August 2017, Somali Region, Ethiopia: Consecutive climate shocks have resulted in back-to-back droughts, which have caused hunger and malnutrition.
Photo: © FAO/ IFAD/ WFP/ Michael Tewe

Go-ahead for Climate Risk Insurance Fund

Again and again, hurricanes, floods and droughts are rendering harvests useless throughout the world. Especially in the rural regions of the South, farmers are anything but resilient to extreme weather events. Entire societies are sliding into poverty again. Can the financial solution of a climate risk insurance mitigate loss in the event of a disaster?

Since the G7 Summit of the world’s leading industrialised nations in Elmau/Germany, the topic of climate risk insurance has been on the political agenda. By 2020, the international community seeks to provide access to insurance solutions for around 400 million people in order to lift them out of poverty. “Over the last few weeks, the topic has spoken for itself,” said Joachim Nagel, General Manager of KfW, the German development bank, in Berlin recently. Hurricanes were developing like on a string of pearls along the Caribbean and up to the USA. Recurrent droughts in East Africa are pushing entire societies into poverty. The consequential costs of weather extremes up to 2050 have been put at 30 trillion US dollars.

Regional solutions

Considerable progress has already been made in discussing the topic. Only recently, at the “Petersburger Dialog 2017” in Bonn, Germany, the World Bank presented a survey describing climate risk insurance as a further element supplementing traditional development co-operation. At issue here are not so much individual insurance policies for farmers but regional solutions, of which several already exist, such as the Africa Risk Capacity (ARC) or the Caribbean Catastrophe Risk Insurance Facility (CCRIF).

The ARC, for example, has spent more than 34 million US dollars on drought compensation for Mauritania, Niger, Senegal and Malawi since it was started in 2014. The ARC above all provides index insurances against drought for West African regions. The governments pay the insurance premiums into a risk fund. The governments participating in the scheme are required to have arranged for payment in the event of loss and have an early warning system in place. Assistance reaches those in need more swiftly than disaster aid payments. The ARC is working on extensions to the scheme for floods and hurricanes.

Private insurance companies ought to make a greater effort

The insurance solution is becoming more interesting as humanitarian aid via the international community diminishes. However, it is also an element in the trend towards aid and development performed by the private sector.

It is for this reason that KfW and Germany’s Federal Ministry for Economic Cooperation and Development (BMZ) gave the go-ahead for a new fund in mid-October. The “InsuResilience Solutions Fund” is to receive 15 million euros of public funding, a sum that will be doubled by the private insurance companies. To Nagel, this represents a product partnership approach.  He maintains that the insurance industry ought to engage more in development co-operation.

State Secretary Thomas Silberhorn of the BMZ noted in Berlin that the Fund should be “a window for an across-the-board model of climate risk insurance”. The private sector, science and developing countries could work out tailor-made financial solutions. However, there was a lot to explain at local level, Silberhorn added. Such financial solutions were new to most countries. Even so, the positive examples of swift payment were very encouraging and could help in informing people. Finally, Nagel stressed the decades of experience that private insurance companies had gathered in a complex system. Currently, the share of insurance companies in the Fund is at less than five per cent.

Such reticence is a result of insurance mathematics. The level of damage compared to the probability of its arising yields the volume of the insurance premium. Alone the amounts of loss are tremendous. And since extreme weather events are occurring ever more frequently and becoming more and more persistent, smallholders simply cannot afford “realistic” premiums. Moreover, expectations regarding potential insurance benefits should not result in good sustainable practice in agriculture falling into neglect, Silberhorn argued.

More information: InsuResilience – The climate risk insurance initiative

Roland Krieg, journalist, Berlin/Germany