16.5.4.3 Risk-sharing and insurance

Insurance is another way of reducing vulnerability and is increasingly being discussed in the context of small islands and climate change. However, there are several constraints to transferring or sharing risk in small islands. These include the limited size of the risk pool, and the lack of availability of financial instruments and services for risk management. For instance, in 2004, Cyclone Heta devastated the tiny island of Niue in the South-West Pacific, where no insurance is available against weather extremes, leaving the island almost entirely reliant on overseas aid for reconstruction efforts (Hamilton, 2004). Moreover, the relative costs of natural disasters tend to be far higher in developing countries than in advanced economies. Rasmussen (2004) shows that autonomous small islands are especially vulnerable, with natural disasters in the countries of the Eastern Caribbean shown to have had a discernible macroeconomic impact, including large effects on fiscal and external balances, pointing to an important role for precautionary measures.

Thus, in many small island countries, the implementation of specific instruments and services for risk-sharing may be required. Perhaps recent initiatives on financial risk transfer mechanisms through traditional insurance structures and new financial instruments, such as catastrophe bonds, weather derivatives, micro-insurance, and a regional pooling arrangement for small island states, might provide them with the flexibility for this form of adaptation (Auffret, 2003; Hamilton, 2004; Swiss Re, 2004). However, as Epstein and Mills (2005) point out, the economic costs of adapting to climate-related risks are spread among a range of stakeholders including governments, insurers, business, non-profit entities and individuals. They also note that sustainable development can contribute to managing and maintaining the insurability of climate change risk, though development projects can be stranded where financing is contingent on insurance, particularly with respect to coastlines and shorelines vulnerable to sea-level rise (Epstein and Mills, 2005).

Climate change adaptation projects can also founder in other ways, either at the implementation stage or when projects that rely wholly on external personnel or financing are completed. For this reason, Westmacott (2002) believes that integrated coastal management in the Pacific should incorporate conflict management that pays particular attention to, for example, the over-extraction or destruction of resources.