Climate Change 2001:
Working Group II: Impacts, Adaptation and Vulnerability
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The financial services sector typically includes banking, insurance, stock exchanges, and brokerages, as well as financial services firms such as investment banks, advisory services, and asset management, among others. Banking crises, currency speculation, and devaluation have become common in recent years in Asia and now are key policy concerns. Climate change could have serious consequences for this sector because many adaptation and mitigation measures such as crop insurance against floods or droughts are mediated or implemented through this sector. The implications and role of risk management techniques such as derivatives, options, and swaps are some of the new developments in financial services to dampen the impact of disasters on national finances.

There is a growing body of literature on the economic impacts of global warming that takes adaptation into account in estimating the imposed costs of climate change, but these studies fall short of specifically estimating the costs and benefits of adaptation. The basis for estimating adaptation costs is the economic opportunity cost of a product or activity. Estimating this cost requires price and other data from market transactions such as sectoral coverage and assumptions about markets, behaviors, and policy instruments in addition to economic growth path as a function of socioeconomic conditions, resource endowment, and government policies. Multiple baseline choices are critical in the estimation and evaluation of the financial costs, based on accurate reporting of financial flows (see also Chapter 8).

Although global gross domestic product (GDP) has increased by a factor of three since 1960, the number of weather-related disasters has increased four-fold, real economic losses sevenfold, and insured losses 12-fold in the same period (see also Chapter 8). These losses have had some notable regional impacts—particularly in developing countries of Asia, where the impacts of climate change are expected to be greatest in terms of loss of life and effects on investment. Individual large events have shown visible short-term impacts on insurance profitability and pricing and public finance. There is only limited penetration of or access to insurance in developing countries. This situation makes them more vulnerable and will impair their ability to adapt. The property/casualty insurance segment and small specialized or undiversified companies have greater sensitivity. Coping mechanisms and adaptation strategies will depend largely on public or international support. Given finite financial resources and international aid, increased climate-related losses would compete with development efforts.

Adaptation to climate change presents complex challenges to the finance sector. Increasing risk could lead to a greater volume of traditional business, as well as development of new risk and financing products (e.g., catastrophe bonds). However, increased variability of loss events would result in greater actuarial uncertainty. The design of an optimal adaptation program in any country would have to be based on comparison of damages avoided with the costs of adaptation. Other factors, particularly in developing countries with incomplete markets, also enter the decisionmaking process—such as the impacts of policies on different social groups in society, particularly those that are vulnerable; employment generation and opportunities; improved air and water quality; and the impacts of policies on broader concerns such as sustainability.

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