STEP 2: Developing an Insurance Strategy at all Levels
Based on the insurance demand study, the government could support the following activities for promoting insurance against extreme weather events:
- Creating an enabling policy, legal and regulatory environment: Insurance policies include incentives for the insurance industry (e.g. tax waivers on inclusive insurance products). Insurance regulation is particularly important as many countries lack a legal index and inclusive insurance framework. In these cases, consumer protection policies addressing client value are of special relevance for scaling-up insurance. Funding strategies consider premium subsidies for the vulnerable and extreme poor under social protection policies.
- Investing in measures that promote insurance and increase affordability: Investments in infrastructure and technology (e.g. weather and yield data, weather stations/satellite data), promoting awareness campaigns and insurance/financial literacy, developing public-private partnerships (PPPs) with the insurance industry − including dialogue programmes with civil society − and supporting DRR and climate change adaptation programmes can reduce the costs for insurers when setting up insurance systems.
- Deciding for whom and at which level insurance products should be developed: The risk layering process conducted in the context of DRF (Phase 2.A Step 3) provides the information on segmentation of weather risks and which weather events are to be transferred to the insurance industry. Low-frequency/medium-loss events, and particularly very-low-frequency/high-loss events, need to be insured, especially as the latter extreme events cannot be mitigated by individual producers and SMEs and fall under the responsibility of the state, while low-frequency/medium-loss events may be managed by medium-size enterprises.
The government, particularly the ministries of finance, agriculture and social protection, have to take strategic decisions as to whom to protect and in which way. At the macro level, indirect insurance enables the government to provide payout benefits to the vulnerable and (extremely) poor. This is a type of social protection or emergency aid after extreme weather events. Direct insurance products at the micro level can be supported through public funding, either by paying market-based insurance premiums to the insurance provider for the (extreme) poor (e.g. PPPs) or by ‘smart’ subsidies for increasing the affordability of products. Though small farmers have the least means for managing extreme weather events, suitable insurance products for affected larger farmers are also lacking in many countries. A successful combination of insurance and other DRM mechanisms for the poor is described in Box 6.
Box 6: The Rural Resilience Initiative (R4)
The R4 initiative is a comprehensive risk management approach to help communities be more resilient to climate variability and shocks (R4, 2018):
Risk transfer: R4 enables the poorest farmers to purchase weather index insurance against drought.
Risk reduction: Farmers can pay insurance premiums in cash or through insurance for assets (IFA) schemes that engage them in risk reduction activities. IFA schemes are built into government safety-net programmes or World Food Programme food assistance for assets initiatives.
Prudent risk-taking: With a stronger asset base, R4 farmers can increase their savings and stocks, using them along with insurance to obtain credit. They can use the money for investing in productive assets such as seeds, fertilizers and new technologies that increase productivity.
Risk reserves: Individual or group savings enable farmers to build a financial base. Providing a self-insurance for communities, group savings can be loaned to individual members with particular needs.
A neglected issue is the vulnerability of the agricultural private sector, especially micro and small enterprises. They suffer losses which often lead to business interruption and negative coping strategies (e.g. selling productive assets). In addition, there are hardly any appropriate and affordable insurance products available. It is important to develop public strategies for this sector that link insurance to other measures (bundled products). For instance, under pro-poor growth policies, national adaptation plans or sustainable agriculture strategies, the government could combine incentivizing preventive measures, providing credit guarantee programmes or interest-free housing loans for resilient reconstruction.
Box 7: Micro, Meso and Macro Level Insurance Customers
Micro level
Policyholders are individuals, e.g. farmers, market vendors or fishers, who hold policies and receive payouts directly. These policies are often sold at the local level and delivered through a variety of channels, including microfinance institutions, farmers’ cooperatives, NGOs and retailers. Premiums are either paid in full by clients, subsidized by the government, or a combination of both, or premiums can be covered/shared by value chain actors (e.g. agricultural input providers) or financial institutions as part of a business strategy.
Meso level
Policyholders are risk aggregators such as business associations or financial institutions, whereby a (re)insurer makes payments to the risk aggregators who then provide services to individuals. The meso level institution chooses how its individual customers or members may or may not receive benefits from the insurance coverage.
Macro level
Policies are held by governments or other national agencies within the international/regional (re)insurance market. Payouts can be used to manage liquidity gaps e.g. for financing post-disaster programmes for predefined target groups that can include individuals (indirect beneficiaries). These schemes can be operationalized through regional/pan-national risk pools.
Guiding Questions and Tools
Guiding Questions
Which strategies and policies for agricultural/climate risk insurance are in place?
Are the development plans for the agricultural/climate risk insurance in line with general development policies of the country and international standards?
Which insurance approach is most suitable for reaching the poor and vulnerable: direct or indirect insurance? Which insurance approach is most suitable for protecting the business of value chain actors? Which insurance approach is most suitable for enabling the government to manage extreme weather events and natural hazards?
Does the insurance strategy contribute to poverty reduction and reach the Sustainable Development Goals?
How will the products contribute to poverty reduction and enhancing resilience?
Guidelines
MCII (2016): Climate Risk Insurance for the Poor & Vulnerable: How to Effectively Implement the Pro-Poor Focus of InsuResilience
http://collections.unu.edu/eserv/UNU:5956/MCII_CRI_for_the_Poor_and_Vulnerable_meta.pdf
World Bank/ GFDRR/JICA (2015): Pacific Catastrophe Risk Insurance Pilot Report − From Design to Implementation. Some Lessons Learned
a2ii/Cenfri (2010): Toolkit No.2 − Country Process Guidelines for Microinsurance Market Development
https://a2ii.org/sites/default/files/field/uploads/2011_10_12_toolkit_2_0.pdf
Guidelines
World Bank/GFDRR (2014): Financial Protection Against Natural Disasters − From Products to Comprehensive Strategies: An Operational Framework for Disaster Risk Financing and Insurance
IFAD (2010): The Potential for Scale and Sustainability in Weather Index Insurance for Agriculture and Rural Livelihoods
a2ii (2017): Proportionality in practice: Distribution
https://a2ii.org/en/knowledge-center/proportionality-in-practice-distribution
Network
The Willis Research Network (More than 50 international research institutions): A collaboration between science and the financial/insurance sector in the areas of, e.g. economic capital and enterprise risk management and natural hazards.
Guiding Questions
Is a suitable regulatory framework for agricultural insurance in place (especially index products)?
Is a suitable regulatory framework for inclusive insurance in place (including supervision of intermediaries and mobile technology)?
Manuals
GIZ/IFC, et.al (2017): Mainstreaming Gender and Targeting Women in Inclusive Insurance: Perspectives and Emerging Lessons, A Compendium of Technical Notes and Case Studies
IAIS/a2ii (2013): Self-assessment and Peer Review on Regulation and Supervision supporting Inclusive Insurance Markets
Source of information
International Association of Insurance Supervisors (IAIS)
Access to Insurance Initiative (A2ii)
Guiding Questions
What type of support has been provided for promoting agriculture or climate risk insurance in terms of:
- Financial support (e.g. ‘smart’ subsidies)?
- Technical support (e.g. provision of data, awareness campaigns) and otherwise (e.g. research, conducive policy conditions)?
Source of information
Multi-/bilateral organizations (e.g. World Bank-GIIF, ILO Impact Insurance, IFAD, WFP, FAO, ADB, GIZ) and INGOs (e.g. Mercy Corps, Planet Guarantee, Oxfam), e.g. Risk transfer concepts, insurance case studies and lessons learned, information on insurance development projects, delivery of insurance, etc.
Universities/research institutions, e.g. International Research Institute for Climate and Society,
Columbia University
PREVENTION
http://www.proventionconsortium.net/
Insurance impact assessments, insurance projects linked to research, climate change research, insurance linked to DRM, research on index and agricultural insurance, etc.
International Association of Insurance Supervisors (IAIS)
Further tools mentioned under the respective insurance sections.