22.09.2019, New York:
Ahead of the New York Climate Summit on September 23, the V20 Group* kicked off their Sustainable Insurance Facility (SIF) by discussing the proposed Operationalization Framework with key partners. In doing so, the V20 call for greater ambition and action for addressing a key gap within the existing climate and disaster risk financing architecture: The lack of climate-smart insurance for micro, small and medium enterprises (MSMEs) in vulnerable economies.
The event itself was framed by introductory remarks from Sayed-Khaiyum, Fiji Minister for Economy, as well as official representatives from the German Federal Ministry of Economic Cooperation and Development, who both acknowledged the need for accelerated action in V20 economies.
The target group selected by the V20 – MSMEs – was identified due to the substantial contributions they make to employment, GDP, tax revenue, and export, with instrumental effects for fiscal health, financial stability and socio-economic development. At the same time, many MSMEs are highly vulnerable to climate change and increasingly threatened in their productivity, leading to severe ripple effects for those dependent on MSMEs and knock-on effects to the wider economy. Specifically, during a shock, MSMEs may deplete savings, sell productive assets or be forced to borrow at high interest rates to bridge the funding gap. In the absence of financial protection measures such as insurance, it is often only the public budget that can be utilized. This additional pressure in combination with losses to employment and GDP can squeeze public resources further.
As such, climate-smart insurance solutions for MSMEs can help to ensure financial protection and enable productivity. The term ‘climate-smart’ is meant to capture a dual need, namely for (a) insurance products which enable low carbon investments, and thereby contribute to increased efficiencies through cost savings and CO2-mitigation, as well as (b) climate risk insurance, enhancing protection and productivity. The SIF as put forward by the V20, seeks to enhance the development and implementation of exactly those solutions, including through stronger private sector engagement on both ends, the demand and the supply side.
The Draft SIF Operationalization Framework, developed jointly by MCII, the UNEP Principles for Sustainable Insurance (PSI) Initiative and the V20 Finance Advisor, provides a proposal for achieving these goals through collaborative efforts among key partner institutions. Through combining complementary action under dedicated financing vehicles managed by these institutions – the Asia Pacific Climate Finance Fund (ACLIFF, managed by the Asian Development Bank), the InsuResilience Solutions Fund (ISF, managed by KfW and the Frankfurt School), the InsuResilience Investment Fund (IIF, managed by KfW and BlueOrchard) and the Natural Disaster Fund (NDF, managed by Global Parametrics) – the MSME protection gap can be addressed sustainably.
“Despite their importance, MSMEs inherently face a wide spectrum of risks, many of which are commercially uninsurable. I hope we are able to garner support for the Sustainable Insurance Facility which aims to significantly increase insurance coverage for populations, livelihoods and economic assets against climate and disaster risks,” said Ywao Elanzo Jr, Assistant Secretary in the Ministry of Finance of the Republic of the Marshall Islands.
In Bangladesh, for example, climate change is expected to decrease agricultural GDP by 3.1% each year, equal to US$36 billion. The loss increases to US$129 billion in indirect impacts on complementary industries. “Needs-responsive financial protection, which supports pro-active risk management and risk reduction, in line with strong, country-led CDRFI frameworks is key to ensure sustainability in solutions,” said Soenke Kreft, Executive Director of Munich Climate Insurance Initiative.
To fully capitalize on the respective strengths of each of the dedicated financing vehicles, the proposed Draft SIF Operationalization Framework will be further refined over the coming months together with the key partner institutions. Further supported through MCII and the UNEP PSI Initiative, the SIF will be launched at the next Spring Meetings of the International Monetary Fund and the World Bank in April next year.
* The Vulnerable Group of Twenty (V20) Ministers of Finance from 48 countries is a dedicated dialogue and action platform that works on financial responses to maintain and strengthen fiscal stability and economic resilience in the face of climate change. This includes addressing investments to enable climate-proof growth, reduce exposure to transition and climate risk, carbon pricing, and tackling increasing cost of investment capital due to climate vulnerability. Complementary to these priorities, the final priority area of the V20 is to enhance systematic, climate-smart insurance for micro, small and medium enterprises (MSMEs) in vulnerable countries. This V20-led demand was first expressed in 2016 and culminated in the request for the Sustainable Insurance Facility (SIF) to support climate-proof growth and development.
MCII and the UNEP PSI Initiative are technical partners of the V20. Together with the V20 Finance Advisor, they form the SIF Technical Support Team. The technical work on the SIF is supported by the German Federal Ministry of Economic Cooperation and Development through the Insuresilience Global Partnership Secretariat.
To find out more about the Sustainable Insurance Facility (SIF), read the SIF Kick-Off Summary HERE.
You can download the SIF Kick-Off Event Summary HERE.
To find out more about the V20 and the SIF, read the SIF press release HERE.
Download the DRAFT High Level V20 Needs & Support Assessment HERE.