INTRODUCTION

The impacts of climate change and the increasing loss and damage resulting from weather-related extreme events continue to pose critical challenges to governments across the world.

At sovereign level and from a risk governance perspective, dealing with climate change not only requires a proper scientific understanding and an accurate knowledge of the complex phenomena that are occurring, but it also requires the careful design and implementation of a sophisticated financial management strategy to cope with the potentially overwhelming damaging effects of changing climate patterns.

The economic and financial dimensions of climate-related risks are indeed crucial, as the financial capacity to absorb and recover from losses is now recognised as a key component of disaster resilience and a pre-condition for development and growth.

In this field, the peculiar features of the risk do not allow for a simple and straightforward application of standard risk-transfer and risk-financing tools, such as traditional insurance, and require new and innovative approaches, especially for the most vulnerable economies.

With a view to addressing these issues, some countries – with the support of international aid – have decided to join forces to develop risk-sharing platforms that allow for more effective access to global risk transfer markets, taking advantage of the positive effects of risk pooling.

Risk pooling means the aggregation of individual risks to manage the consequences of independent risks. Risk pooling is based on the law of large numbers. In insurance terms, the law of large numbers demonstrates that pooling large numbers of roughly homogenous, independent exposure units can yield a mean average consistent with actual outcomes with a smaller standard deviation. Thus, pooling risks allows an accurate prediction of future losses and helps determine insurance premium rates.

This chapter presents and discusses from a comparative viewpoint and from a legal and public policy perspective three multi-country disaster risk transfer and financing schemes, namely:

• – the African Risk Capacity (ARC);

• – the Caribbean Catastrophe Risk Insurance Facility (CCRIF); and

• – the Pacific Catastrophe Risk Insurance Company (PCRIC).

The multi-country schemes presented in this chapter use parametric risk transfer tools. These instruments make payments based not on an assessment of the individual loss, but rather on measures of a parametric index that is assumed to proxy actual losses.