When climate risk insurance (CRI) schemes first started gaining popularity 10 years ago, many believed they would be an ideal solution to help vulnerable communities financially manage natural hazards and adapt to climate change. However, over the past decade implementers have learned that changes to existing approaches are required to better meet the needs of the target populations.
The question arises on how implementers, such as international organizations, NGOs, insurers and reinsurers, can adapt current practices to better succeed in their mission to increase vulnerable groups’ resilience to natural hazards. The Munich Climate Insurance Initiative (MCII) brought together experts from academia, NGOs, international organizations and the public and private sectors to identify the shortcomings in existing schemes and the practices that can be improved upon and promoted. Four main areas were highlighted:
Making target groups part of the product design process
In order to successfully design a product that is accessible and attractive, it is necessary to understand the target population’s current coping mechanisms, the hazards they would like protection against, and the risks and barriers they face. For example, according to research conducted by the London School of Economics (LSE) together with the UN Capital Development Fund (UNCDF), income level and access to finance have a large effect on an individual’s demand for insurance. Understanding the factors that affect the demand for insurance can help implementers better design products. For example, introducing new products and conducting a marketing campaign during the harvest season can help overcome some of the population’s economic constraints. Alternatively, pairing CRI with loans could increase access for those with limited financial liquidity.
Civil society actors, social movements, relief organizations and local NGOs can help by bringing together implementers and target groups. Since implementers often don’t have a significant amount of time nor resources to build up local networks, partnering with these organizations can greatly help in ensuring that discussions take place. These would allow the target group to directly communicate with product designers about their particular risks, challenges, and insurance needs. They would also help implementers introduce the concept of climate risk insurance and explain how it can best be used. Target groups should understand that CRI is meant to cover larger, less frequent events while more frequent, low-impact events require different efforts. Moreover, these discussions can help reveal the target groups’ readiness to pay risk-based premiums.
Local groups can also facilitate meetings with underrepresented groups, giving implementers access to traditionally hard-to-reach individuals and enabling them to identify ways to increase accessibility, e.g. by investigating gender aspects and identifying community members that cannot sign contracts. Co-developing CRI with vulnerable groups will ensure that new insurance products meet the target groups’ needs and expectations.
Distribution is all about working together and creating effective networks
Many project implementers and reinsurers have come to realize that more time and resources need to be spent on local insurers to help them develop their distribution networks. But what is the best way to create effective networks?
Implementers should work with insurers to identify trusted brands for distribution to increase demand. Micro-finance institutions can be a good partner, as they have experience working with vulnerable groups and understand their needs. For groups that have financial constraints, insurers can also look into credit-based insurance distribution, for example, via development banks. Understanding the types of financial institutions that the target population is accustomed to using can help implementers better determine the potential for scale. Government supported schemes could also help groups who are difficult to reach through traditional channels and cannot afford market prices.
Implementers can work together with insurers to address regulation challenges that affect where and how insurance is sold. Updating country insurance regulations is an important part of empowering local insurers to utilize new technologies for premium collection and distributing payouts. The Access to Insurance Initiative (A2II) has many great resources on how implementers can help regulators become more flexible while protecting consumers.
Capacity-building: pursuing a smart mix of approaches
When introducing CRI into new communities, the amount of time needed to build the capacity of governments, local insurers and distribution channels and the target population is commonly underestimated and neglected in the planning process. Implementers should ensure that these stakeholders understand how they can each actively contribute to making innovative CRI schemes a success.
Implementers can train governments on integrated climate risk management (ICRM), which emphasizes the role insurance can play in risk prevention, retention and transfer, preparedness, response and recovery. Governments have a key role to play in ICRM, as their data collection can contribute greatly to developing better products. By introducing and maintaining resilience measures, for example through regular waste collection, cleaning sewer systems, regulating construction in flood zones, constructing dykes etc., the government can also help lower the premium payment. Moreover, governments can use their ministries, organizations and extension officers that train on disaster risk management (DRM) and financial literacy to increase awareness and understanding of insurance. When governments build this education into their existing financial literacy and DRM trainings, insurance can become more affordable as insurers can reduce their marketing and awareness raising costs.
In addition, as many local insurers do not yet have experience working with CRI, implementers should spend a considerable amount of time with them to ensure that they understand how these products work, the aspects of CRI that differ from traditional insurance schemes, the steps for building a market for these new products and the potential cost of all these efforts. CRI often aims to protect vulnerable groups who cannot afford or do not have access to traditional forms of insurance. Implementers can work with local insurers on developing innovative outreach efforts for their new target markets and ensure that they have the necessary knowledge and material to train and equip other distribution channels and outreach officers. Local insurers should also understand the importance of educating potential policy holders, as this will be key in helping individuals identify the right insurance products for them and managing their expectations.
Lastly, it is important to note that implementers should work to find more sustainable ways for building the capacities of governments, local insurers and potential policy holders. Governments and local insurers can then partner with civil society organizations and local groups that can institutionalize these trainings for local populations. Mutually-beneficial training partnerships that could reduce the overall cost of insurance products can also be developed by implementers. CRI is an evolving topic; thus, finding ways to ensure that education, trainings and workshops are regularly given is vital for long-term success.
New technology development: Utilizing new and innovative products
As the limitations of some current CRI schemes become more evident, implementers should start considering new and hybrid insurance approaches.
Insurers and implementers can investigate how new technologies can be leveraged to create new and innovative products. These developments can range from utilizing picture-based technology used in India, where farmers regularly take pictures of the growth of their crops, to using electronic chips in livestock animals (which is planned to be tried in Rwanda), using satellite and drone imagery in order to help insurers assess damage and determine if ad-hoc payments are required (as planned for India) or analyzing and estimating crop yields before the harvest season, as it has been used in China. As these technologies continue to improve and become more affordable, insurers can investigate how they can enhance their current product offerings and develop new products to better meet the needs of their beneficiaries. They should also keep in mind that some forms of new technology, such as camera phones, may be out of reach for some segments of the population. Implementers can refer to the Insurance Development Forum (IDF) to uncover some of the latest research on public asset insurance, technology options etc.
As a conclusion, these four main areas show how implementers can inform themselves of the latest practices and findings, and search for ways to continuously improve their current programmes. Many institutions, such as the InsuResilience Investment Fund (IIF) and the London School Economics (LSE) have been conducting thorough research on these topics that implementers can use to inform themselves. Through research, knowledge exchange and regular dialogues, implementers can help CRI schemes evolve to better meet the needs of vulnerable communities both today and in the future.
MCII invites experts, organizations and other interested stakeholders to jointly find solutions to improve the adaptive capacities of people at risk in vulnerable countries. This can be done by using existing tools and approaches that have been proven to successfully buffer impacts of natural hazards. If you are interested in joining our community of practice, or if you would like to engage further on the topic, please email us at: firstname.lastname@example.org or check out our website at: https://climate-insurance.org/