11.2.6.4. Financial Aspects
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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