uninsurable will be included in this classification due to the risk of river flooding, flash floods and forest fires as other prominent risks.

In such cases, the governments usually come to the aid of the insurance sector, and they can carry out joint work. For example, as a result of the increase in flood risks in the United Kingdom, there has been a significant increase in insurance premiums. It is stated that one-sixth of the residences in the country, where some risks have become uninsurable, are at risk of flooding. Based on this, the government and the insurance industry cooperated in the country, and Flood Re, a reinsurer that provides affordable premiums for 350,000 residences located on the plains facing the risk of flooding, was established by insurance companies. On the other hand, governments offer various incentives to make houses, structures, and lands climate resistant.

While the help of states against climate risks is needed in developed countries, the picture is different in developing countries. In these countries, the debt ratio of the government increases with each major hurricane or other natural disaster and then gradually decreases over time. However, it should not be forgotten that these countries, which have serious problems with their budgets after the global pandemic, have not been able to recover yet, and they have been exposed to many climate-related disasters.

It is worth emphasizing that in the last 30 years, parallel to the increase in the frequency of hurricanes, there has been a serious increase in the debt ratio of these countries.

Being solution ready

One of the most important elements of the Paris Agreement was the increasing climate change adaptation investments funded below expectations, and in this context, allocating investments for adaptation and mitigation as 50%-50%. However, until now, adaptation investments are less preferred by donor countries or multilateral financial institutions, as they are riskier and take longer to return than mitigation investments. Based on this situation, one of the very important decisions in the Glasgow Climate Pact was doubling the adaptation investments.

Despite this positive development, considering the effects of the Russia-Ukraine war on the subject, countries will try to shift their climate finance resources to renewable energy investments, in other words, to investments with a reduction theme to be independent of the Russian energy resources in the coming period. In this context, it is stated that the countries in the harmony theme, which are disadvantaged and funded at relatively low levels, will try to shift their climate finance resources to renewable energy investments. Therefore, it is possible to witness that investments will lose speed.

As mentioned before, every climate change adaptation policy and action we cannot implement today will lead to more serious loss and damage, especially in developing countries. Considering that a mechanism to provide financing within the scope of loss and damage in climate negotiations is not accepted by developed countries, it is possible to foresee as of today that developed countries will limit this issue at the dialogue or cooperation level only in the upcoming period, and avoid that financing shift to this area in the short-term.

Until a common ground is reached on this issue and global steps are taken, losses and damages may endanger the operability of not only the insurance sectors of countries but also all financial sectors due to the unpredictable effects of climate change. Continuing to work within the framework of net zero emission targets for 2053, Türkiye not only maintains its constructive stance in achieving global climate change targets at international platforms but also shows the necessary sensitivity to make the insurance sector resistant to climate risks.

In the Climate Council, the identification of vulnerable sectors against the adverse effects of climate change and potential risks and the creation of a special insurance coverage framework for the relevant risks were discussed. Under the Climate Change Adaptation Commission, decisions were taken to strengthen the agricultural insurance system (TARSİM) against climate change-related disasters, to develop financial instruments to access national and international funds needed for climate change adaptation and to develop insurance schemes in order to manage loss and damage risks.

In addition, the subject has been discussed at the local government level. Mitigation of the adverse impacts of climate change, developing an existing insurance mechanism within the scope of reducing the negative effects of climate change, and ensuring the establishment of a central fund to finance the activities to be carried out by local governments are also included in the recommendations.

It should not be forgotten that climate change is one of our planet's greatest risks. In order to eliminate such a risk, in addition to the sectoral measures to be taken at the national level, all countries should work together and accelerate their environmental policies, especially in terms of adaptation and mitigation. We must act bearing in mind that we have no other planet to go to and leave a world that is resistant to climate risks for future generations.

*Deputy Minister of the Republic of Türkiye’s Ministry of Environment and Urbanization, chief climate change envoy

**Expert at Türkiye’s Ministry of Treasury and Finance