Climate Risk Insurance

Climate risk

The earth is nearly 1℃ warmer than it was before the industrial era, and if current trends continue, temperatures could rise by 3-5℃ by 2100. Climate risks include water and food shortages as well as a US$7.9 trillion hit to the global economy by mid-century and a further 100 million people pushed into poverty.

Extreme weather is on the increase. In the first six months of 2019 alone, seven million people were displaced by tropical storms, flooding and droughts. Total losses from climate and weather events in 2017 were US$320 billion, the largest ever recorded. Disaster risk is a combination of hazard, exposure and vulnerability, and since the poor are more exposed to hazards, they therefore face the biggest risks. In the decade to 2018, 91% of storm-related fatalities were in low- and middle-income countries.

Disaster risk management (DRM) requires a proactive, collaborative integrated approach which both reduces disaster risks and promote sustainable development. In Viet Nam for example, following a series of devastating tropical storms, the government, local authorities and World Bank have piloted a ‘Community Based Disaster Risk Management’ project.

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Climate Risk Insurance (CRI)

Rural and coastal communities are often under-insured or uninsured against losses caused by extreme weather, which then drive them even further into debt and poverty. CRI is a key component of DRM as it reduces vulnerability, promotes resilience and pays out cash to rebuild communities and infrastructure. Countries with high insurance cover recover faster from disasters.

At the macro level, CRI can be a sovereign risk transfer mechanism to cover governments and international institutions against uncertain future losses known as contingent liabilities. At the micro level, CRI can be weather-indexed insurance (usually crop or livestock insurance) or disaster insurance for infrastructure and property. Climate and disaster risk insurance (CDRI), also known as natcat insurance, also includes non-climate related disasters such as earthquakes, tsunamis or volcano eruptions.

In the 22 countries surveyed in the 2019 Landscape of Climate and Disaster Risk Insurance in Asia and the Pacific, 90% of the population had no financial protection against climate risks. Most countries still rely on donor aid when disaster strikes, and of the US$140 billion losses in the last decade, only US$20 billion (14.2%) were insured.

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MEFIN encourages governments, insurers and donors to promote and invest in CRI. Through our Secretariat at RFPI Asia we organise the annual Climate Risk Insurance Joint Technical Working Groups meeting and host a series of webinars and events. We promote regional and global exchanges, training and dialogue between insurance supervisors, we offer tailored support to supervisors in individual countries (for example, through pilots to develop and implement regulatory reforms) and we facilitate cooperation between the public and private sectors.

MEFIN also set up the ‘VIP Engine’ (Vietnam, Indonesia, Philippines) to serve as a risk and financial modelling platform, centralising available hazard-exposure-vulnerability data, processing it for risk analysis and providing catastrophe loss estimates. Viet Nam, Indonesia and Philippines are ranked 6th, 20th and 50th in the countries most at risk from climate change, yet insurance penetration is less than 2% across all three countries.

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CRI and the SDGs

CRI can help achieve the Sustainable Development Goals (SDGs). For example, crop and livestock insurance is key for agricultural development, which reduces poverty (SDG1) and stimulates economic growth (SDG8). Yet globally, more than 500 million farmers have no access to insurance. Inclusive insurance can also help achieve the targets for hunger (SDG2), health and wellbeing (SDG3), gender equality (SDG5), and climate action (SDG13).

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Gender-sensitive CRI

Women and girls are more affected by climate change, but gender-sensitive CRI can help them cope with climate risks. However, gender barriers can be considerable in some emerging economies - for example, women may not be able to legally access insurance, may be ineligible for insurance schemes, or may be excluded from financial decisions.

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CRI innovations

Technological and digital innovations in microinsurance mean more vulnerable people can access CRI. Known as InsureTech, they include index insurance (sometimes known as parametric insurance) which pays out in the case of crop or livestock losses; insurance products on smartphones; tele-medicine and weather forecasting.

Use of blockchain, satellite data and smart contracts enable automatic triggering of agricultural index insurance, and revenue index insurance protects farmers against shocks in prices in volatile years - although regulatory barriers sometimes hamper the roll-out of InsurTech products and services.

Public-private cooperation

CRI public-private partnerships (PPPs) can play a crucial role advancing the development agenda, bringing together insurers looking for new markets, with governments and donors looking for new investors. Insurers provide capital and develop targeted products, while governments support CRI schemes through subsidies, sponsorship or regulation. Donors and NGOs can test new schemes, raise awareness and build trust.

MEFIN works with the main PPP players including the InsurResilience Global Partnership, Microinsurance Network, CGAP, Microinsurance Catastrophe Risk Organisation (MiCRO), Insurance Development Forum, UNEP-PSI, Cenfri, Access to Insurance Initiative (A2ii), International Association of Insurance Supervisors (IAIS) and the ILO’s Impact Insurance Facility.

CRI and nature-based solutions to climate change

Ecosystems and the people who depend on them also face climate risks. Nature-based solutions, or ecosystem-based adaptation (EbA) can help communities adapt - for example by restoring coastal mangroves to reduce erosion, flooding and storm surges. Insurance companies are starting to develop integrated CRI and EbA products such as the parametric insurance cover for the Quinta Roo coral reef in Mexico, which is triggered if wind speeds go above 100 km per hour. The project is a PPP between local insurers, the local state government, Swiss Re, the Nature Conservancy and the tourism industry.