Climate Risk Insurance Mechanisms and Social Protection Systems: Mutually Reinforcing Resilience for Food Insecure Communities

There has been an increased focus on social protection as a tool for poverty reduction with the adoption of the Sustainable Development Goals (SDGs) and in particular SDG 1, to end poverty in all its forms everywhere. The targets of Goal 1 include implementing nationally appropriate social protection systems and measures for all, as well as building the resilience of the poor and those in vulnerable situations through reducing their exposure and vulnerability to climate-related extreme weather events. For this reason, it is imperative to integrate social protection systems with emergency and disaster recovery responses that are timely and cost-effective to prevent low-income households from falling into poverty when extreme weather events disrupt livelihoods and damage property.

Social protection refers to the broad set of policies and programmes designed to protect members of society from shocks and stresses over their life cycle, including safety nets, labour market policies, insurance options and basic social services. When social protection measures provide regular, predictable support to people throughout their lives, it plays a critical role in reducing poverty and inequality while supporting inclusive growth. ‘Shock-responsive’ or ‘shock-sensitive social protection’ refers to the potential role that a social protection system can play in dealing with the negative impacts of shocks by both reducing long term risks and helping cope with the immediate effects of these shocks. The administrative systems required for implementing social protection have the potential to be leveraged in quick, efficient and effective emergency responses, which can be complemented with climate risk insurance mechanisms. This can provide financial resources that might be used, if appropriate, for the temporary expansion of social protection programmes and their benefits either vertically, when the value or duration of transfers to beneficiary households is increased, or horizontally, when the number of beneficiaries is expanded to include new households affected by a shock.

The World Food Programme (WFP) has developed innovative tools and processes for transferring climate-related risks through a variety of insurance products, targeting both low-income farming households as well as providing coverage for entire nation states. The timely cash or in-kind assistance that these insurance products provide is a vital lifeline to vulnerable people before they take survival measures such as selling their livestock, property or being displaced from their homes. To increase the efficiency and effectiveness of this support, WFP is also developing frameworks for partnering with national social protection programmes to complement and leverage existing targeting and data management systems, delivery mechanisms, coordination and financing; in addition to providing capacity strengthening and technical support to government counterparts.

Expanding coverage of climate risk insurance to the poorest and most vulnerable people can be achieved through integrating microinsurance as a component of a social protection system. Conversely, this can also be achieved through country-scale macroinsurance that leverages existing schemes or develops new policies that create the right conditions for early disaster responses that reduce the impact these events have on lives and property. There are comparative advantages for each insurance mechanism, with micro and macro-level insurance reciprocally strengthening the resilience-building potential of each respective instrument.

Supporting Microinsurance Market Creation Through Social Protection

Increased access to microinsurance products that protect low-income farming households from livelihood threatening climate-risks, such as droughts, floods, animal disease and crop pests, can be achieved through linking these products to social protection schemes, when these risks are otherwise uncovered. When deployed as part of an integrated risk management strategy, these instruments allow the poorest and the most vulnerable people to make and protect investments that increase, improve and diversify their productivity, livelihoods and well-being.

When provided to low-income households through government support, microinsurance is a form of social protection, with the payouts from insurance policies providing predictable and rapid transfers that compensate beneficiaries for production investment costs during cyclical crises. This provides protection against inter-annual climatic variability and is triggered only when weather conditions affect food security. The insurance payout is effectively an expansion of overall social protection benefits for participating households—if they are in receipt of any others. The process for delivery of the transfer is established prior to the shock during the insurance product’s design. Initially, insurance enables a faster recovery for households after a shock; as insured participants become more resilient, the intervention can increasingly promote investment into more productive activities. For farming households, this can help to not only cope with shocks, but also become less vulnerable to them by increasing productive, income and food security, potentially reducing or eliminating the need for transfers from the social protection system. Social protection can also incentivize participants to reduce their exposure to climate-related risks, which improves the viability of the insurance product, through community work programmes that focus on disaster risk reduction.

WFP has extensive experience implementing microinsurance programmes for smallholder farmers through the R4 Rural Resilience Initiative (R4), in partnership with Oxfam America. In Ethiopia, R4 builds its risk reduction component on the Productive Safety Net Program (PSNP). Farmers enrolled in the microinsurance scheme are part of the PSNP, becoming eligible for the insurance once they have completed the specified number of community asset building work days. This example highlights how a government-led social programme can increase beneficiaries’ access to microinsurance, ensuring that households can protect their livelihoods and remain food secure when impacted by a shock.

Sovereign Climate-Risk Insurance Leveraging Social Protection Systems for Emergency Response Delivery

Sovereign or macroinsurance, meaning insurance that provides coverage and payouts at the national level, reduces the amount of economic losses from disasters through making investments in the management of risks before disasters strike, resulting in assistance arriving much earlier than a conventional emergency response after a crisis. These insurance mechanisms, which provide ex ante support for disaster risk management, often require contingency plans that clearly define how payouts will be utilized, meaning that critical decisions on resource mobilization are determined before the catastrophe. These contingency plans can also leverage the institutional architecture of social protection programmes, which avoids the need to set-up ex-novo delivery mechanisms to support the emergency response. The payout can be utilized to expand the existing social protection programme to additional households that are impacted by the shock (or, indeed, to fund a standalone emergency response if more appropriate). The transfers to end beneficiaries that are provided from these macro level index insurances are no longer part of an insurance payout, but act as a temporary safety net, and reach a broad geographical area, perhaps including where there is no current coverage of social protection schemes.

To scale up access to climate risk insurance, WFP is piloting ARC Replica, an initiative to allow humanitarian actors to purchase ‘replica’ climate-risk sovereign insurance policies that mirror the coverage of the government-purchased policy of ARC member countries. The African Risk Capacity (ARC) is an institution established by the African Union, designed to improve the effectiveness of emergency response in member countries in the event of drought. Through pooling the risk to weather hazards across the African continent, ARC lowers the cost of premiums for insurance policies that provide protection from climate-related risks, with member country governments as the insured parties.

To ensure that resources are mobilized rapidly and effectively, WFP develops operation plans for each replicated country that profile the disaster risk, identify specific interventions and develop a draft implementation plan for when a crisis occurs. These plans will complement the government-led emergency response, and will ultimately reduce the negative impact of climate-related disasters on people being able to meet their basic food needs.

When ARC and ARC Replica policy pay-outs are triggered by extreme droughts, the resources that are made available could leverage the targeting and distribution mechanisms of social protection schemes to rapidly reach the most vulnerable recipients, providing a quick infusion of assistance for communities as a component of disaster risk response to extreme droughts.

Reciprocal Strengthening: Micro and Macro insurance

While these initiatives are on the opposite end of the scale for climate-risk insurance products, these two risk transfer mechanisms, if implemented jointly, can strengthen their resilience building potential. The two mechanisms have distinct advantages in different contexts in terms of timing, administrative requirements, transfer sizes and geographical reach. Microinsurance has the advantage of providing timelier assistance, in addition to larger transfer sizes per household, however only participants who are pre-enrolled in the programme are eligible to receive this assistance, while macroinsurance can reach the entire affected population in a geographic area. The mechanisms can also leverage their similarities; for instance, both can be weather index-based products, that rely on satellite data for determining the amount of water availability and/or vegetative cover that provides an estimation of the impact on crop and livestock production. If implemented jointly, these initiatives can share data that will improve the efficiency of the indexes and provide additional sources of information for monitoring the basis risk of the microinsurance products.

Written by World Food Programme