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The insurance scheme proposed by AOSIS

It was in the light of these conclusions that a proposal for an insurance scheme was put forward by the members of the Alliance of Small Island States (AOSIS) in the negotiations for a Climate Change Convention. The proposal was outlined in an Insurance Annex which was introduced into the draft text in the course of the negotiations and remained in the draft until the last meeting of the International Negotiating Committee for a Framework Convention on Climate Change in New York in May 1992. It was not directly included in the Climate Change Convention, but was reflected in Articles 3 and 4 (see Chapter 1). The text of the proposed insurance scheme is set out in the appendix to this chapter.

The AOSIS Insurance Annex explained that under the insurance scheme, no contributions would become payable by the industrialized countries for at least ten years - the period within which many scientists believe that it may be possible to establish with more certainty the extent to which global warming and sea level rise will increase if greenhouse gas emissions remain unchanged. Further, no claims on the Insurance Pool would arise unless the rate and absolute increase of global mean sea level rise reach certain levels. These figures might be set to reflect a rate of increase beyond which the vulnerable ecosystems of the insured countries could not easily adapt and an absolute rise beyond which significant damage to small islands and low-lying coastal areas would occur.

The Insurance Annex adopted a funding method for the International Insurance Pool that is similar to that of the Nuclear Damage Convention, but recast in the context of global warming and sea level rise by reference to GNP and total CO2 emission levels of the industrialized developed countries. The scheme would therefore offer incentives to the industrialized developed countries to limit their CO2 emissions so as to mitigate the rate and extent of global warming and consequent sea level rise.

The scheme would also offer the possibility of building up a long term fund. After a minimum of ten years, a single contribution of a per centage of GNP (adjusted to reflect respective CO2 emissions) would be made by the industrialized countries. Depending upon the rate and magnitude of global mean sea level rise, no claim on the Pool might arise for several decades, even if 'lousiness as usual' continues. A fund of US$1 billion established in 2003 and invested at a real interest rate of 5 per cent would produce a fund of $4.3 billion in thirty years, and $7 billion in forty years.

What losses would the Insurance Pool cover? The Working Group set up by the Intergovernmental Panel on Climate Change to consider response strategies (Working Group III), and in particular its Coastal Zone Management (CZM) Subgroup, categorized the responses to sea level rise in three groups: retreat; accommodation and protection. To quote the CZM report:

Retreat involves no effort to protect the land from the sea. The coastal zone is abandoned and ecosystems shift landward. This choice can be motivated by excessive economic or environmental impacts of protection. In the extreme case, the entire area may be abandoned.

Accommodation implies that people continue to use the land at risk but do not attempt to prevent the land from being flooded. This option includes erecting emergency flood shelters, elevating buildings on piles, converting agriculture to fish farming, or growing flood- or salt-tolerant crops.

Protection involves hard structures such as sea walls and dikes, as well as soft solutions such as dunes and vegetation, to protect the land from the sea so that existing land uses can continue.

In general, losses resulting from the retreat option would seem to fall naturally within the scope of the Insurance Pool, whilst expenditure incurred in implementing protection responses would fall under other mechanisms to provide resources to developing countries such as the proposed International Climate Fund. More difficult is the question of whether, and to what extent, losses or expenditure resulting from the adoption of implementation responses should be covered by the Insurance Pool, or whether these should be dealt with in another context. I suggest that much of this latter category of expenditure should be covered by the Pool. This approach accords with ordinary commercial insurance principles that expenditure incurred or loss suffered in responding to an immediate threat of the insured peril should be treated as a loss by that peril. Measures taken in advance of any immediate threat, even if taken on reasonable grounds, would not be covered by the Pool, but would be dealt with under other funding mechanisms.

In principle, the main criterion for entitlement to claim should be proved loss attributable to sea level rise. Apart from inundation and flooding, the most widely predicted consequences of climate change so far as small islands and low-lying coastal countries are concerned are increased incidence and intensity of hurricanes, typhoons, severe storm surges and coral bleaching. It may not be possible yet to prove conclusively that such events are attributable to climate change due to global warming. I suggest therefore that such claims against the Pool should include, at minimum, loss or damage resulting from sea level rise, together with expenditure incurred in connection with immediate accommodation responses, and that the criteria for entitlement to claim against the Pool should be set by reference to the rate of global mean sea level rise over a given period as well as to the total rise from a given date.

For many developing countries, traditional insurance definitions of physical and economic loss would not reflect the impact of sea level rise. The total inundation of a small island with a minimal economic life of its own would result in the inhabitants' loss of their homeland (quite apart from the costs of resettlement). It might also involve loss of development potential; and even loss of the potential economic benefit of its surrounding 200 mile Exclusive Economic Zone (which is defined with reference to terrestrial landmarks). Losses suffered by small island and low-lying coastal countries should be assessed therefore by reference to 'total economic value'- that is, values arrived at not only by reference to actual use value, but also to option and existence values.

The design of the Pool took into consideration the necessity for setting an overall limit to its liability and to structure an equitable system of distribution such that its resources would not be completely absorbed by a single massive loss suffered by one large country. Moreover, the question was also considered as to whether losses suffered which might otherwise be claimable against the Pool could have been mitigated by measures which reasonably could have been taken by the claimant at an earlier stage.

Loss or damage to commercially insured property would not be recoverable under the scheme. I do not expect that this exclusion would discourage insured countries from arranging commercial insurance where available at reasonable rates for two reasons:

1 claims would not be recoverable in full where the totality of claims against the Pool in any one insurance period exceeded the funds in the pool;

2 in assessing claims, the authority administering the Pool would take into account whether steps could have been taken earlier to avoid or mitigate the loss, including taking out commercial insurance if it could have been obtained at reasonable premiums.

I consider that these factors would encourage also the insured countries to take preventative or mitigating measures where possible, even where no commercial insurance was available.


The Climate Change Convention

As I noted above, the Insurance Annex proposed by AOSIS remained in the draft Convention text until the last negotiating meeting before it was signed in Rio. At that time, all annexes dealing with matters of substance were removed on the grounds that insufficient time remained to reach agreement on matters of detail before Rio; and the view of some countries (although not the AOSIS countries) that the Convention should not in any event be concerned with detailed mechanisms such as the Insurance Pool.

Nonetheless, the Climate Change Convention signed at Rio did refer to insurance. When it comes into force, the parties are bound by Article 4.8 to give 'furl consideration to what actions are necessary' in regard to insurance to meet the specific needs and concerns of the most vulnerable developing countries. Small island and low-lying coastal states head the list of vulnerable countries. Also, under Article 4.4, the developed country parties are obliged to assist the vulnerable developing country parties to meet the costs of implementing adaptation to those adverse effects. It is precisely to these adaptation costs that the AOSIS insurance proposal is directed.

The AOSIS countries therefore intend to develop the outline insurance proposal into a fully researched, viable insurance scheme and to put it before the parties to the Convention when protocols related to financial issues are negotiated.


Notes and references

1 The IPCC First Assessment Report, August 1990; see also R Warrick and A Rahman, 'Future Sea Level Rise, Environmental and Socio-Political Considerations,' in I Mintzer (ed), Confronting Climate Change, Risks, Implications, and Responses, Cambridge University Press, New York, 1992, pp 97-112

2 Report of IPCC Working Group II, Policymakers' Summary, June 1990

3 IPCC Working Group I, Scientific Assessment, Climate Change 1992, The Supplementary Report to the IPCC Scientific Assessment, Cambridge University Press, 1992, pp 5-19

4 IPCC First Assessment Report, Overview, August 1990, p 8

5 'Strategies for Adaptation to Sea Level Rise', Report of Coastal Zone Management Subgroup of IPCC Working Group II, June 1990, p 5

6 Munchener Ruckversicherungs-Gesellschaft,'Windstorm', Munich, 1990, p 111

7 ibid. p 4

8 Prudential Insurance v. IRC [1904] 2 KB 658 at p 613; see also Soya GmbH Kommanditgesellschaft v. White [1980] 1 Lloyd's Rep. 491,[1982] I Lloyd's Rep. 136, [1983] 1 Lloyd's Rep. 122

9 Munchener Ruckversicherungs-Gesellschaft, 'Flood Inundation', Munich, 1973, p 7 10 Report of IPCC Working Group I, Policymakers' Summary, p 23

11 J Hindle 'Warming Signals', The Review, March 1989, p 35

12 Munchener Ruckversicherungs-Gesellschaft, 'Windstorm', Munich, 1990 p 4 13 J Hindle, op. cit. (note 11)

14 G Dimmock, 'The Reinsurers' View', in 'The Greenhouse Effect - Implications for Insurers', Insurance and Reinsurance Research Group Limited, February 1989, p 119 and J Hindle, op. cit. citing C T Suthons, 'Frequency of Occurrence of Abnormally High Sea Levels on the East and South Coasts of England, 1963' 15 Munchener Ruckversicherungs-Gesellschaft, 'Windstorm' and 'Flood Inundation', op. cit.; J Hindle and G Dimmock, op. cit.; F Nierhaus and G Berz 'Natural Catastrophes - Elements of Risk', The Review, December 1989, p 17; A F Dlugolecki, 'Natural Catastrophes arising from the Greenhouse Effect', Journal of the Isurance Institute of London, 1990, vol. 78, p 49; S Hitchcock, 'Changing Weather Patterns and their Effect on Reinsurers', Paper to Insurance Institute of London, March 1989

16 Ibid.
17 Munchener Ruckversicherungs-Gesellschaft, 'Windstorm', op. cit. (note 6) p 11

18 Following disastrous floods in Queen Island, New South Wales and Victoria in 1990, the President of the Insurance Council of Australia was reported as stating that few householders in flood-prone areas could obtain insurance cover for flood damage and that the Australian Government should 're-think the question of catastrophe reinsurance'. The National Insurance Brokers' Association of Australia was also reported as having called upon the Federal Government to provide catastrophe reinsurance above whatever level is freely available in the private insurance market: The Re Report, London Issue 9019,17 September 1990

19 Mans Jacobsson, Director, International Oil Pollution Compensation Fund, 'The International Conventions on Liability and Compensation for Oil Pollution Damage' in Oil Pollution Claims and Liability, Legal Studies and Services Limited, London, November 1989; for a summary of the IOPC, see M Jacobson, 'The International Convention on Compensation for Oil Pollution Damage,' Siren, (UN Environment Programme, Nairobi), no 42, September 1989, pp 20-24

20 Ibid. p 8

21 Article 1.6 of the 1984 Protocol to the Civil Liability Convention
22 P Sands, Chernobyl: Law and Communication, Grotius Publications, Cambridge 1988, p 51
23 Ibid. where the text of the Convention is set out at p 53
24 Ibid. where the text of the Convention is set out at p 68
25 Ibid. p 96; the text of the Convention is set out at p 97

26 Ministerial Declaration at the Second World Climate Conference, Geneva, November 1990, paragraphs 26 and 27

Appendix: Scheme proposed by AOSIS for inclusion in the Climate Change Convention§

I The Parties recognise that:

1 There should be established, as an integral part of the Framework Convention on Climate Change, an International Climate Fund to finance measures to counter the adverse consequences of climate change, and a separate International Insurance Pool to provide financial insurance against the consequences of sea level rise.

2 Revenue for the Insurance Pool should be drawn from mandatory sources, in particular, developed country assessments.

3 The financial resources of the Insurance Pool should be new, additional and adequate.

4 The Insurance Pool should be under the control and direction of the Conference of Parties.

5 The resources of the Insurance Pool should be used to compensate the most vulnerable small island and low-lying coastal developing countries for loss and damage arising from sea level rise.

II. The Parties further recognise that the formulation of an Insurance Pool scheme involves consideration of the following main questions:

• methods of funding an international insurance pool;
• classification of the types of loss to be covered by the Insurance Pool;
• criteria for establishing entitlement to claim against the Pool;
• methods of evaluating loss resulting from sea level rise;
• limitations on the amount of compensation payable by the Pool.

III The parties accordingly agree as follows:

1 The financial burden of loss and damage suffered by the most vulnerable small island and low-lying developing countries (Group 1 countries) as a result of sea level rise shall be distributed in an equitable manner amongst the industrialized developed countries (Group 2 countries) by means of an Insurance Pool.

2 The Insurance Pool shall be funded by contributions levied on Group 2 countries.

3 The administrating authority ('the Authority') for the scheme shall be a body controlled on an equitable basis by the Group 1 and Group 2 countries within the framework of the Conference of Parties.

4 The contributions referred to in paragraph 2 shall be calculated according to a formula modelled on the 1963 Brussels Supplementary Convention on Third Party Liability in the field of Nuclear Energy, as follows:

(a) As to 50%, on the basis of the ratio between the gross national product at current prices of each Group 2 country and the total of the gross national product of all Group 2 countries in the year prior to the year in which the contribution was levied ('the contribution year');

(b) As to 50%, on the basis of the ratio between the total emissions of CO2 of each Group 2 country and the total CO2 emissions of all Group 2 countries in the year prior to the contribution year.

5 Ten years from the date on which the Convention enters into force the Group 2 countries shall contribute to the Insurance Pool an agreed per centage of the total gross national product of all Group 2 countries in the year prior to the contribution year, apportioned as in paragraph 4, provided that over the 10year period the rate of global mean sea level rise will have reached an agreed figure. If the rate of global mean sea level rise has not reached the agreed figure by the end of the 10-year period, a review shall thereafter be carried out at five-yearly intervals and the obligation of the Group 2 countries to contribute to the Insurance Pool will not arise until the year following the review in which it is established to the satisfaction of the Authority that the rate of global mean sea level rise has reached the agreed figure or that absolute global mean sea level rise has reached an agreed figure.

6 The insurance fund so constituted shall be invested by the Authority in interest-bearing securities as determined by the Conference of Parties.

7 No right to claim against the Pool in respect of loss or damage in any area of a Group 1 country shall arise until:

(a) It shall have been established to the satisfaction of the Authority that the rate of global mean sea level rise and the absolute level of the global mean sea level rise has reached agreed figures;

(b) It shall have been established to the satisfaction of the Authority that the relative mean sea level rise for any insured area in a Group 1 country has reached an agreed level above base levels determined for each area insured (such relative mean level figures having been determined within 10 years of the Convention coming into force);

(c) One year shall have elapsed from the date upon which the figures referred to in sub-paragraph (a) shall have been established as having been reached (that date plus one year teeing 'tine inception date').

8 In the first instance those areas of Group 1 countries which would be directly affected by sea level rise to a level of an agreed number of centimetres above the base levels referred to in paragraph 7(b) shall be valued for insurance. Marketed assets shall be valued on the basis of gross domestic product for the insured area in question. Non-marketed interests shall be valued on the basis of formulae to be agreed.

9 The insured values covered shall be negotiated between the Authority and the Government of each Group 1 country in accordance with valuation principles to be agreed. The same 'policy conditions' shall be applicable to all Group 1 countries.

10 All assets and interests intended to be insured under the scheme shall be listed by Group 1 countries for registration with the Authority. Records of assets and interests registered for insurance shall be kept up to date. Valuations of assets and interests registered for insurance shall be carried out in accordance with the agreed formulae and shall be assessed as soon as possible after the setting-up of the Authority and in any event within 10 years of the Convention coming into force. Revaluations shall be carried out periodically as appropriate.

11 The first period of insurance shall commence on the inception date as defined in paragraph 7(c) and shall cover an agreed period following the inception date. Loss or damage occurring within the first and each following period of insurance, if accepted as a valid claim by the Authority, shall be paid out of the Insurance Pool as accumulated at the closing date of the period of insurance.

12 If the funds in the Pool are insufficient to meet all valid claims, the claims shall be paid out on an equitable basis. If, after payment out of all valid claims in full, any surplus shall remain in the Pool, the surplus shall be carried over to the credit of the following insurance period.

13 Prior to the closing date of the first period of insurance and of each subsequent period, the Conference of the Parties shall, after consultation with the Authority:

(a) fix the length of the next period of insurance;

(b) estimate the probable extent of claims on the Pool during the next insurance period;

(c) determine the level of contributions to be levied on Group 2 countries sufficient to meet the estimated claims after taking account of any surplus carried forward from the preceding period.

14 Claims against the Insurance Pool in respect of insured assets and interests shall be dealt with by the Authority. The Authority shall investigate the cause of any claimed loss, prepare estimates, determine whether the claim comes within the terms of the insurance, evaluate the extent of loss and assess the amount of the claim recoverable by reference to the insured value of the asset or interest and any applicable limits.

15 All assets in insured areas of Group 1 countries, whether commercially insured or not, shall in the first instance be valued for insurance, but no claims shall be accepted by the Pool in respect of property which at the time of loss or damage occurs is insured commercially, whether by a private insurance company or otherwise.

16 In assessing claims against the Pool, the Authority shall determine whether the loss or damage claimed could have been avoided or mitigated by measures which might reasonably have been taken at an earlier stage. In determining whether measures could or could not reasonably have been taken at an earlier stage, account shall be taken, amongst other things, of the availability of funds, both domestic and international, which would have enabled mitigating or preventative measures to have been taken, and the availability of commercial insurance on reasonable terms.

17 If differences of opinion arise between the Authority and the participating countries, every effort shall be made to negotiate a resolution, but if this is not achievable disputes shall be submitted to an [the] arbitration tribunal under a special arbitration scheme [the Convention].

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