The political economy of premium subsidies: searching for better impact and design

This study aims to further global understanding on the uptake, size and value of premium and capital support (PCS). It follows a call in the InsuResilience Evidence Roadmap for follow-up work to explore the macro-level factors that influence governments’ ‘willingness and capacity’ to take out climate and disaster risk finance and insurance (CDRFI), as well as the incentives that could be created to enable and promote this. The study also builds on IGP’s previous conceptual work on SMART PCS Principles (Töpper and Stadtmüller, 2021) and a Monitoring and Evaluation Guidance Note (IGP, 2021) which examines the efficacy of PCS solutions to support insurance vehicles and increase CDRFI uptake.

Risk pools offering climate-related insurance have been operating for several years in Africa, the Caribbean and the Pacific. All have benefitted from donor capitalisation and subsidisation of premiums in the past. With growing climate risks across all these regions; limited fiscal space in low- and middle-income countries; and an overburdened humanitarian caseload, there is increasing interest in using donor subsidies to grow the risk pools and offer more reliable, costeffective and faster support to disaster-affected communities. The IGP has been leading work to identify global standards and best practice in relation to premium subsidies, to help inform a likely increase in this kind of donor support.

This report investigates the political economy of countrylevel decision-making in relation to sovereign-level CDRFI, and the role of premium and capital support in these decisions. It also analyses the political economy of donor decisions in relation to PCS. The analysis shows that affordability emerged as the main barrier to insurance uptake, followed by a lack of understanding and technical capacity; availability of alternatives; and perceptions of reliability, among others. Further, the report covers premium subsidies, investigating how these can shape governments’ incentives to purchase insurance as well as considering how the allocation and design of subsidies can affect their impact and effectiveness.