How Insurance Builds Resilience - Abstract

In 2015, the UN Agenda brought the insurance industry to the spotlight in a remarkable effort to outline a path for resilience and development. During the COP21, the G7 Group launched the InsuResilience Initiative with plans to increase insurance coverage by up to 400 million people in developing countries by 2020, and to provide funding for climate risk insurance for strengthening these countries’ resilience to climate change (G7 Group, 2016). An estimated 50%-55% of those new 400 million beneficiaries are expected to come from Sub-Saharan Africa (GIZ, 2015). This instance closed a year marked by milestone global agreements. In started when the SFDRR prioritized DRR for resilience and aimed to promote insurance as a mechanism for financial protection, and later on the Sustainable Development Goals determined the targets of development finance.

In July 2017, the UK announced it will provide GBP 30 million for the London-based Centre for Global Disaster Protection which, among other aims, will be working with the World Bank and the German Government in providing more cost-effective, rapid and reliable disaster risk financing and insurance solutions for Africa (IDF, 2017b). This follows the Insurance Development Forum’s (IDF) advocacy for insurance as a resilience building tool for governments by helping parties better understand, assess risks, prevent and reduce them, and, ultimately, price and diversify sovereign risk. The IDF partnership brings together the support of the World Bank, the UN Development Programme and global insurers.

In the context of CRM, parametric insurance is an innovative type of coverage against weather extremes that provides timely payouts before a crisis hits (e.g. droughts) or post-event (e.g. earthquakes, excess rainfall leading to floods), which enables rapid emergency response.

Early funding and timeliness are fundamental characteristics of climate risk insurance and its ability to make payouts before a crisis unfolds. When a weather index threshold level is surpassed after an event (e.g. using magnitude for earthquake or rainfall for floods), an insurer can release funds necessary to prevent a crisis from unfolding, or to mitigate the detrimental consequences of the hazard. In the case of a slow onset event like a drought, for example, low soil moisture or the change in vegetation index can be exposed weeks before a crisis hits a region, thus triggering payouts that would minimize the risk of food insecurity and post-event response costs.

Parametric insurance is a paradigm shift from the popular indemnization insurance, which is based in actual losses usually determined by field adjusters assessing the disaster hit area. The cost of adjustment of indemnization insurance is high and results in payment delays. With payment-triggering mechanisms based on weather indexes, and thanks to weather data technologies, insurers have been able to streamline the loss estimation thus minimizing the time to complete a payout.![endif]--