The paradox of climate change is that it has mainly been caused by the wealthier nations but its consequences impact developing countries first and already. Climate-vulnerable countries suffer disproportionately from climate change and lack adequate infrastructure and financial resources to protect themselves from adverse climate events. In effect, climate change poses unpredictable and unseen risks that trigger high costs of reconstruction. Thus, adaptation to climate change is essential in the most exposed regions, which are also generally the poorest ones.
Access to insurance aimed at low-income individuals, the so-called microinsurance, increases resilience to climate-induced risks. Climate-linked indices are the most adequate microinsurance schemes to protect against climate change-induced natural disasters. An index is linked to a specific insured event, such as drought, and once the pre-agreed level of drought is attained, the insurance pay-out is automatically triggered. Satellites monitor the weather and if the drought happens, the insured do not need to introduce an insurance claim and prove their losses. This technology also reduces the verification cost for the insurer and eliminates the risk of fraud and moral hazard. This kind of insurance strengthens populations’ capacity to cope with adverse climate events before their worst consequences have occurred by for instance compensating the income loss from destroyed crops in case of the WFP-Supported Microinsurance Programmes[1].
However, insurance has its limits when it comes to safeguarding large populations against physical risks such as flooding, hurricanes, droughts or soil degradation. Traditionally, insurance works when the probability of the insured event can be calculated and, if the event happens, it affects only a small portion of the insured population at a given time. Yet, climate change bears risks that are difficult to estimate as the severity and frequency of calamities are growing, affecting many inhabitants across different communities simultaneously. A recent example is the intense flooding that stroke Bangladesh last summer[2]. These conditions put the insurers at risk of high losses, which will lead to an increase in insurance premiums that the poorest may not afford to pay, and further expose them to fall in the poverty trap
When the need for microinsurance grows and prices soar, we can question its benefits and whose responsibility it is to pay for damages resulting from climate change. Rich countries should contribute to financing the microinsurance of low-income countries impacted by climate change, by creating special insurance funds for climate protection that would closely work with and finance MFIs or local NGOs. The objective of the collaboration would be to develop new insurance products adapted to the most disadvantaged and the most at risk of climate change-induced natural disasters.
These funds could also expand the scope of their action by working hand-in-hand with local MFIs. Some MFIs provide financing for MSMEs developing technological climate adaptation solutions which reduce the costs for insurers and increase resilience for local communities. Another solution is to have public-private partnerships (PPP) between world-leading reinsurers, the UN and local NGOs to switch from pre-disaster insurance instead of post-disaster recovery funds. Local NGOs and MFIs have more experience in providing smallholder farmers with insurance products and educating them about their benefits. One of the most prominent illustrations of this kind of PPP is R4[3], a partnership between reinsurer Swiss Re, the UN World Food Programme (WFP) and Oxfam America. Its aim is precisely to provide insurance payments as soon as pre-defined risk (a level of drought) is attained, instead of waiting for losses (decreased crop yield) to materialise.
Although microinsurance has the capacity to improve people’s lives, we need to act to prevent adverse climate change events from happening: “The insurance instrument itself can deal with the symptom, but it can’t fix the core problem”[4]. Microinsurance might be perceived by the poor as a way for the developed nations to escape their duty of lowering carbon emissions to prevent the occurrence of climate catastrophes in the most vulnerable part of the world. Ultimately, microinsurance can help with mitigating the impacts of climate if supported by developed countries but is not the unique answer to this climate change crisis. Rich countries should also implement policies to fight the roots of climate change and should send financial support to developing countries to implement climate change adaptation solutions. Lastly, the establishment of the Loss and Damage Fund at COP27[5] will go in this direction and help offset the negative consequences of climate change.
Sources: “pour aller plus loin”
[1] World Food Programme-Supported Microinsurance Networks. https://www.wfp.org/publications/does-climate-insurance-work-evidence-wfp-supported-microinsurance-programmes-2021
[2] https://www.washingtonpost.com/world/interactive/2022/millions-stranded-heavy-flooding-sweeps-through-bangladesh-india/
[3] https://www.oxfam.org/en/press-releases/oxfam-and-world-food-programme-announce-r4-partnership-resilient-livelihoods
[4] Zurich financial services chief climate officer Lindene Patton; see the Guardian Article https://www.wfp.org/publications/does-climate-insurance-work-evidence-wfp-supported-microinsurance-programmes-2021
[5] https://www.unep.org/news-and-stories/story/what-you-need-know-about-cop27-loss-and-damage-fund
This article was written by Anna Letta, Sustainable Operations Officer at LuxFLAG as part of her InFiNe.lu scholarship recieved to attend the Certified Expert in Microfinance organised by the Frankfurt School. This article is the third of a serie.
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