New report: Protecting low-income communities through climate insurance

New report: Protecting low-income communities through climate insurance

By Will Bugler (Acclimatise) & Andrew Eil (Climate Finance Advisors)

Since 2015, the InsuResilience Investment Fund (IIF) has worked to build the climate resilience of poor and climate-vulnerable households as well as micro, small and medium enterprises, by increasing climate insurance coverage. Today, at a side event of the InsuResilience Global Partnership’s 4th Annual Forum, it has launched a new report “Protecting low-income communities through climate insurance”, which takes stock of its experience and achievements to date. As the first fund of its kind to raise private capital to invest in climate insurance markets in developing countries, IIF’s report shares valuable lessons relevant tor impact investors, insurers, policy makers and other relevant entities involved in building resilience using insurance and disaster risk finance.

Authored by Acclimatise and Climate Finance Advisors, the report is based on an analysis of reporting data, interviews and survey responses from IIF’s investee companies. It shows how IIF has developed a unique model that allows it to invest in companies across the entire insurance market value chain, helping to build new networks that support climate insurance market growth in developing countries. In its first six years, the IIF has extended climate insurance cover to 25 million poor or climate vulnerable people in developing countries.

Contributing to climate resilience

The report begins by placing the IIF’s work in the context of the wider challenges of closing the climate finance gap and increasing insurance market penetration in developing countries. Climate-driven extreme events have doubled from an average of under 300 events per year in the 1980s to over 600 per year since 2010. This has continued to drive economic losses, affecting practically all sectors. According to Swiss Re, the last decade has been the costliest on record with economic damages from natural disasters totalling over USD 2 trillion. However, as the report notes, current investments worldwide are insufficient to prepare for such impacts. In fact, according one UN estimate, climate adaptation finance totalled an average of $30 billion in 2017-2018,[1] well below the $210-300 billion needed per year between 2010 and 2030.[2]

As noted in the 2015 Paris Agreement, insurance can play an important role in building resilience to climate change and it impacts, allowing people to withstand the financial impacts of disasters and invest in adaptation measures. However, the majority of economic losses generated by climate-related extreme events are not covered by insurance, resulting in a substantial protection gap of $280 billion in 2017 and 2018. Whilst this gap has narrowed in recent years in upper-middle and high-income countries, there has been little progress in lower to middle-income countries, where the protection gap persistently exceeds 95 percent (see map below).

To close the adaptation finance gap and increase access to climate insurance products in developing countries, private sector investment is crucial. The IIF uses a blended finance approach, raising public capital with high risk tolerance complemented by grant resources, and leveraging it to attract private investors. So far, the IIF has raised $166 million (approximately $100 million of which in private capital) and invested $133 million in 21 companies around the world.

Figure 1: Property and casualty insurance premiums per capita. Source: Munich Re in InsuResilience Investment Fund’s ‘Protecting low-income communities through climate insurance’ report.

Overcoming barriers to climate insurance penetration

IIF, managed by BlueOrchard, was initiated by KfW, the German Development Bank, on behalf of the German Federal Ministry for Economic Cooperation and Development (BMZ). It has a mandate to improve access to and the use of insurance in developing countries and, in so doing, reduce the vulnerability of MSMEs and low-income households to extreme weather events. To achieve this, IIF’s investee companies must overcome several important barriers such as high transaction costs of delivering climate insurance, difficulties distributing products to large numbers of poor and climate-vulnerable clients, low levels of awareness of and trust in insurance, and regulatory challenges associated with earl-stage climate insurance markets.

To overcome these challenges, IIF’s innovative blended finance approach combines aspects of a conventional investment fund with traditional donor grantmaking and technical assistance programmes. It has established a unique model that promotes a whole-value-chain approach to investing, careful selection of investee companies, and a high level of technical support provided by the Fund itself. It does this by operating two sub-funds: A Debt Sub-Fund and an Equity Sub-Fund. The Debt Sub-Fund invests in companies that distribute climate insurance products, such as micro finance institutions, whilst the Equity Sub-Fund invests in climate data and service providers, insurers and reinsurers.

This whole-value-chain approach to investing recognises that a thriving ecosystem of climate insurance entities is essential for long-term climate insurance market development. Service providers cannot exist without insurers and aggregators to buy their products, insurers in developing countries require a healthy pool of distributors to extend insurance to low-income communities, and new technologies from data and service providers underpin the market and are essential to take climate insurance products to scale. Climate insurance entities also interact with financial institutions such as retail banks and reinsurers in critical ways; these interactions are reflected in the business models of many of IIF’s investees and contribute to the development of the climate insurance ecosystem.

Other elements of IIF’s support for its investees to launch and grow climate insurance products are the Technical Assistance Facility (TAF) and Premium Support Facility (PSF). Through the TAF, IIF has undertaken 25 technical assistance projects supporting companies with activities ranging from business planning, and corporate structure, to product development and marketing. To help climate insurance products gain a foothold in the market, the IIF also provides temporary subsidies for insurance premiums through its PSF, making its investees products more affordable.

Figure 2: How the IIF supports entities across the insurance value chain. Source: InsuResilience Investment Fund’s ‘Protecting low-income communities through climate insurance’ report.

Encouraging results

Recent interviews and surveys with IIF’s investee companies have shown that the Fund has delivered significant benefits to their companies. Investees reported that IIF’s involvement has helped them to: develop new and improve existing climate insurance products, tailoring them for specific clients; scale their operations, allowing them to expand into new markets and reach more clients; reduce transaction costs by making capital investment in new technology and strategic planning; and improve business governance and reputation which has enabled them to access new investment.

Many of IIF’s investees are yet to launch or have only recently launched their climate insurance products. This status, coupled with the challenges they face when scaling products in developing countries, serves to explain why reaching large numbers of IIF’s target beneficiaries takes considerable time. Despite the long runway to large-scale impact, IIF has already demonstrated that its investments increase access to climate insurance for poor and climate-vulnerable people. At the end of its first year of operation in 2015, the IIF had approximately 1,700 beneficiaries, a number which had grown to 25 million by September 2020.

With IIF’s model now well established, the Fund expects to make a further 12 to 15 investments in companies in the coming years. Through these new investments and the further growth of its existing investees’ climate insurance offerings in maturing markets, the IIF expects to reach between 90 and 145 million beneficiaries by 2025.

Building resilience

The report also features evidence that the climate insurance products released by IIF’s investees have had a positive impact on the lives of its beneficiaries. Eight IIF investees reported paying out a total value of $4.75 million to clients, from over 18,000 claims, since 2015. The report found that access to climate insurance allowed beneficiaries to recover more quickly from climate related shocks and gave other benefits including improved access to credit in order to invest in their businesses. Interviews conducted by impact measurement company 60 Decibels, with 120 beneficiaries of one of IIF’s investees – Kashf Foundation – found that claimants were over twice as likely to have recovered to their pre-shock levels of welfare compared with those who did not make a claim.

Overall, the report finds that IIF has successfully established a model that can raise both public and private capital, provide investor returns, and achieve real benefits for poor and climate vulnerable communities. Ultimately, IIF’s successes are founded on the quality of its relationship building with its investees and with other institutions in its target countries. Whilst this approach is not quickly

scalable, it does provide a real and lasting impact in building resilience through climate insurance.

Download a copy of the report here.

For more information about the IIF and its work contact: info@blueorchard.com


[1] Climate Policy Initiative, 2019. Global Landscape of Climate Finance 2019. https://www.climatepolicyinitiative.org/publication/global-landscape-of-climate-finance-2019/

[2] UNEP, 2018. The Adaptation Gap Report 2018, Nairobi: United Nations Environment Programme.


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