Microinsurance and the new market for climate equity
Microinsurance holds promise to protect the world's poorest from the impacts of climate change while providing new business opportunities.
Much of the talk about climate change adaptation has focused on investment — in things such as stronger infrastructure, renewable energy, microgrids and disaster response capabilities. But another area could be just as important in helping communities in the developing world bounce back from climate change impacts: insurance.
The worst effects of climate change will hit the developing countries of the global South hardest, according to the Intergovernmental Panel on Climate Change’s 2013 Fifth Assessment Report.
Last month’s historic international climate change agreement coming out of the United Nations COP21 climate talks in Paris may help soften the blow through increased mitigation, but the world’s most vulnerable regions still will need to steel themselves against such extreme weather events as hurricanes, heat waves, droughts, heavy downpours and floods.
Insurance approaches have been mentioned in the United Nations climate negotiations since the early 1990s. More recently, it has received renewed attention in the Kyoto Protocol, the Bali Action Plan and in the Cancun agreement on a "Loss and Damage" program.
Last year, Germany led the G7 toward a commitment to increase climate risk insurance from 100 million people in the developing world today to 400 million by 2020.
"Climate risk insurance is a means of obtaining insurance against the risks of extreme weather events," German Minister Gerd Müller said at the G7 Stakeholder Conference on climate risk insurance in May. "What may be an incalculable drama for individuals or for individual governments can become a calculable risk for the community of the insured."
While macro-level insurance programs may help expand climate risk insurance to millions in the global South, digital technology is enabling "microinsurance" to play an increasingly more important role in improving resilience in the global South.
Can microinsurance protect the poor from climate change?
Microinsurance is a "means of protecting low-income people against specific risks in exchange for a regular payment of premiums whose amount is proportional to the likelihood and cost of the relevant risk," according to the Microinsurance Network, a microinsurance nonprofit.
The primary distinction from conventional insurance is in the targeting of low-income people, which leads to distinct characteristics and objectives, including addressing the particular risks of poor people, affordability and accessibility, among others.
And this is a growth market: From 2007 to 2013, the microinsurance industry expanded from an estimated 78 million clients to more than 263 million, said the Microinsurance Network. In the same period, total demand increased more than 10 percent per year, and premium growth surpassed that in the developed markets.
One area where Paris was a failure was in sorting out how adequate funding will reliably and transparently flow to help developing countries make the transition to a low-carbon economy.
Still, the question remains how many people living in poverty really would be able to pay for a new insurance premium, and what sorts of consumer protections would have to be in place to ensure that microinsurance systems function as promised.
It's a similar challenge as that posed by the nascent off-grid renewable energy industry, where providers say they can offer reliable services at affordable costs in developing countries, yet it remains to be seen if they can deliver on that pitch at scale.
Regardless, innovations in microinsurance already are creating new investment opportunities for companies such as Bima Mobile, MicroEnsure and MFS Africa, which act as technical service providers for insurers, banks, credit providers and mobile network operators. They already have attracted millions of investment dollars and are creating platforms for growth in microinsurance.
Digital tech helps insure smallholder farmers in Kenya
A prolonged drought in northern Kenya has pushed many smallholder farmers to the brink of financial ruin, but microinsurance powered by digital technology might just help save them.
In 2009, the Syngenta Foundation for Sustainable Agriculture and the Kenyan telecom operator Safaricom piloted a program called Kilimo Salama to insure smallholder farmers against the possibility of drought and excessive rain. The program used weather monitoring stations armed with sensors to determine weather patterns. If there is too little or too much rain, then the farmers get a payout sent directly to them via a mobile payment platform called M-Pesa.
The pilot’s success led to the formation of a for-profit company called Acre Africa, which links farmers to insurance products so that they can invest in their farms. It isn’t an insurance company, but a service provider that works with local insurers and other stakeholders in the agricultural insurance value chain.
In 2014, the company helped insure over 233,000 farmers in Kenya, Tanzania and Rwanda.
If anything, this shows how a non-profit innovation can open an entirely new market to socially conscious entrepreneurs.
Climate insurance as a resilience investment
That the global South is least responsible for generating the carbon emissions causing climate change but is suffering the most from its impacts was a popular topic at COP21. Developing countries, led by India and China, argued that the wealthier nations of the global North should pay to help poorer countries both transition to low-carbon economies and improve resilience against climate impacts.
While previous COP negotiations in Copenhagen and Cancun led to the creation of the Green Climate Fund, which involves developed countries delivering over $100 billion a year by 2020, the Paris agreement vaguely said: "Developed country Parties shall provide financial resources to assist developing country Parties with respect to both mitigation and adaptation in continuation of their existing obligations under the Convention."
In other words: it’s still not clear which countries will pay, how much and when.
"One area where Paris was a failure was in sorting out how adequate funding will reliably and transparently flow to help developing countries make the transition to a low-carbon economy and to assist them in preparing for the impacts of climate change," Timmons Roberts and Romain Weikmans wrote last month in a blog for the Brookings Institute.
Granted, developed countries have pledged billions of dollars to support the Green Climate Fund, including $3 billion from the United States, but this still falls short of what will be needed to help developing nations to weather current and future climate change impacts.
Meanwhile, microinsurance may turn out to be one of the better resilience investments we can make to help people on a more personal level.