A1. Insurance
Definition
Insurance against extreme weather events can be defined as a mechanism which provides financial security against loss of assets and livelihoods by ensuring effective post-disaster relief on an individual, community, national, regional and local level (BMZ, 2015).
STEPS
Insurance can be divided into the following steps
Brief Description
Insurance coverage helps governments, individual producers and private enterprises along the agricultural value chain to manage extreme weather impacts. If embedded into an agricultural risk management plan, insurance can contribute to resilience building in the sector and its value chain, and facilitate the use of better production techniques. Insurance products for extreme weather risks can be distinguished into two categories:
- Direct insurance approaches are those in which the insured customers benefit directly from transferring risk to a risk-taking entity (such as an insurer) in the event that the insurance agreement is triggered. The insured beneficiary receives the insurance payout (direct transfer).
- Indirect insurance approaches are those where the final intended customers benefit indirectly from payments. This is usually intermediated by an insured government, or follows from the customer being a member or client of an institution that has insurance cover (MCII, 2016).
Involved Actors
The government is the initiator at the national level, usually the Ministry of Agriculture in coordination with the Ministry of Finance. Other relevant ministries or departments of authority, such as social protection, which cooperate with meteorological offices for data provision should be involved. The actual insurance product development process should be led by the (re)insurance provider in a participatory manner, and in partnership with the insurance regulator and supervisor for product approval.
At the regional level, financial institutions and/or producers’ cooperatives are to be involved. At the local level, additional actors such as NGOs, business associations and technology providers are needed, to act as delivery channels to potential customers. In practice, international development agencies often support the processes of product design and capacity development.
SYNERGIES: INSURANCE and PRE-DISASTER FINANCING
Risk selection to be transferred to insurance industry
Risk retention analysis, by segmentation of weather risks according to frequency and severity, enables the government to define which weather risks should be transferred to a third party (e.g. (re)insurance industry).
Targeted mix of DRF and insurance (complementarity of mechanisms)
The “risk layering” approach shows how DRF and insurance complement each other with suitable products and enable the government to develop a DRF strategy with more affordable financial products, compared to ad hoc ex post financing.
(This applies also to individual producers and the private sector, which is better equipped to avoid negative coping strategies such as selling productive assets after a disaster).
Potentially better credit rating by credit rating agencies (if insured − macro level)
Local-level insurance could lead to easier access to credit for smallholder producers and small entrepreneurs.
At the regional level, by insuring the credit portfolio, rather than a farmer, the financial institutions could reduce their credit portfolio risk, potentially resulting in an easing of access to credit for smallholder producers and SMEs.