Step 4: Building Insurance Capacity at all Levels
While indemnity-based insurance against extreme weather events is available for large industries and the higher-income population, index products are still relatively new, resulting in higher capacity development efforts for all actors:
- Strategic orientation on the role of insurance in the context of DRM and CCA for government institutions and potential customers, including agricultural SMEs as part of the private sector.
- Information on index products and inclusive insurance for the insurance industry and government officials: This includes the differences between traditional indemnity products and index products, as index products require different modelling and the payout does not fully correspond with the occurred damage and needs precise data (e.g. weather or yield data, basis risk).
For reaching the poor and vulnerable, the inclusive insurance approach should be introduced to government officials and the insurance industry, as it requires participatory product development, new sales processes and administration with non-traditional partners.
- Policy dialogue with the government, and particularly the insurance supervisor and regulator pertaining to index products, pan-national insurance pools and inclusive insurance is a long-term process; the process should start early.
- Develop awareness-building campaigns, including financial and insurance literacy and marketing strategies for insurance providers.
- Organize technical training and advisory services for all stakeholders, particularly to the non-traditional delivery channels, related to the key processes such as product sales and renewals, insurance administration and claims management. For instance, mobile technology such as mobile premium transfer (if regulation permits) requires significant inputs in information technology security − a process that would require the involvement of global actors, identification of training institutions (preferably local training providers) and the development of training materials, including Training of Trainers.
- Pay special attention to claims management as payouts after extreme weather events pose significant challenges to involved parties, when disrupted electricity and communication systems delay distribution of mobile payments, and claims verification or proof of insurance become difficult if documents have been destroyed and travelling is impossible. The insurance industry, financial institutions and the government have to prepare for these circumstances.
(see Philippines example in Phase 4.A Step 2)
Guiding Questions and Tools
Do the involved actors have the respective capacity to manage insurance schemes in the context of DRM?
Is there a capacity-building strategy to address the needs of all relevant actors?
Does the strategy reflect the specific capacities and operations required for all-inclusive agricultural/climate risk insurance (e.g. participatory approaches, non-traditional delivery channels, dialogue with a broad range of actors)?
World Bank/GFDRR/JICA (2015): Pacific Catastrophe Risk Insurance Pilot Report − From Design to Implementation. Some Lessons Learned
IAIS (2014): A Core Curriculum for Insurance Supervisors. Regulation and Supervision Supporting Inclusive Insurance Markets − Basic-Level Module
Box 9: Pitfalls in Insurance against Extreme Weather Events
Preparation: Insurance must be tailored to local needs and conditions. Without risk assessment and insurance demand studies, which consider DRM performance analysis, it is impossible to define the potential products and customers at the national, regional and local levels.
Integrated DRM approach: Insurance is not suitable as a ‘stand-alone’ instrument but must complement other DRM mechanisms.
Participation, transparency and accountability: Participation of potential customers and delivery channels in product design ensure ownership and higher acceptance of the product. Implementation processes, especially marketing and claims management, need to be transparent and accountable, otherwise customers lose trust, resulting in low renewal rates. This is even more important with index products because misunderstandings can arise about what is covered and what is not without good communication and education.
Product development: Products must be affordable and create value for the customer. The downsizing of traditional products neglects the particular needs of the clients, regardless of which level. Ensure that critical risks are not under-insured or that they are compensated by other mechanisms such as prevention or DRF.
Weather risk sequencing through the ‘layered approach’ can be a challenge as frequent events will not be insured (not affordable), while less-frequent but high-severity (approx. > 20 years) events will show low acceptance and renewal rates, especially if the insured suffered a loss and no payout was triggered. Scaling-up requires better client value (e.g. understanding clients’ needs and linking the product to additional services to form hybrid models).
The client value of products and services: Due to the basis risk, the client value of index products can be a challenge if the insured suffers a loss but does not receive a payout. Linking index products with additional services that are beneficial to customers will enhance product value (e.g. agricultural and business training, access to credit, high-quality seeds, access to equipment, information on market prices, etc.). Insurances linked to prepaid phone cards create high numbers, but not necessarily client value.
Client value and sustainability assessment is crucial and must be checked (e.g. PACE method, ILO). Effective monitoring and evaluation systems such as the insurance key performance indicators measure outputs, outcomes and impacts and can ensure that the products actually reach and benefit the customers.
Delivery of products: Micro level products for low-income groups need non-traditional, effective and efficient delivery channels that are trusted by the customers. Organizations that are close to the insured are essential for scaling-up. The scope of mobile technology is often overrated; it can play an important administrative role (if regulation permits and IT security is ensured), although it has its limitation on awareness-building and the display of complex information. Governments have to ensure that macro level product payouts reach the poor and vulnerable (e.g. defined in contingency plans).
Capacity development: Insurance against extreme weather events is complex and still relatively new. Accordingly, capacity-building involves all stakeholders and covers programmes ranging from conceptual and strategy inputs via awareness and marketing campaigns to technical training and policy dialogue. Capacity-building is not a one-time event but rather a strategy containing a set of continuous, sequenced programmes of various methods.
Sustainability: Setting up insurance schemes is a multi-year effort implying a long-term perspective. Affordability of products can challenge sustainability and could be enhanced, for example, through social protection schemes by paying market-based premiums through indirect macro level sovereign insurance, or smart subsidies.
For developing pan-national macro level insurance, the initial capital requirement exceeds the financial capacity of potential member countries. The international debate on climate change adaptation led to the international support of capital for sovereign pan-national insurance pools (African Risk Capacity, CCRIF, PCRAFI).
Ensure that insurance schemes do not incentivize practices that are not environmentally sustainable.
Enabling environment: Only a few countries have appropriate regulation of index products, pan-national pools and processes, and inclusive insurance. Even if suitable regulation is not in place, supervisors and regulators may grant permission on a case-by-case basis − although the dialogue has to start at an early stage of the project, otherwise the delivery may be at stake. Strengthening regulatory and legal frameworks that govern the market require long-term collaboration with national governments and regulatory and supervisory agencies.
Successful impact of any insurance solution also depends on how well products or schemes align with a country’s development priorities.
Expected Outputs When Using the Tools
- Insurance provides quick funds for timely relief and resilient recovery without putting tremendous strain on the fiscal budget to reduce the financial repercussions of volatility related to disasters.
- Index insurance could bridge the gap between slow disbursement of national funds to the local government and the affected population.
- Insurance enables individual producers, private enterprises and financial institutions to shorten business interruptions, reduce adverse coping strategies, start the recovery process quickly and expand the business.
- Macro level insurance payouts create a safety-net mechanism for the (extreme) poor and vulnerable.
- Meso level products for financial institutions contribute to continuing in lending business after disasters and may open opportunities for smallholder/pastoralists and MSMEs for easier access to credit.
- Micro level insurance products (especially forecast-based financing) contribute to enhanced agricultural development and food security.
- Insurance may give lenders and investors confidence that there is a mechanism in place for protecting their capital and may reduce the reluctance to investing in disaster-prone countries.
- Insurance promotes climate resilience by catalysing other mechanisms in the process of comprehensive risk management (anticipate), protecting against extreme weather events and climate shocks (absorb), and promoting growth by unlocking opportunities (adapt).