Principles approved: Enhancing affordability and sustainability of climate risk insurance through smart premium and capital support

Protecting the lives and livelihoods of poor and vulnerable people from the impacts of disasters is more urgent today than ever. Climate-related disasters have increased significantly in frequency and severity, and climate change is expected to further exacerbate losses, especially in developing countries. Planning for early action, relief and recovery before disasters occur, in combination with prearranged financing to carry out these plans, is crucial to assist affected communities faster and more effectively and to lower the overall cost of disasters.

The InsuResilience Global Partnership has set out to accelerate a shift from ex-post financing (i.e. humanitarian and disaster reconstruction funds arranged after disasters) to prearranged risk finance (financial tools such as insurance which provide funds reliably and quickly when disasters occur). The InsuResilience Vision 2025 aims to scale up Climate and Disaster Risk Finance and Insurance (CDRFI) solutions to 500 million poor and vulnerable people by 2025. But despite the substantial resilience benefits that CDRFI can generate, affordability challenges and market inefficiencies remain persistent barriers in vulnerable countries. Limited uptake, in turn, threatens the sustainability of CDRFI supply.

In the wake of fiscal pressures exacerbated by the Covid-19 pandemic, supporting countries and people financially with the payment of insurance premiums and providing capital for vehicles that offer insurance are gaining importance. This year, the InsuResilience Global Partnership set out to arrive at a joint understanding on how to maximise the effectiveness of premium and capital support. As a result of a collaborative process across InsuResilience members, five Principles for SMART Premium and Capital Support were developed. These Principles represent a common understanding among InsuResilience members and partners, with details under each principle addressing questions around recipient eligibility, volume, duration, and form of premium and capital support, as well as the conditions under which this support should be provided:

  • S: Sustainable Impact for The Most Vulnerable

To enable tangible, lasting change in the lives of those most vulnerable to disasters, premium and capital support should be used to fund risk transfer mechanisms coupled with effective, development-oriented delivery systems. Smart premium and capital support entails a clear dedication to reach the poor and vulnerable, including through supporting real impact in line with the InsuResilience Pro-Poor Principles.

  • M: Value for Money

To maximise poor and vulnerable countries’ and people’s resilience for each dollar of premium or capital support, premium and capital support initiatives should support needs-based CDRFI products that add value, and entail a clear assessment framework that makes improvements in resilience verifiable and comparable. Smart premium and capital support proactively and effectively crowds-in private capital rather than undermining private sector potentials, recognizing the key role that effective private insurance markets can play in resilience-building of developing economies.

  • A: Accessibility

To realise the resilience benefits CDRFI instruments promise, premium and capital support should make risk transfer instruments accessible at a price that is affordable to those who stand to benefit from them, including poor countries and individuals. Smart premium and capital support is needs-based, (climate) risk-adjusted, and aligned with appropriate measures for enabling access, while empowering beneficiaries and promoting client ownership of the solutions employed.

  • R: Resilience-building incentives

To build financial, physical and social resilience, only risks that are too costly to further reduce should be absorbed by risk financing instruments, and only risks stemming from low-frequency and high-severity events should be transferred via insurance. Reducing premiums through premium and capital support should not alter this but keep incentives to reduce risks in place. Smart premium and capital support does not disguise the true risk cost, but allows price signals to guide risk behaviour. To avoid maladaptation and moral hazard, premium and capital support should be performance-oriented, avoid rent-seeking behaviour and undue private market rents.

  • T: Transparency and Consistency

To empower recipients and maximise synergies, premium and capital support should be provided and employed in a manner that promotes transparency and accountability towards recipients and at-risk communities as well as consistency and coordination among support offers and providers. Smart premium and capital support is used to finance money-out systems that transparently serve a development purpose. Reliability of support is needed for premium and capital support to unfold its impact, and public monitoring and evaluation (M&E) should be part of all premium and capital support initiatives.

By way of more detailed guidance within a Policy Note, these principles offer conceptual guidance for the provision, channelling and use of premium and capital support by donors, implementers, clients and other recipients. The Partnership’s highest steering body, the High-Level Consultative Group, has approved these principles as a Partnership-wide framework in their last meeting on 27 October 2021. The SMART Principles are intended to inspire a principled, coordinated approach on premium and capital support provision and use among InsuResilience members, and thereby drive a significant scale-up of affordable and sustainable CDRFI in climate-vulnerable countries.

By ensuring greater affordability and sustainability of prearranged risk financing solutions, SMART premium and capital support ought to be a catalyst for the urgent global shift from ex-post disaster finance to ex-ante risk financing. The Policy Note further outlines how the principles could be operationalised and applied in programming and designing premium and capital support at the macro- and meso-/micro-levels. To address evidence gaps and areas for further research around premium and capital support, the note proposes a learning plan which outlines specific technical follow-up work to specify suitable methodologies for the various criteria.