Each year, natural disasters push 26 million people into poverty, inflicting an estimated $300 billion in financial losses. As the effects of climate change mount, the frequency and intensity of these extreme weather events also rises. But while climate change is a global problem that affects us all, the financial devastation it causes has historically been concentrated in many of the world’s most vulnerable communities.
In developed countries, financial losses caused by natural hazards are covered in large part by insurance. But for developing nations that already suffer disproportionately from extreme weather events, insurance only covers about 10 percent of the damage.
Image credit: Jeremy Guest, Feed the Future Innovation Lab for Soybean Value Chain Research, University of Illinois
Recognizing the need for strengthening resilience to extreme weather throughout Africa, Asia and Latin America, the U.S. International Development Finance Corporation (DFC) supports innovative new insurance products specially designed to protect smallholder farmers and impoverished communities. DFC, a Feed the Future agency, will provide support and funding to the InsuResilience Investment Fund, managed by BlueOrchard, a leading impact investment manager with a 20-year track record of fostering inclusive finance and sustainable growth.
To learn more about this pivotal work, we sat down with DFC Deputy Chief Climate Officer Aparna Shrivastava and BlueOrchard Regional Director Yann Groeger.
What makes access to insurance so vital to the resilience of developing countries?
Aparna Shrivastava: In 2017, half of all losses from natural disasters in developed countries were covered and paid for by insurance. But in developing countries, only 10 percent of those losses were covered. That’s why DFC’s strategy for addressing climate change includes supporting mitigation, as well as adaptation and resilience. We’re committed to supporting projects that will help communities adapt to significant changes caused by the climate crisis, and insurance is an effective tool for building climate resilience.
Yann Groeger: It’s important to remind ourselves that in developing countries, agriculture is the main source of income for most people. We know that about 2 billion people in developing countries earn a living on small-scale farming. And we also know that small-scale farming has a lot of constraints, starting from land ownership, which in many cases is not clearly established, to climate events that affect production and destroy income streams. Having insurance is one way to help people facing these constraints.
Why are smallholder farmers uniquely vulnerable to climate change?
AS: Rural people living in extreme poverty are disproportionately reliant on natural resources. Globally, three out of every four people living in poverty rely on agricultural and natural resources to survive. This makes them more vulnerable to the impacts of the climate crisis. For example, when a severe weather event destroys a crop cycle, farmers can be left in debt and without any income. Crop insurance helps smallholder farmers recover more quickly from these climate hazards and become more resilient against future shocks.
Image credit: Mugarura Victor, Feed the Future Rwanda Hinga Weze Activity
Why are so few smallholder farmers insured?
YG: First, there is a certain novelty to these products. Many farmers are not familiar with these offerings, so there is skepticism. It’s really important that these products are well-explained, that people are being walked through the advantages. Another element is pricing. In order to achieve reasonable pricing on these insurances, there is a scale needed. That is why, in the initial phases of launching this insurance product, it’s important to provide some support to premiums, to encourage people to join.
AS: Traditional insurance products are expensive to administer. Recent advancements around parametric insurance and other innovations have reduced costs and, for the first time, made it possible for commercial actors to reach smallholder farmers with impactful climate insurance products.
What is parametric insurance?
AS: Parametric insurance is an innovative solution to a longstanding challenge that’s only worsening with climate change. Traditional insurance can require lengthy times for claims to be processed because you have to do things like damage assessments. In contrast, parametric insurance ties the policy’s payment triggers to predetermined thresholds, such as the amount of rainfall or the intensity of wind speeds in a storm, or the magnitude of an earthquake. Because these thresholds are predetermined, payments are automatically triggered when a hazard occurs. This is quite important with regards to humanitarian and disaster-risk financing, as the first few hours and days are absolutely critical in minimizing the long-term impacts on an individual or community’s resilience.
How will you measure success?
YG: Beneficiaries are at the core of how we measure impact in this fund. Each investment is a small program onto itself, so for each investment, we ask, “How many beneficiaries could we potentially reach?” To date, we’ve already reached about 30 million beneficiaries, which is a quite significant increase from last year.
AS: DFC closely monitors every project we support and tracks progress against a range of development goals and indicators. One thing we really like about the InsuResilience Investment Fund is its thoughtful and thorough approach to impact monitoring. The fund’s principal goal is to expand access to climate insurance for 100 million poor and climate-vulnerable individuals. Importantly, more than half of all beneficiaries are expected to be women. The fund has incorporated a gender lens into its investment approach, to ensure that it responds to the disproportionate impact that the climate crisis is having on women.
Image credit: Mark Wambui, Policy LINK
How does the initiative work with partner institutions?
YG: We typically finance small farmers and other beneficiaries through financial intermediaries, such as microfinance institutions. These are institutions that have a geographical focus within one country, and they would then provide loans to smallholder farmers or other small businesses. When we say “small,” we’re talking about loan amounts around $1,000 or less. The fund works to extend loans to these financial institutions and helps them develop insurance products for their clientele.
What are some of the macro benefits associated with wider access to insurance?
YG: Being able to recover livelihood has very positive long-term impacts for health, education, and economic growth. Effective insurance coverage will help families keep children in school, continue to pay rent and other household expenses. Also, having an insurance product that can cover for losses caused by climate events not only helps people get their businesses started again, but also helps them become more eligible for other financial products. For instance, a farmer with insurance can go to a bank and say, “I need a loan for the next harvest.” And that loan is a much safer risk because the farmer is insured.
AS: A key metric of success will be the fund’s ability to expand climate insurance markets globally. Greater scale means a more affordable product. Our hope is that the fund’s work to develop new climate insurance products and expand on existing ones will help to create scale and broaden reach, which in turn will spur other private-sector actors to enter the market.