Editing IPCC:AR6/WGII/Chapter-17 (section)

==== 17.2.2.1 From Risk Prevention to Risk Financing and Risk Retention ====

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Portfolios of adaptation options generally include actions to reduce vulnerability and exposure, complemented by risk financing mechanisms that help people avoid the impacts of loss events, particularly very rare ones. There is also explicit or implicit risk retention, where further risk management is not desirable, cost-effective or feasible ( [[#Mechler--2021|Mechler and Deubelli, 2021]] ). Risk financing can include a variety of instruments, with insurance as the most widely known. Formal insurance uptake is lower in developing and emerging economies than in wealthier countries ( [[#Ali--2020|Ali et al., 2020]] ). To overcome some of the barriers to insurance uptake, index-based insurance has been offered for agriculture and livestock in many developing economies, with varying levels of success ( [[#Chantarat--2013|Chantarat et al., 2013]] ; [[#Isakson--2015|Isakson, 2015]] ; [[#Dewi--2018|Dewi et al., 2018]] ). In recent years, regional disaster insurance pools for sovereign states have been established, such as the Caribbean Catastrophe Risk Insurance Facility (CCRIF) ( [[#Iyahen--2018|Iyahen and Syroka, 2018]] ). Insurance can encourage the quantitative evaluation of climate-related risks and adaptation limits, and it can incentivise risk reduction by charging lower premiums for less risky situations ( [[#Schäfer--2019|Schäfer et al., 2019]] ).

While insurance is increasingly accepted as an adaptation option ( [[#Linnerooth-Bayer--2015|Linnerooth-Bayer and Hochrainer-Stigler, 2015]] ), positive outcomes are not guaranteed ( ''high confidence'' ). First, there are concerns as to whether this will shift responsibility to the most vulnerable people to pay premiums ( [[#Surminski--2016|Surminski et al., 2016]] ). There is also high risk for insurance to cause maladaptation ( [[#Müller--2017|Müller et al., 2017]] ); for example, [[#Annan--2015|Annan and Schlenker (2015)]] showed that insured crops were less well adapted to heat stress. To avoid this, people simultaneously invest in insurance and adaptations that reduce vulnerability/exposure ( ''medium confidence'' ) ( [[#Surminski--2016|Surminski et al., 2016]] ; [[#Highfield--2017|Highfield and Brody, 2017]] ; [[#Schäfer--2019|Schäfer et al., 2019]] ; [[#Reguero--2020|Reguero et al., 2020]] ).

The combination of interventions that reduce risk and risk financing for residual risk (often through insurance for sudden-onset events, or social protection for risks including those linked to slow-onset processes) will reduce collective risk to a certain level. For very extreme and potentially catastrophic events, it is often impossible (or financially infeasible) to fully reduce vulnerability and exposure, and people, communities and countries therefore retain risk requiring the ''ex post'' management of unavoided and unavoidable residual impacts in case of events.

Ex-post risk management relies on national assistance, social safety nets ( [[IPCC:Wg2:Chapter:Chapter-7#7.4.2.1|Section 7.4.2.1.3]] ; [[#Béné--2012|Béné et al., 2012]] ; [[#Elmi--2019|Elmi and Minja, 2019]] ) and support from social networks as well as lending from international institutions ( ''high confidence'' ) ( [[#Hochrainer-Stigler--2014|Hochrainer-Stigler et al., 2014]] ). Even in places where normalised losses have stabilised in recent years with investments in adaptation, effective planning to manage losses remains necessary ( [[#Jongman--2018|Jongman, 2018]] ). Resilient recovery can support adaptation goals in periods of losses and damages ( [[#Slavíková--2021|Slavíková et al., 2021]] ).

To coordinate between a suite of applicable risk management interventions, the concept of risk layering has been discussed and used in (financial) risk governance of disaster risk management ( [[#Mechler--2006|Mechler et al., 2006]] ; [[#Cummins--2009|Cummins and Mahul, 2009]] ; [[#Clarke--2011|Clarke and Mahul, 2011]] ) and climate risk management ( [[#Lal--2012|Lal et al., 2012]] ; [[#Mechler--2014|Mechler et al., 2014]] ; [[#Herron--2015|Herron et al., 2015]] ; [[#Schäfer--2016|Schäfer et al., 2016]] ; [[#Mechler--2021|Mechler and Deubelli, 2021]] ). Incremental risk prevention and preparedness as well as risk financing occurs within national systems. Over the years, regional cooperation, such as through the regional sovereign insurance pools in the Caribbean, the Pacific and Africa, but also transboundary risk management elsewhere have become more important ( ''medium confidence'' ) (see [[#Martinez-Diaz--2019|Martinez-Diaz et al., 2019]] ). Also, with risks increasingly experienced as severe and existential ( [[#Boyd--2017|Boyd et al., 2017]] ), global governance and solidarity have been invoked (see [[#Linnerooth-Bayer--2019|Linnerooth-Bayer et al., 2019]] ; [[#Pill--2021|Pill, 2021]] ), largely as part of the policy discourse on Loss and Damage ( [[#Mechler--2019|]] [[#Mechler--2019|Mechler et al., 2019]] ) with further momentum provided by discussions on the global goal of adaptation and recognition of climate risk as transboundary ( [[#Benzie--2019|Benzie and Persson, 2019]] ; Cross-Chapter Box INTERREG in Chapter 16). Transformational risk management has emerged where incremental and ''in situ'' adaptation is not effective in managing risks, such as for managed or strategic retreat for communities facing severe coastal and riverine flooding ( [[#Siders--2019|Siders et al., 2019]] ). Transformation has not been well documented, including as to its governance ( [[#17.2.2.5|Section 17.2.2.5]] ).

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[[File:27b3a1a407fc4af14b45b5fd4a48c932 IPCC_AR6_WGII_Figure_17_004.png]]

'''Figure 17.4 |''' '''A graphical representation of layered risk management.''' Risks can be reduced or managed by risk finance (insurance and other means), but some residual risk remains, particularly for high-impact unavoided and unavoidable risk, which is retained implicitly or explicitly. Where incremental and ''in situ'' adaptation is not effective in managing risks, transformational adaptation supports systemic change. Risk management occurs in national systems, and regional insurance systems have stimulated regional collaboration. Particularly for high impact risks and impacts in specific events, international assistance is required. Policy domains on disaster risk reduction (DRR) and climate change adaptation (CCA) as well as Loss and Damage overlap in their governance of risk management. Figure building on [[#Mechler--2014|Mechler et al. (2014)]] ; [[#Cummins--2009|Cummins and Mahul (2009)]] ; [[#Lal--2012|Lal et al. (2012)]] ; [[#Mechler--2021|Mechler and Deubelli (2021)]] .

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