Disaster risk insurance: understanding the role of microinsurance

14 November 2017
Insight
 Trees cocooned in spiders' webs, an unexpected side effect of the flooding in Sindh, Pakistan.

Insurance has been touted as one of the development agenda’s ‘next big things’, promoted as a means to facilitate investment by transferring risks, enhancing post-disaster response and incentivising risk reduction.

For insurance to be effective and sustainable and for it to work for the most vulnerable, the development and disaster risk reduction (DRR) sectors need to engage with it. Debates about insurance mechanisms can be both tricky and overwhelming, so, drawing on our recent paper on disaster risk insurance (and discussions with industry experts and practitioners) we’re examining key lessons learned and ways forward.

Here we take look at some of the recent evidence on microinsurance.

Unsubsidised weather index-based microinsurance has not worked at scale

With traditional insurance contracts, like those for your home or your car, pay-outs are released once an insurance officer has assessed the actual damage. With index-based schemes – also known as parametric insurance – pay-outs are triggered by an index that represents losses or foregone income.

In agriculture, for example, rain gauges or satellite-based vegetation estimates are used to assess and model rainfall, plant growth or harvests. If these indicators cross or remain below pre-defined thresholds, compensation is released.

Microinsurance is aimed at protecting people with low incomes, but so far, the evidence for its effectiveness when it comes to weather- and climate- related hazards is limited and not everybody benefits from it in the same way. It does have a role to play in managing these risks but the reliability and quality of products, how it fits with other disaster response methods, and the responsibilities of those involved in such initiatives must be better defined.

Evidence on the longer-term benefits of insurance is limited

Many pilots for parametric microinsurance have focused on the transfer of weather risks – in agriculture or livestock – in countries including Kenya, Ethiopia, India, China, Mexico or the Sahel states. In some cases, insurance pay-outs helped people to cope with and recover from a shock – or motivated investments in agriculture.

In other cases, the prospects for small-scale unsubsidised retail insurance were considered limited. Evidence on the longer-term net impacts of weather index-based microinsurance – or its added value compared to other measures – is scarce. This may be because it is new and because it is difficult to isolate insurance impacts. Consequently, more long-term research and funding is needed to help understand whether people are actually better off with this type of insurance.

People’s background influences their use of insurance

Existing studies suggest that the benefits of insurance are not the same for everyone; when used as a standalone instrument it rarely seems to benefit the poorest. In Kenya, wealthier herders (the 'non-poor vulnerable’) tend to receive the greatest welfare benefit from index-based livestock insurance (IBLI) and education levels affected the impact of insurance on agricultural investments in India. Nevertheless, targeted premium subsidies – used as a tool for poverty reduction – appear more cost-effective than direct cash transfers in some cases, for example in Northern Kenya.

Are subsidies key to access and adoption?

Subsidies do not automatically lead to high take-up, but they have been found to increase coverage in different contexts.

Insurance against weather impacts – on crops and livestock – has not yet taken off in many developing countries, where premium subsidies are much lower than in the USA, Canada and elsewhere. The adoption and renewal rates of many parametric schemes have remained low; often behind what is financially viable for insurers. Premium prices, transaction costs and the timing of payments are among the major obstacles.

A key question remains. Are microinsurance subsidies the most effective and sustainable way to protect the poorest against disaster impacts? To begin to answer this question we must better define what success looks like and what we measure it against. The responsibilities of different actors involved in these mechanisms, including governments, private companies, donors and non-governmental organisations (NGOs), also require more consideration.

Where does this leave us?

Microinsurance has a role to play in dealing with weather- and disaster-related risks. But, because different people benefit differently, there is a need for greater precision in the debate around the purpose and the targeting of these initiatives.

This week’s packed agenda, including the COP23 presidency’s event on the ‘frontiers of risk sharing’, insurance actors coming together in London to discuss ‘insurance and climate risk’ and the InsuResilience Initiative’s Global Partnership Forum, must make room for an exchange on how to make microinsurance enhance resilience and increase well-being. Discussion must include the use and sustainability of subsidies, the effective integration of insurance mechanisms within broader strategies, its viability in the context of climate change and the reliability and quality of products.

Lena Weingärtner