Managing Risk: How climate finance can help manage risk in Bosnia and Herzegovina

Source(s): United Nations Development Programme (UNDP)

By Climate Adaptation UNDP 

In 47 developing countries, across four regions, and with the support of 14 partners, National Adaptation Plans (NAPs) are promoting ambitious climate action across the world. These NAPs also help countries meet their commitments under the Paris Agreement, and achieve the Sustainable Development Goals.

A core part of the NAPs is working to integrate climate change adaptation into medium and long-term national planning and financing.

A Tailored Approach 

In the case of Bosnia and Herzegovina (BiH), with its unique decentralised political and administrative structure, implementing national policies can be complex. This means that the NAP BiH project has a strong focus on municipal-level financing and bottom-up programming.

The main goal is improving national co-ordination mechanisms for planning in multiple sectors - enhancing climate action at the national and sub-national levels. At the same time, the project is helping to develop a financing framework at the municipal level, including identifying financing solutions.

In selected municipalities, the project is exploring potential climate finance for future investments and figuring out possibilities for incentivising the private sector to take climate action.

Developing municipal assistance tools for adaptation planning and financing in order to design ‘bankable’ adaptation interventions will help secure financing for climate change adaptation action for medium- to long-term planning.

Readiness Support 

One of the most effective adaptation mechanisms for managing disaster risks is by establishing disaster insurance schemes. With support from UNDP in BiH and financing through the Green Climate Fund (GCF) Readiness and Preparatory Support Programme, this is underway.

Working with multiple partners, various governmental institutions are involved in the NAP process, e.g. the Ministry of Spatial Planning, Civil Engineering, and Ecology of Republika Srpska as the country’s UNFCCC and GCF focal point, the Ministry of Foreign Trade and Economic Relations of BiH as a state-level ministry in charge of co-ordination of climate change adaptation activities throughout the country, and the Federal Ministry of Environment and Tourism.

Managing Disaster 

According to the European Environment Agency, annual flood losses in BiH are expected to increase five-fold by 2050 and up to 17-fold by 2080.

The UNDP BiH NAP project understands that more attention should be paid to educating locals - especially young people - to this reality. It also recognises that we need more action in the field of flood risk insurance and other natural disaster risk mitigation mechanisms.

‘Establishing a flood and other natural disaster insurance system for legal entities, farms, public, and residential buildings can contribute to reducing the risk of floods and other natural disasters. Through project activities, we encourage discussion between key stakeholders in this area to define the risk management assurance model applicable in BiH’, said Raduška Cupać, UNDP Project Manager.

A Risk Pool for Climate Action  

One risk management assurance model is ‘public-private’, wherein a flood insurance group is formed. Members of that group would include insurance companies that have the financial wherewithal to accept flood risks.

Insurance expert Prof Dr Jelena Kočović emphasised that ‘without the introduction of mandatory insurance against catastrophic risks, we cannot cope with adverse consequences. The enormous financial losses from the floods that BiH experienced in 2014 remind us that nothing should be left to chance’.

The 2014 floods in BiH are estimated to have caused damage equivalent to 15% of GDP. The ex-ante flood insurance is a vital financial mechanism that can have significant impact as a climate adaptation tool (e.g. when flood-damaged buildings are rebuilt, the flood insurance group can stipulate the use of climate-resilient materials and processes).

What Does Catastrophic Insurance Look Like in a Changing Climate?

Due to the lack of a comprehensive mechanism for insurance against natural disasters, only 14.9 per cent of the total estimated losses from the 2014 floods were covered. Of these losses, less than one per cent was covered by budgetary reserves, and less than two per cent by insurance; the vast majority of losses were never recovered. In 2014, only six citizens in BiH were covered by flood insurance.

Working with the Federation of Insurance Companies in the Federation of Bosnia and Herzegovina, the project is contributing to discussions regarding catastrophic insurance, and is supporting initiatives to make risk-pooling compulsory to protect property in the face of increasing natural disasters. 

The Minister of Finance and Treasury of BiH, Vjekoslav Bevanda, notes that ‘by providing economic protection against risks and dangers and mobilising savings, they significantly contribute to financial stability and the development of the economic system. Today, at a time when we are witnessing numerous natural disasters, such as the catastrophic floods of 2014, with industrial accidents and increased business risks, the role of insurers is growing daily’.

Intoducing a New Mechanism for Property Insurance

Within the NAP project, an innovative, sustainable and bottom-up mechanism tailored for adaptation investment is under development in four selected municipalities, and includes a set of guidance and tools to potentially scale-up these activities through future adaptation investments outside of the pilot municipalities.

Through NAP and other UNDP initiatives in BiH, support and a better understanding of the importance of insurance in the adaptation context is ensured, enabling better coping with future climate change challenges.

For example, the NAP BiH team introduced a new risk mitigation product to insure property against damage from natural disasters correlated with climate change, including floods, landslides, earthquakes, and extreme weather events. The product includes the introduction of a form of compulsory insurance for individual residential buildings against these four common types of disasters.

‘If insurance against the most common natural disasters would be mandatory for all housing facilities, such as the legal obligation of liability insurance for all vehicles, it would allow the price of housing insurance against natural disasters to be acceptable to all’, said Prof Dr Safet Kozarevic, from the Faculty of Economics at the University of Tuzla.

This insurance product was developed as part of UNDP's climate change adaptation portfolio, in collaboration with the Association of Insurance Companies in the FBiH. Representatives from UNDP, the FBiH Insurance Industry, the Federation of Insurance Companies of the FBiH, and local experts took part in product development. This type of compulsory natural disaster insurance is in line with EU requirements, and is already being implemented in a large number of both developed and developing countries.

Investing in Adaption

By clearly establishing the roles and responsibilities of different stakeholders at the entity, municipal, and cantonal levels, the project is improving climate change adaptation planning. Specifically, the project is enhancing in-country knowledge and technical capacity to appropriately apply policy guidance. The project is also supporting these stakeholder in using existing climate assessments to inform medium- to long-term adaptation budgeting and planning.

This suite of solutions will support science- and evidence-based arguments (and proposed interventions) to inform policymakers at the planning and finance ministries and ensure appropriate attention is given to sustainability and climate change adaptation within BiH’s NAP.

For more information on the NAP BiH project, please visit the project profile here.

For more information on the Vrbas River Basin project, please visit the project profile here.

For more information on UNDP BiH, visit here.

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