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Climate risk insurance: how to protect 400 million people?

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The 2015 G7 summit set a goal of providing climate risk insurance to 400 million of the world's most vulnerable people by 2020. We talked to a few experts to find out why this coverage is important, and how to achieve the G7's target.

Allianz-An Egyptian farmer walks across his drought-damaged field.

  • Climate risk insurance is intended to protect people and businesses from damages resulting from climate change-induced extreme weather events like droughts
  • Some of the roadblocks to wider uptake of climate insurance are related to affordability, profitability, distribution and delivery
  • Macroinsurance schemes and public-private cooperation are essential to meeting the G7 goal

Since the announcement of the new Climate Risk Insurance Initiative (CRII) at the G7 few weeks ago, the subject of climate risk insurance in developing countries has gained momentum.

Climate risk insurance is intended to protect individuals and businesses from damages related to climate change-induced extreme weather events, such as drought-induced harvest failures or flood-related production losses. Developing countries possess only very limited adaptation capacities, but at the same time are also considered to be the most exposed countries to the adverse impacts of climate change.

The CRII aims to tackle exactly this problem, with the aim of expanding climate-related insurance cover for the poorest and most vulnerable people in developing countries to an additional 400 million by 2020. So what are the main hurdles to making this happen? We talked to a few experts and found some answers.

Finding the right channels and products

Reaching low-income families via microinsurance products comes with several difficulties related to, for instance, affordability, profitability, distribution and delivery. Some experts believe that publicly-subsidized insurance schemes could help overcoming initial stumbling blocks. “Without premium subsidies, making a case for climate-related insurance in developing countries is difficult right now, “ explains Martin Hintz, responsible for Emerging Consumers at Allianz. “Of course smallholder farmers are interested in weather insurance, but when they see the high price for such coverage, the demand immediately drops to a trickle.”


For health insurance, where climate change may lead to more heat stress and pandemics, Hintz says the situation is similar. Crop damages due to weather and climate-related health issues are prevalent – hence the considerable price for insurance coverage for these risks. Other risks are cheaper to insure because they occur less frequently, for example damage to homes due to fire, floods and storms.


“However, here we see little demand as people care more about their harvest, their health and their children’s education,” Hintz says. “In short, there is high demand for high cost products, low demand for low cost products. Subsidies can help to get us to a high demand at affordable costs situation.”

Macroinsurance is needed to help reach the goal

A second major issue is how to achieve the objective of insuring an additional 400 million people by 2020. Such a large-scale goal will not be possible through microinsurance alone, so efforts are intended to be complemented through macroinsurance schemes such as the African Risk Capacity (ARC). The mission of the ARC is to use insurance mechanisms such as risk pooling and risk transfer to create climate response systems that enable African countries to assist people affected by natural disasters.


Karsten Berlage works with Allianz Risk Transfer, one of the main re-insurers of the ARC. When asked about these macroinsurance initiatives and their challenges, he explains that limited insight into the final pool of beneficiaries is one of the primary issues. “As a macro-insurer, our products cover so-called risk aggregators, such as banks, governments or certain entities specifically created for protection against climate risks,” he explains. “In effect, the final decision where the money will be used and how many people will receive help lies with these aggregators – this is also how the ARC works. If a drought triggers the insurance pay-out, the aggregator receives the pay-out and passes it on to affected households.”


One mitigating factor here is that the ARC is committed to transparency, requiring participating countries to submit an Operations Plan and a Final Implementation Plan (FIP) that include detailed information on how an ARC payout would be utilized in a specific situation. These plans are developed collaboratively between national governments, in-country partners, and in some cases the ARC itself.


For these macroinsurance schemes to be successful, Berlage says another key point is making sure the intermediaries that insurers work with are reputable and have a broad reach. “It is also important that we do not simply go for off-the-shelf products, but ensure tailoring of products to meet local market needs.”
As for the opportunities of these initiatives, Berlage takes the long-term view. “It has to be understood that the full market potential will materialize in the long run,” he says. “In the first years, the insurance will need to prove its value and that can lead to a claims-to-premium ratio of over 100%. But this ‘value proving’ has been driving the expansion of the ARC from 5 to 20 regions.”


As for the next steps for climate risk insurance, Delphine Maidou, CEO of Allianz Global Corporate & Specialty Africa, sees some growth ahead. “ARC indicated it will be looking to expand its coverage to additional countries, such as Burkina Faso, and also look to adding coverages beyond the regular flood and drought cover,” she says.

Cooperation needed between public and private sectors

Another key hurdle for climate risk insurance is that as of now, there’s no comprehensive data base which provides critical data needed for insurers to draw on. Information like weather forecasts as well as the valuation of their economic and human impacts will be essential not only for creating relevant insurance solutions, but also to avoid the lock-in of climate risks into current development efforts and to preserve recently achieved development gains. A collaborative, public-private partnership will be needed to overcome this issue.


“In many cases insurers do not have access to the information needed to design insurance products, while the public sector either has it available or is in the position to generate it,” says Markus Stowasser, Allianz Re, NatCat. “So for example, if you want to build a flood risk model, data is needed which sometimes only local governmental offices provide – either for a high price, or not at all. “Enabling the insurance industry to use the information that the public sector has access to can leverage the collaboration.”


There are other reasons why a collaborative approach is necessary. Public programs respond to shocks such as natural catastrophes by providing compensation after the fact, but fail to create incentives for proactive action. “Private-public collaboration can explore possibilities to develop insurance cover that is conditional on adaption measures, which will also help to keep risk premiums at an acceptable level,” says Stowasser.


Building trust is also an issue. Insurance is a promise for a later payment against an upfront premium. In parallel, the ability of farmers to understand and discuss a product is key for demand, explains Stowasser, so partnering with organizations and local public offices that have already built trust is essential.


At the recent UN Financing for Development Conference in Addis Ababa, the overall theme of the conference was around how to engage the private sector into the economic development of developing markets. Maidou, one of the participants, is hopeful that the conference signals a sea change in how business and the public sector work together on crucial environmental and social issues. In discussions in Addis Ababa, UN Secretary General Ban-Ki Moon noted that it was the first time over 800 people from the private sector joined a UN conference. “It is the beginning of a fundamental shift,” Maidou says.


And that fundamental shift is crucial, as there is a lot of work to be done to meet the G7 goals – not only for climate risk insurance, but for the agreed target of keeping global temperature increases below 2°C.

“Given the amount of finance required in a short space of time, resources will need to be mobilized from both public and private sources,” says Simone Ruiz-Vergote, Head of Climate Advisory and Projects, Allianz Climate Solutions GmbH and Member of the Board of the Munich Climate Insurance Initiative.

“While a crucial part of the picture, green investments can only mitigate future climate risks. The conference recognized that insurance solutions can also contribute to responding to the consequences of a changing climate. The insurance industry has the tools to assess and manage these risks; the readiness to write these risks will be crucial.”