By Sheldon Chanel and Akata Taito (United Nations Development Programme)
With climate risk insurance growing across the Pacific, a new conversation is emerging around premium support using subsidies and concessional financing for low-income households and small businesses to improve affordability and access.
A new paper from UN University's Institute for Environment and Human Security (UNUEHS) sheds light on how targeted premium support schemes can help many of the most vulnerable afford climate risk insurance solutions against extreme weather events.
Building on these findings, the UN Capital Development Fund (UNCDF) is developing an Insurance Guarantee and Financing Facility (IGFF), a blended-finance mechanism that uses concessional lending and risk guarantees to make climate risk insurance more affordable and sustainable in the Pacific.
This blog explains why premium support matters, what the UNUEHS research reveals, and how the IGFF can help close the protection gap for climate-vulnerable communities.
Insurance coverage is well-recognised for protecting households, communities and businesses against climate shocks, the solutions remain out of reach for many of the most vulnerable.
More than 47,000 households across Fiji, Samoa, Papua New Guinea, Tonga, and Vanuatu are covered by some form of climate risk parametric insurance today, including farmers, fishers and MSMEs.
However, evidence from over four years of implementing the Pacific Insurance and Climate Adaptation Programme (PICAP), a programme which aimed to improve the financial preparedness of Pacific households, communities, small businesses, organisations and governments towards climate change and natural hazards, indicates that uptake among many low-income households, such as social welfare recipients, continues to lag behind.
Without broader uptake, it becomes commercially unsustainable for private insurers to offer these solutions. This is where well-designed premium support schemes, offering subsidies and financing, can make a meaningful difference.
The UNUEHS paper, titled Considerations for Operationalizing Micro- and Meso-level Premium Support, highlights the transformative potential of premium support schemes in helping insure the uninsured against climate shocks.
The UNUEHS is a co-implementor of PICAP, which is led by the UNCDF and supported by UNDP.
Concessional Finance
UNCDF is the UN’s flagship entity for mobilising and catalysing finance in the world’s Least Developed Countries (LDCs).
These markets often struggle to attract investment due to high perceived risks, limited financial infrastructure, and small market size. UNCDF helps bridge this gap by deploying targeted and concessional finance and guarantees to unlock economic opportunities for people, communities, and businesses.
UNCDF uses a mix of investment grants, concessional loans, blended finance, and guarantees to reduce risk and unlock additional capital from development banks, private investors, and national partners. This approach allows UNCDF to support local economies where commercial financing is scarce or unavailable.
What sets UNCDF apart is its ability to operate with a higher risk appetite, provide non-credit-rated lending, and remain active in underdeveloped, high-risk markets with weak regulatory environments.
Crucially, UNCDF is not constrained by the demands of fund reflows and minimum shareholder returns, allowing it to patiently and sustainably invest in solutions that close financing gaps and build long-term resilience.
The Insurance Guarantee and Financing Facility (IGFF) is designed within this framework
Rather than directly subsidising all premium costs, the IGFF proposes to deploy concessional finance to local financial service providers, including microfinance institutions, cooperatives, savings and loan societies, and private insurers.
With UNCDF's backing, these intermediaries can in turn, offer premium pre-financing to clients, enabling them to pay premiums upfront and repay over manageable instalments. The mechanism may also include partial guarantees to protect lender exposure.
Why Premium Support?
The risks to public assets and livelihoods from natural hazards are high and increasingly unpredictable. Due to limited fiscal capacity and high debt levels, many PSIDS are unable to allocate sufficient resources for disaster relief in the aftermath of climate shocks.
Despite the global protection gap - the difference between insured losses and the total amount of insurance needed – standing at 67 percent, the insurance sector’s role in disaster relief remains largely overlooked globally and in the Pacific.
Citing a separate 2018 publication, the UNUEHS paper identifies limited affordability, low awareness, lack of trust, cultural norms, behavioural biases, high transaction costs and institutional obstacles as the primary factors driving the low uptake of climate risk insurance.
It calls on national governments and regulatory authorities to lead the implementation of premium support schemes to ensure they reach the most climate-vulnerable communities.
Other stakeholders, such as the insurance industry, the financial sector, donors, development banks, the development community, and non-governmental organisations, can serve as the supporting cast to ensure the schemes meet their objectives and deliver meaningful impact.
The paper recommends clearly defining objectives before establishing such schemes, whether it is to increase insurance uptake or protect vulnerable communities.
With clear objectives, it becomes easier to design effective, sustainable and targeted premium support schemes, map gradual phase-out strategies, and specify the duration of subsidy assistance.
Some low-income climate-vulnerable groups, such as social welfare recipients, may require prolonged premium support to ensure earning ability is not a bar for accessing insurance protection.
The paper recommends intentionally and precisely targeting low-income groups with premium support schemes based on three important considerations: socioeconomic, geographic, and behavioural targeting.
Under socio-economic targeting, factors such as profession, company size, income levels, gender, or disability status are important to ensuring premium support is distributed equitably.
A notable example is the World Bank’s DRIVE Programme in the Horn of Africa, which specifically targets pastoralists with quicker insurance payouts as protection against losses from drought.
Geographical targeting is dependent on the availability of reliable data and involves allocating premium support based on the degree of exposure to climate hazards in each location.
The paper also recommends providing incentives that encourage households to adopt risk reduction and climate adaptation behaviours, such as coral reef restoration or mangrove planting.
Transparent, open, and clear communication among all the partners involved in premium support schemes is the fourth factor the paper cites as critical to building trust and fostering accountability.
Without it, schemes risk failure — and low-income households stand to lose the most.
Information on the objective of premium support schemes, premium prices, funding sources, selection criteria, the percentage of premium costs covered, the duration of the subsidy, and the total number of beneficiaries reached should be regularly and transparently communicated.
Conclusion
As global aid budgets shrink, premium support, whether through concessional lending, smart subsidies, or blended finance, can be a vital enabler for climate-vulnerable communities to access insurance protection against natural hazards.
As the paper highlights, fully subsidising premiums for poor households may be necessary in the short term, but phase-out strategies are also critical.
This is where UNCDF’s Insurance Guarantee and Financing Facility’s blended finance approach offers a clear pathway: enabling affordability today while building sustainable market dynamics for tomorrow.
The IGFF reflects UNCDF’s commitment to go beyond pilots to meaningful scale.
Without such financial mechanisms, climate risk insurance solutions will remain out of reach for many of those most at risk in frontier and emerging markets.
This limits both household resilience and private sector interest, threatening the commercial viability of solutions that are otherwise well-designed and desperately needed.