When climate risk insurance (CRI) schemes first started gaining popularity ten years ago, many believed they would be a solid 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 Munich Climate Insurance Initiative (MCII) brought together experts from academia, non-governmental organizations (NGOs), international organizations, and the insurance sector for the annual MCII Membership Assembly from 16-17 June 2020 to discuss which practices need to be improved. Four main action areas were highlighted: making target groups part of the product design process; working together and creating effective networks for distribution; building capacity through a smart mix of approaches; and utilizing new technologies.

Making Target Groups Part of the Product Design Process  

In order to design a successful product, it is necessary to know the target populations’ 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), with the UN Capital Development Fund (UNCDF), income level and access to finance have a large effect on the demand for insurance. By introducing new products and conducting a marketing campaign during the harvest season, implementers can help overcome some of the population’s economic constraints. Alternatively, pairing CRI with loans or allowing premiums to be paid overtime 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 do not have the time or resources to build up local networks, partnering with grassroot organizations can help ensure that discussions with the target groups take place in a fully inclusive manner, taking into consideration gender aspects and the needs of hard-to-reach individuals.

Distribution is About Working Together and Creating Effective Networks

Many project implementers and reinsurers have come to realize that they need to spend more time and resources on local insurers as they help them develop their distribution networks. But how can these effective networks be created?

Implementers should work with insurers to identify trusted brands for distribution. Micro-finance institutions can be a good option as they have experience working with vulnerable groups. For groups that have financial constraints, insurers can also look into credit-based insurance distribution, for example, via development banks. Government-supported schemes can also help groups who 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 payouts distribution. The Access to Insurance Initiative (A2II) has many 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 need to build the capacity of governments, local insurers, and distribution channels to work with the target population is commonly underestimated and neglected in the planning process. These groups however have a pivotal role to play in making innovative CRI schemes a success.

Implementers should 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.

In addition, as many local insurers do not yet have experience working with CRI, implementers should 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 these efforts.

Local insurers should also be trained on how to educate potential policy holders on CRI as this will be key in helping individuals identify the right insurance products for them and managing their expectations.

New Technology Development: Utilizing New and Innovative Products

As the limitations of some current CRI schemes become evident, implementers should start considering new and hybrid insurance approaches.

Insurers and implementers should also investigate how new technologies can be leveraged to create new and innovative products. These developments include: utilizing picture-based technology, where farmers regularly take pictures of the growth of their crops (an approach tried in India); using electronic chips in livestock animals (planned in Rwanda); using satellite and drone imagery in order to help insurers assess damage and determine if ad hoc payments are required (planned in India); and analyzing and estimating crop yields before the harvest season (an approach used in China).

By focusing on these four main areas, 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 LSE, have been conducting research on these topics, which implementers could use. 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.

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This article was written by Jennifer Phillips, Associate Project Manager, UN University Institute for Environment and Human Security (UNU-EHS) and the Munich Climate Insurance Initiative (MCII).

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: mcii@ehs.unu.edu or check out our website at: https://climate-insurance.org/.