Increasing food system resilience through insurance
The Alliance to Feed the Earth in Disasters (ALLFED) is one of the newest members to the InsuResilience Global Partnership with work focused on food security, tail risks & financial products for risk transfer in vulnerable countries.
Food insecurity has been increasing since 2015/16 (FAO, UN), especially due to the interlinkages with climate change, and there are tremendous opportunities for the insurance industry to help mitigate this.
ALLFED coordinates across governments, the financial industry and agriculture industry to facilitate increased food security through innovative disaster risk finance (DRF). These are some of their insights on how DRF can contribute to increased food security.
Traditional hazard-based parametric insurance is insufficient to fully secure food systems.
The links between natural hazards and how shocks manifest themselves in food systems are complicated and the manner in which hazards manifest themselves cannot be accurately predicted. Moreover, hazard based insurance does not take into account other risks that lead to food insecurity such as trade shocks and conflict, which can be just as likely, if not more likely to cause food insecurity. Food system shocks can be highly persistent and unfolds over time so risk mitigation needs to operate over this time frame.
‘Food system’ financial products can be a solution.
Index triggers intrinsically linked to food systems, such as particular commodity prices (e.g. grain) or output (e.g. production falls below a certain threshold), can ensure that payouts are commensurate with food system shocks. This insures that the actual underlying risk rather than the shock is mitigated, which may not perfectly correlate with the risk. This is an opportunity and new market for insurers and reinsurers.
Non-traditional payouts can be more effective.
Significant food system shocks can lead to price spikes, which limit the effectiveness of monetary payouts. Moreover, if significant amounts of food need to be imported, this time lag can be critical. Parametric food-based payouts could accelerate recovery in line with humanitarian efforts. Working in conjunction with major food producers from other areas of the world can enable this, especially if shocks are regional so food needs to be imported from further afield.
ALLFED suggests holistic risk assessments of food systems to better achieve this, acting as a precursor to procuring insurance and working with external food producers. This would include assessing major risks to food systems, the likelihood of these events and the humanitarian and economic impacts. This enables better understanding of systemic and cascading risks, and makes governments aware of how minor shocks/hazards can lead to significant food system shocks.
ALLFED assists in the conducting of risk assessments, in finding the best suiting financial products and identifying potential partner food producers for the above. They work with a combination of industry, academia and NGOs to ensure a range of specialists who can assess a wide range of hazards and the interlinkages between hazards and food system shocks.
Any financial institutions, governments or NGOs/Multilateral Organisations interested in the above can contact us at email@example.com to find out more.
Written by the Alliance to Feed the Earth in Disasters (ALLFED)