Researching risk-pooling initiatives in the face of climate change in South Africa

Floods are a common and damaging climate-related hazard in South Africa. South Africa’s Disaster Risk Financing strategy is primarily focused on a form of self-insurance. Climate change will test the resilience of this strategy. The use of risk-transfer tools, such as risk-pooling, is an option to increase the financial capacity of provincial governments if losses become exorbitant. Risk pooling has the potential to extend coverage to those individuals who are not covered by commercial insurance, and thereby acts as a safety net. Funded by Canada’s International Development Research Centre (IDRC), the Municipal Risk Pooling project is examining the feasibility of developing subnational risk pools as a mechanism for managing climate risk, with the aim of generating guidance for others. A risk-pooling facility based at the municipal level would allow South African entities to accrue all benefits from premiums paid, with governance and decision-making power retained within South Africa. Under this model, local municipalities pay premiums towards the risk pool (either from their own budget or supported by donors), determined by the type of coverage required (e.g., 1-in-5-year event) and the risk profile of the municipality. Participating in risk pools could allow local governments to access insurance on better terms than if they applied as an individual entity. The risk pool would grow the capital reserves over time through investments that yield returns, while also reducing exposure of the pool by passing on risks to reinsurance and capital markets.

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