Climate change and microinsurance – Summary of the online discussion

This article summarises the main points brought up during an online discussion in March 2012 entitle “Microinsurance debate: Climate change and microinsurance”, organised by the Microinsurance Network and facilitated by Roland Steinmann. The discussion itself was triggered by a discussion paper on “Climate Change: A Microinsurance Perspective”. Though the discussion focused initially on the three areas of “implication”, “adaptation” and “risks”, a range of other, equally important topics came up during the debate.

An incomplete summary

Climate is set to change over the next decades and possibly centuries, with effects on our daily lives not yet well understood. Microinsurance schemes and more generally the wider insurance industry will have to deal with these changes – but how best to do so? This question is far from being completely solved, but a couple of possible avenues emerged during the discussion:

• Several participants suggested that as weather related disasters hit large areas, insurance on the meso and macro level may lead to better results for all involved than insurance on the household level. Whether such schemes should be labelled ‘microinsurance’ or not is of lesser importance as long as they provide adequate protection to low-income populations in developing countries. 
• Some lines of business will be more affected than others – and some would have to be developed in order to offer protection. At this stage, the discussion about climate change invariably leads sooner or later to a discussion about crop insurance – and is then caught by all the issues specific to these products even before taking into account climate change. The discussion confirmed this observation.
• All participants agreed on the need for a diversity of actions: setting-up microinsurance schemes will not be sufficient to provide adequate and sustainable protection to the target customers. Careful assessment of the local risk exposure and likely trends in the future should inform a broader risk management strategy, which may include such measures as planting trees, reinforcing water retention dams, better farming techniques and relocation to less exposed places.

Climate change is likely to affect large proportions of the low-income population around the globe. At the same time, discussing climate change on a global scale is of little value to local microinsurance schemes, as the impact and likely development of climate change on a local level needs to be better understood first.

Some implications

The impact of climate change on the microinsurance sector may be felt in several ways. One participant suggested that climate change has added another layer of uncertainty to pricing microinsurance products. However, compared to other sources of uncertainty, climate change may be a minor one at this point in time. While a gradual shift in weather patterns may be picked up by insurance companies and priced in along the way, an increase in frequency and/or severity of extreme events is more worrying and calls for adequate reinsurance cover of microinsurance schemes. Collapsing microinsurance schemes after a disaster could badly affect trust in the market and tarnish growth prospects in other lines, too.

The public sector’s role in disaster relief

During the discussion it was mentioned that it is difficult to integrate low-frequency / high-severity events properly into national risk management strategies. This may be one explanation why in most countries disaster insurance is not bought in adequate amounts, including in developed insurance markets. In other words, the perception of risk doesn’t play in favour of developing microinsurance schemes against natural disasters.

The role of governments may be more important in supporting natural disaster insurance than in other lines of business. Governments’ increased attention to natural disaster exposure and climate change would facilitate systematic risk mapping. Further, it could enable a broader risk management approach, raise awareness in the public and set up a framework in which microinsurance solutions complement other efforts to make communities more resilient.

On the other hand, governments are often perceived as the insurer of last resort and people may expect assistance from the public sector after severe events and hence choose not to buy insurance themselves. This behaviour can be observed in developed insurance markets. How widespread this expectation is among the typical microinsurance clientele and whether this really deters them to buy insurance remains to be assessed. The situation could also be similar to what we find in the health sector, where in many countries the public sector should provide most services, but often fails to do so in adequate extent and quality.

The perpetual question of subsidies

Some governments are beginning to shift away from ad-hoc post-disaster relief to either buying insurance on a national level or subsidising insurance schemes that should assist the population in case of catastrophe. To some extent, any disaster microinsurance scheme may also face perceived competition from international disaster relief programmes, though these are by nature uncertain to materialise and sometimes fail to reach the target population.

State involvement or direct subsidies in various forms are relatively common in disaster insurance. Clearly, if microinsurance was the only form of protection offered, then many will not be able to afford it. However, whether subsidising microinsurance schemes is the best use of public funds for providing protection is not yet clear and no conclusion on the matter was reached during the discussion. Some studies, such as Swiss Re’s ECA report, claim that economic returns are higher if public funds were used to finance adaptive measures instead of insurance.

Arguments in favour of subsidies, including among others, social protection for the poorest, get people to experience and appreciate insurance, subsequently kick-starting self-sustaining market development. The question of subsidies for microinsurance schemes is not restricted to protection against natural disasters and deserves more attention.

Encouraging adaptation through insurance

In order to reduce exposure, microinsurance schemes may want to issue policies only under certain preconditions such as simple but effective risk mitigation measures, suggested one participant. Yet, setting up minimum standards for getting insurance requires education and controls, which is costly. In theory, insurance could also help raise awareness about climate change if premium levels would increase from year to year. While this may work with existing and very seasoned insurance clients it is unlikely to have any positive effect with potential microinsurance clients.

There is little evidence that any microinsurance scheme alone would lead to positive behavioural change and adaptation to climate change. Where such changes can be observed they result from education or add-on services to insurance and could well be delivered without insurance. For example, as one participant noted, Fonkoze’s borrowers in Haiti benefit from training and advisory services on how to reduce their individual loss potential through simple measures such as storing goods not on the floor where they are subject to higher flood risk.

By no means a conclusion

Microinsurance against natural disaster is still heavily underdeveloped. Many questions remain open and the impact of climate change is just one of them. The participants agreed that the appropriate role of governments and subsidies, the required preconditions to make any scheme financially sustainable as well as the most suitable form of compensation are all areas for further study and debate.

There was also a consensus on the need for a thorough understanding of the local risk landscape and evaluation of options how best to provide protection before launching an insurance project in order to use resources responsibly.

Microinsurance, understood as insurance that provides protection to the low-income segment of the population, independently whether bought on the household, meso or macro level, could well play an important role in making communities more resilient to weather related shocks. However, it should be considered a complement to other measures and initiatives that help people better deal with disasters. Or, as one discussion participant said, “Microinsurance will not be able to replace disaster relief interventions and I do not see this as the intention of microinsurance. I consider microinsurance as a valuable instrument to strengthen resilience. It could play a role in the measurement of the effectiveness of disaster prevention interventions.”

April 2012