www.IFC.org/ThoughtLeadership Note 13 | September 2016 INSURANCE OPTIONS FOR ADDRESSING CLIMATE CHANGE Emerging markets are especially vulnerable to threats from climate change. Storms, droughts, and floods jeopardize the livelihoods of farmers, while extreme temperatures limit the ability of workers to be outdoors. Insurance is one tool that can help emerging markets adapt to climate change by heading off threats before they become disasters. Some pilot projects around the world are showing promise in using insurance to help emerging markets reduce the impact of climate change. Climate change has proven to be a major stumbling block to Finally, as awareness about climate change risks grow, people and development in emerging markets. Floods in Thailand, typhoons businesses are looking for solutions that minimize the impact of in the Philippines, and droughts in Africa and India have cost climate related threats. Many governments are further boosting thousands of lives and stalled economic development. awareness by taking steps to increase financial literacy in their Temperatures are likely to rise even higher, which will only countries. As a result, more people are starting to see insurance as worsen the impact of climate change. And extreme heat can affect one tool that can help them address climate change. productivity and economic activity. In 2015, for example, when temperatures across Iraq topped 50 degrees Celsius, the India, for example, is especially vulnerable to climate change government called for a mandatory four-day holiday.1 Such threats. Flash floods and droughts have disrupted energy incidents are likely to become common. production and destroyed crops in the rapidly growing country. In the state of Uttarakhand, for example, flash floods shut down six In emerging countries, insurance markets are under development hydropower plants in 2013, cutting the state’s installed power and don’t play a major role in helping businesses mitigate climate capacity by 35 percent. The situation could worsen, as most of the change threats. Because insurance is viewed as a luxury product, existing nuclear plants and many planned coal power projects will many emerging markets have yet to prioritize the regulations and be on the coast where they will be exposed to extreme storms. 3 standards that insurance markets needs to function. Yet few people in India have insurance today, and insurance But now a number of factors are driving emerging markets to use penetration stands at about 1 percent of gross domestic product. insurance as a tool to adapt their countries to the changing climate. India faces about $9 billion to $10 billion in losses every year The insurance industry has been looking to emerging markets, because of extreme weather events, and 80 percent of those losses where penetration rates have historically been low, in order to are uninsured, according to the Earth Security Group.4 Agriculture grow their business. In addition, cellular and digital technologies has been especially hard hit. From 2000 to 2016, India now make it possible to reach customers in remote areas. 2 Many experienced five drought years and crop insurance has covered international donors are also realizing the importance of heading less than half of those losses. Because losses couldn’t be fully off climate change to promote growth in emerging markets. Their covered, the government had to cap the premium for insured crops efforts have shifted from programs that focus on distributing aid at between 1.5 percent and 3.5 percent of the insured value so as after a disaster to complementary programs that also reduce the to allow some protection to all the farmers at risk. impact of natural disasters, such as insurance. Insurers could, for example, lower premiums for a business that raises buildings in But as extreme weather and related losses grow, people —and flood prone areas, or for builders who use fire resistant materials especially India’s rapidly expanding middle class—are becoming to build houses in areas at risk of wildfires. more aware of insurance. As a result, insurers have a major Source: National Oceanic and Atmospheric Administration, State of the Climate in 2015 opportunity to reach this market with products that cater to local Insurance should be seen as a complement to other measures to needs. promote development, including the extension of credit. For example, banks are more willing to lend to small farmers when climate risks are covered by insurance. Insurance may also need Donor Funded Efforts to be capped and over time may prove infeasible if climate change Donor-funded environmental projects have historically focused causes losses to occur too frequently or if losses are too great, as on reducing greenhouse gasses, often through clean energy with the crop insurance program for small farmers in India. initiatives. Now international organizations are turning their attention to helping countries adapt their economies to reduce the Public and private Efforts threat of climate change, with insurance as a potential tool. International donors are also starting to work with private insurers to create other forms of disaster relief that reduce the impact of The United Nations Framework Convention on Climate Change, climate change in emerging countries. For example, the Africa for example, has created the Green Climate Fund. The fund’s goal Risk Capacity, which supports pre-approved disaster relief is to generate $100 billion in private funds to address climate programs based on defined weather events, and the G7 Climate issues in emerging economies, with about half going toward Risk Insurance Initiative, which addresses climate risk, both climate change adaptation efforts in the lowest-income countries involve a mix of public and private support. These ‘risk pools’ can such as small island nations. The fund backs programs that are be even more efficient than insurance because premiums are both long-term and self-sustaining, as well as some that are more collected as needed and not annually. So far such programs experimental. The first projects approved for funding in remain the domain of governments, but commercial insurers are November 2015 included several adaptation measures such as the getting involved with crucial aspects of program design. With the construction of emergency shelters in Bangladesh’s coastal areas ARC, for example, private insurers help design and execute and support for modernizing weather observation and early programs. While private insurers have yet to see major profits warning systems in Malawi.5 from such programs, they are gaining a toehold to new customers The World Bank and IFC are also developing innovative in emerging markets and testing new business models. insurance products in emerging markets and providing seed funding to help other organizations grow their climate related insurance programs. The Global Innovation Lab for Climate Conclusion Finance, for example, is identifying new financial products, Climate change has led to major economic and financial losses in including insurance, to better use private investment to help emerging markets. As weather conditions become even more emerging economies lessen the impact of climate change. 6 The extreme, the potential for losses will continue to rise in the donor-funded organization has backed green bonds to fund water absence of adaptation measures. Insurance, which has mostly projects in Kenya and a project to encourage people in Indonesia, been used to protect people and businesses in advanced Bangladesh, and the Philippines to buy property insurance.7 Even economies after disaster strikes, is now being tested to help though these projects are in the early stages, they show promise emerging markets adapt to climate change. As governments and in using insurance as a tool to promote climate risk management. private insurers step up their support for such efforts and consumers become more aware of their benefits, such programs The World Food Programme, Oxfam America, and the R4 Rural will take off. Resilience Initiative teamed up to create a program that allows Alan Miller is an independent consultant on climate change finance and low-income farmers to pay for crop insurance with their own policy, retired from the IFC Climate Change Business department (astanley92@gmail.com). labor. The goal of the program is to encourage farmers to eventually pay for insurance with cash by making them aware of Stacy Swann is the former Head of IFC’s Blended Finance Unit, Climate Change Business Department, and is currently the CEO of Climate the benefits and helping them generate savings. In 2015 about Finance Advisors, LLC (sswann@climate-fa.com). 32,000 farmers in four African countries participated in the program, which has a goal of enrolling 500,000 farmers by 2020.8 1 Nick Wiltgren, “Feels-Like Temp Reaches 164 Degrees in Iran, 159 in 4 Ibid Iraq,” Weather.com, August 5, 2015. 5 Green Climate Fund, (http://www.greenclimate.fund/home) 2 PWC, “Insurance 2020: The digital prize – Taking customer connection 6 The Global Innovation Lab for Climate Finance, to a new level,” http://www.pwc.com/gx/en/industries/financial- (www.climatefinancelab.org). services/insurance/publications/digital-non-life.html. 7 Laurie Goering, “New ways to lower investment risk seek to propel 3 Earth Security Group, 2016. “Indian Insurance and Sustainable climate action,” Reuters, June 30, 2016. Development” (http://earthsecurity.org/esg-convenes-roundtable-with- 8 World Food Programme, “The R4 RuralResilience Initiative,” indian-insurers-to-discuss-sustainable-development/). http://www.wfp.org/climate-change/initiatives/r4-rural-resilience-initiative.