Index insurance for climate risk management

Swiss Re and the International Research Institute for Climate and Society co-hosted a high level roundtable on “Index insurance for climate risk management & poverty reduction”. The event was part of the first annual meeting of the Global Humanitarian Forum on 24-25 June 2008 in Geneva.

The changing climate contributes to poverty in emerging countries directly, through actual losses from climate shocks, and indirectly, through responses to the threat of crisis. The direct impacts occur, when, for example, a drought destroys a smallholder farmer’s crop. An indirect impact might be that people are under pressure to be excessively risk-averse due to the threat of a possible climate shock. Combinedwith the continued population growth, the situation could further deteriorate. “Climate change will challenge vulnerable people in poor countries more than in other parts of the world”, said Ivo Menzinger, Swiss Re’s Head Sustainability and Emerging Risk Management.

Index-based financial risk-transfer mechanisms can reduce conditions of chronic vulnerability and underdevelopment by both enabling investment and reducing the impact of shocks on rural livelihoods. The objective of this roundtable was to articulate a common vision and strategy for the use of index insurance to reduce poverty. Christina Ulardic, Swiss Re’s Senior Advisor Sustainable Development comments: “Index insurance can be a powerful tool for disaster relief and development, for example, by shifting from post-event to pre-event financing.”

Representatives from (re)insurance, donors, development practitioners and climate scientists attended the roundtable and addressed three key questions:

What kind of index insurance is necessary to span the range of poverty problems and assist development?
There are three distinct but complementary ways that index insurance can contribute to poverty reduction: the crisis safety net, the cargo net and the productive safety net. Whilst a safety net aims to catch an individual who is falling into poverty, a cargo net is intended to lift someone out of it. The productive safety net is designed to protect the productive assets of those who are both poor and vulnerable.
Can index insurance overcome hurdles in scaling-up to cover the risks it must address?
Successful implementation of index insurance depends upon the identification of an appropriate (context-specific) index, and the availability of adequate data to construct it. Basis risk is perhaps the largest hurdle to successfully scaling up index insurance. The index must target the correct risks and minimize basis risk. Ivo Menzinger said: “We are excited about the growing interest from the development community in financial risk transfer instruments to help cope with the financial consequences.”
What are the roles of governments, NGOs and donors in scaling up index insurance for poverty reductions?
The government’s role is crucial. It establishes the reglatory environment for index insurance, and national meteorological services and agriculture extension services provide vital knowledge for insurance design and implemention. There is a controversial debate on the role of subsidies in insurance.

The discussion’s outputs were formally presented at the following Global Humanitarian Forum’s session “Are the right risks insured?”, and were fed into the GHF declaration and outcomes. Kofi Annan, President of the GHF and former UN Secretary-General, announced that the participants’ ideas should be turned into immediate action and will be presented in the Forum’s second annual meeting in 2009.