Linking climate risk insurance with shock-responsive social protection

Climate change is already affecting the most vulnerable around the world – by 2030 it could result in an additional 100 million people living in extreme poverty. The poor and vulnerable are often least able to prevent, cope with and adapt to climate impacts and stand to lose more overall in extreme weather events. Linking insurance with social protection systems could enhance households and communities’ ability to absorb climate shocks, and improve their ability to reduce and manage risk, and reduce poverty.

Climate risk insurance is a risk transfer solution that aims to protect individuals, businesses and countries against the negative impacts of extreme weather events that are becoming more frequent and more severe due to climate change. Well-designed climate risk insurance schemes can help people, businesses and countries manage the impacts of climate related shocks in different ways.

How can linking climate risk insurance and social protection strengthen climate resilience?

Insurance and social protection can be elements of a comprehensive risk layering approach. ‘Risk layering’ refers to the process of separating risk into tiers that allow for more efficient financing and management of risks (World Bank, 2012). Layering insurance and social protection can help address different risks faced by a household. Hybrid products combining insurance and social protection can support poverty reduction in the face of climate change.

Linking social protection and climate impact insurance not only enables the poorest and most vulnerable to access economic instruments for risk smoothing but also creates entry points for economic inclusion of these groups.

Climate risk insurance can serve as a contingency financing mechanism for governments to temporarily scale up shock-responsive social protection in anticipation or response to a shock. Read more about how linking climate risk insurance and social protection strengthen climate resilience here

Challenges in linking climate risk insurance and social protection

A key challenge for climate risk insurance and social protection is to strike a balance between providing rapid support following a (climate) shock and precisely targeting those most in need. Case studies from Ethiopia and Malawi show that the cost of a drought to households can increase from zero to about $50 per household if support is delayed by four months, and to about $1,300 if support is delayed by six to nine months (Clarke and Hill, 2013). While this highlights the need for quick delivery of initial support, effective targeting of assistance is key for the ultimate impact and cost-effectiveness of schemes. Targeting specific households or vulnerable groups is however time consuming and difficult, often because of the lack of data, low administrative capacity, and political economy factors (Coudouel et al., 2002).

As climate change increases the intensity and frequency of extreme weather events, there may come a time when some risks become so severe that insurance becomes too costly. This is a challenge when linking climate risk insurance and social protection. Read more about on challenges encountered when linking climate risk insurance and social protection to strengthen climate resilience here

This study was conducted by Elina Väänänen with support from Katharina Nett, Cecilia   Costella, and Janot Mendler de Suarez

The full Policy Brief ‘Linking climate risk insurance with shock-responsive social protection’ can be found here.