Insurance is widely seen as an additional tool for countries to bolster their financial resilience, particularly against increasing risk due to climate change. However, the most vulnerable countries are also often the poorest economically. As such, many don’t take out insurance as the upfront costs often outweigh the benefits.
One way of overcoming this is through insurance premium subsidies. Instead of providing finance to help rebuild after an event (ex-post), donors increasingly see subsidising insurance premiums as a more sustainable long-term solution (ex-ante) which helps both donors and beneficiaries. This has become more typical since the COVID-19 pandemic, where a time of multiple crises and a shrinking fiscal space threatened the traditional model. It can also be translated to the micro- and meso-insurance level, with private sector support.
Premium subsidies are not necessarily a permanent solution, rather a way to introduce those without insurance to its benefits, encouraging them to self-fund in future. And there is evidence that they work to strengthen the resilience of those who are vulnerable, particularly at the micro- and meso- levels. According to José-Miguel Flores Contró, “Through well-designed subsidy schemes, public–private partnerships can reduce vulnerability to poverty in a cost-effective manner. A key motivator for supporting the development of insurance mechanisms is their ability to improve productivity and access to resources... By making insurance more accessible, subsidies improve access to productive resources while providing protective cover.”
The current premium support model faces challenges
Despite the growing attraction, there are several challenges with the existing model – both at the sovereign insurance level and the micro- and meso-levels – which risks reducing the impact of premium support. These challenges have been addressed in a recent policy note from independent advisory and research group, the Centre for Disaster Protection: Rethinking Premium Support – Enhancing the Impact and Sustainability of Climate Risk Insurance.
This policy note primarily addresses international premium support for sovereign-level insurance products. This is typically offered by donor countries, through development banks or regional risk pools, such as the Caribbean Catastrophe Risk Insurance Facility (CCRIF), the African Risk Capacity (ARC), and the Pacific Catastrophe Risk Insurance Company (PCRIC). The financing of this comes through national taxation allocated for overseas development aid from donor countries. In the case of the regional risk pools, which are owned by their member states, profits from subsidised insurance accumulate into member capital. This structure differs from premium support for micro- and meso-insurance products which typically involve private insurance companies, which accumulate premium income into their equity base. Despite these differences, there are shared challenges, so insurance providers can also take recommendations from this report.
Bringing beneficiaries into the conversation
One of the main challenges for sovereign-level premium support highlighted in the report is that decision-making around the allocation of funds is usually taken at the global level – by donors or fund-holders – without appropriate input from recipient countries. As a result, the offer doesn’t always meet the country’s needs or the political and fiscal context it operates in, resulting in unrealistic expectations from donors. This one-size-fits-all approach reduces the impact the support could have and increases the risk that a country will not continue taking out insurance once the subsidies end.
This is not dissimilar to the challenge at the micro- and meso-level, where decisions around insurance products and premium support are often taken without considering the beneficiaries’ circumstances and needs. As a result, subsidised products designed for vulnerable populations are often not taken up or collapse when the subsidy ends. In the same way that donors and providers of sovereign-level premium support need to incorporate the member countries’ perspective into decision-making, insurance companies that offer micro- and meso-level insurance should consider the communities they serve. On the sovereign level this can be done by giving the beneficiary a seat at the table, to understand their needs and have honest conversations about how premium payments could be financed in future. On the micro- and meso-level, insurance companies should talk to the beneficiaries and analyse data to understand their ability and willingness to pay. In doing this, they can tailor discounts through subsidies that reflect their current - and future - financial circumstances. Not only will this directly benefit the end-user, but it will also reduce the risk of insurance lapsing once subsidies are eventually removed.
Increasing transparency for greater insurance uptake
Another shared challenge is around the lack of transparency. At the sovereign level, it’s not currently possible to find basic information about who is providing subsidies and who is receiving them. It is also unclear how decisions are made to allocate the funds and set the terms and conditions. This lack of transparency not only makes it difficult for stakeholders to take decisions and coordinate premium support effectively, but it also presents several risks: a feeling of unfair treatment by some countries, uncertainty about future subsidies, negative outcomes, low demand and poor decisions being taken due to lack of information.
At the micro- and meso-insurance level, a lack of clarity around the subsidies needed, what a subsidised insurance product could offer, the level and duration of financial support a beneficiary would receive and the conditions for receiving this support can ultimately lead to low uptake of insurance. By working to better communicate with end-users and by making information about the offering public, the chances of long-term success of any premium support programme to create long-term protection will be greater.
Improving alignment for more effective support
There is also a need for better alignment among the different stakeholders around premium support. This has been a growing problem within sovereign premium support, as uncoordinated approaches can unintentionally create competition and lower standards for funding criteria, ultimately undermining the long-term goals and creating uncertainty for climate-vulnerable countries. The lack of coordination stems from the fact that premium subsidies have developed organically over time, with different institutions and stakeholders in place. To rectify this, there needs to be a focus on positive outcomes for the beneficiary rather than what works best for the donor’s own programme. And for this, data is needed to understand the true impact of the investment and establish clear standards for support.
The same can be said for micro- and meso-insurance providers. Rather than developing products with only ROI in mind, it’s crucial to focus on achieving the greatest impact possible for customers and set standards for eligibility and coverage accordingly. In doing this, the benefits to the company will come naturally. Data around the use and impact of insurance and – more importantly - the lack of uptake or where products fail is crucial. That’s why the Microinsurance Network annual Landscape of Microinsurance study has become such a vital resource for the industry.
Calculating the optimal duration for support
The final challenge highlighted in the policy note is around the duration of premium support. To date, this has usually been determined by donor commitments, budgetary rules or by the standardised terms of development banks and has often resulted in short-term (often only one year) and ad-hoc funding. There has also been an emphasis on developing exit strategies – more so than in other funding areas – to ensure they won’t need to subsidise insurance indefinitely.
However, for demand to increase, investment needs to have a longer timeline. According to the SMART Principles, premium support should be provided for a minimum of three years. For countries facing severe fiscal distress, it requires even longer. The African Development Bank’s mid-term review for their ADRiFi programme found that ‘a five-year time period for supporting countries with premium payments is not enough time’ and recommends lengthening the time period it provides financial support in each country, requesting ‘more systematic, long-term donor support’.
The same is true for subsidies at the micro- and meso-level. Time is needed for the benefits of insurance to take hold. Subsidising premiums facilitates a larger demand for climate risk insurance in new markets and offers insurers more opportunities to develop new products. But, by removing the financial support before individuals and businesses have had the chance to access the benefits, the likelihood of them continuing to take out insurance will be reduced, the initial investment wasted, and the opportunity lost. As a result, donors and insurance providers should acknowledge the need for long-term support and design programmes and products accordingly. Even if that means supporting fewer countries or offering fewer products in a more limited market in the short-term to ensure more sustainable growth.
Rethinking premium support programmes
As highlighted by the Centre for Disaster Protection’s latest policy note, vital shifts need to be taken in the creation provision of premium support programmes to achieve reliable protection. As more countries experience a positive impact due to insurance, not only will they be more likely to continue purchasing insurance, but they might also expand their coverage to more risks and expanded geographic areas. For them to achieve the greatest impact, a new approach to developing subsidy programmes and allocating funds is needed. The challenges faced at the sovereign level are not dissimilar to those of the private insurance sector on the micro- and meso-level. By taking the recommendations from the policy note, a more sustainable and inclusive approach to subsidising insurance for climate risk could be created which would not only benefit the end-users, but the donors and providers of the support too.