Enhancing affordability and sustainability of climate risk insurance through smart financing

Enhancing affordability and sustainability of climate risk insurance through smart financing

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Date: 1st November 2021
Author: CDKN Global
Type: Feature

The over 110 members of the InsuResilience Global Partnership are collaborating to scale up affordable and sustainable risk finance and insurance in climate-vulnerable countries, aiming to assist 500 million poor and vulnerable people by 2025. Daniel Stadmueller reports.

This is the seventh story in the Windows on Resilience series produced by CDKN and the Resilience Knowledge Coalition for the COP26 Resilience Hub – a physical and virtual space at COP26 dedicated to sharing best practice and building collaboration, momentum and new opportunities on adaptation and resilience. This story series shares practical and inspiring resilience solutions from communities and countries around the globe. Register for the Resilience Hub here.

Protecting the lives and livelihoods of poor and vulnerable people from the impacts of disasters is more urgent today than ever. Climate-related disasters have increased significantly in frequency and severity, and climate change is expected to further exacerbate losses, especially in developing countries. Planning for early action, relief and recovery before disasters occur, in combination with prearranged financing to carry out these plans, is crucial to assist affected communities faster and more effectively and to lower the overall cost of disasters.

The InsuResilience Global Partnership has set out to accelerate a shift from ex-post financing (humanitarian and disaster reconstruction funds arranged after disasters) to prearranged risk finance (financial tools such as insurance that provide funds reliably and quickly when disasters occur). 

The Partnership was launched at COP23 in 2017 as a joint G20 and V20 initiative with over 110 partners from governments, civil society, international organisations, the private sector and academia. It aims to enable a more timely and reliable disaster response and to strengthen financial protection in developing countries. 

The InsuResilience Vision 2025 aims to scale up climate and disaster risk finance and insurance solutions to 500 million poor and vulnerable people by 2025. But despite the substantial resilience benefits that risk finance and insurance can generate, affordability remains a persistent barrier in vulnerable countries. Limited uptake, in turn, threatens the sustainability of the supply of risk finance and insurance solutions.

In the wake of fiscal pressures exacerbated by the Covid-19 pandemic, supporting countries and people financially with the payment of insurance premiums (i.e., the price of insurance) and providing capital for vehicles that offer insurance are gaining importance. This year, the InsuResilience Global Partnership set out to arrive at a joint understanding on how to maximise the effectiveness of this premium and capital support (PCS). As a result of a collaborative process across InsuResilience members, five principles for SMART PCS were developed. These principles represent a common understanding among InsuResilience members and partners, with details under each principle addressing questions around recipient eligibility, volume, duration, form of premium and capital support, as well as the conditions under which this support should be provided:

  • S: Sustainable Impact For The Most Vulnerable

To enable tangible, lasting change in the lives of those most vulnerable to disasters, premium and capital support should be used to fund insurance mechanisms coupled with a clear development objective. Smart premium and capital support entails a clear dedication to reach the poor and vulnerable, including through supporting real impact in line with the InsuResilience Pro-Poor Principles.

  • M: Value for Money

To maximise poor and vulnerable countries’ and people’s resilience for each dollar of premium or capital support, these initiatives should support needs-based insurance  products that add value, and entail a clear assessment framework that makes improvements in resilience verifiable and comparable. Smart premium or capital support proactively and effectively crowds-in private capital rather than undermining private sector potentials, recognising the key role that effective private insurance markets can play in resilience-building of developing economies. For example, regional risk pools such as the Caribbean Catastrophe Risk Insurance Facility or the African Risk Capacity pool risk across different countries, and then transfer those risks to reinsurers which they cannot retain cost-effectively.

  • A: Accessibility

Premium and capital support should make insurance solutions accessible at a price that is affordable to those who stand to benefit from them, including poor countries and individuals. Smart premium and capital support is needs-based, (climate) risk-adjusted, and aligned with appropriate measures for enabling access, while empowering beneficiaries and promoting client ownership of the solutions employed.

  • R: Resilience-building Incentives 

To build financial, physical and social resilience, only risks that are too costly to further reduce should be absorbed by risk-financing instruments, and only risks stemming from low-frequency and high-severity events should be transferred via insurance. Reducing premiums through premium and capital support should not alter this, but keep incentives to reduce risks in place. Smart premium and capital support does not disguise the true risk cost, but allows price signals to guide risk behaviour. 

  • T: Transparency and Consistency

To empower recipients and maximise synergies, premium and capital support should be provided and used in a manner that promotes transparency and accountability towards recipients and at-risk communities as well as consistency and coordination among support offers and providers (such as multilateral development banks). Smart premium and capital support is used to finance money-out systems that transparently serve a development purpose. For example, the African Risk Capacity links their insurance policies to predefined contingency plans. When a drought occurs, the money disbursed by the insurance can be used to execute the contingency plan and reach affected people as quickly as possible. Reliability of support is needed for premium and capital support to be impactful, and public monitoring and evaluation (M&E) should be part of all premium and capital support initiatives.

More detailed guidance is available within a Policy Note.  These principles offer conceptual guidance for providing, channelling and using premium and capital support by donors, implementers, clients and other recipients. The Partnership’s highest steering body, the High-Level Consultative Group, will be asked to approve these principles as a Partnership-wide framework at its upcoming meeting on October 27. Subject to approval, the SMART principles are intended to inspire a principled, coordinated approach on premium and capital support provision and use among InsuResilience members, and thereby drive a significant scale-up of affordable and sustainable risk finance and insurance in climate-vulnerable countries. 

By ensuring greater affordability and sustainability of prearranged risk-financing solutions, SMART premium and capital support ought to catalyse the urgent global shift from ex-post disaster finance to ex-ante risk financing. The Policy Note further outlines how the principles could be operationalised and applied in programming and designing premium and capital support at the macro- and meso-/micro-levels. To address evidence gaps and areas for further research around premium and capital support, the note proposes a learning plan that outlines specific technical follow-up work to specify suitable methodologies for the various criteria.

Daniel Stadmueller is a Senior Policy Advisor and Team Lead at the Secretariat of the InsuResilience Global Partnership, focused on Policy Advisory, Innovation, and Monitoring and Evaluation.

Find out more on the InsuResilience Global Partnership's COP26 events.

Photo: Flooding in Pakistan, courtesy of Asian Development Bank.

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