Climate change is the greatest threat our planet faces; it wreaks havoc on lives, households and entire communities, in the form of catastrophic events that can destroy livelihoods in a heartbeat and drag the vulnerable (back) down into poverty.
But even if your home doesn’t lie in the path of a hurricane, or your business doesn’t rely on regular and controlled rainfall to bring in an income, the economic impacts of volatile weather conditions can be felt all around the world. In short, no one is safe.
The fact of the matter is natural disasters are becoming more frequent and severe, and while developed countries have the financial capability and support to rebound quickly from climate-related impacts, developing and emerging economies tend to struggle; not least because they have a strong reliance on climate-reliant activities, such as farming, but because there is a lack of accessible and affordable risk management to ensure their resilience.
According to data from the World Bank, it is estimated that more than 90% of the global population are unprotected against the impacts of climate change – a figure highlighted during the recent Asia Regional Dialogue: The role of insurance and data in closing the climate risk protection gap.
Although not a panacea, insurance can be part of the solution. It can be effective in building resilience and easing recovery in the face of climate change-related perils. As Surannit Chit, Deputy Director of Financial Development and Innovation at Bank Negara Malaysia explained during a discussion panel, when faced with business disruption due to the impacts of climate change, lower income households stand to benefit from claims pay-outs, as it could prevent them spiralling into severe economic hardships and debt. Without such financial security, global inequalities will simply continue to deepen.
Numbers speak louder than words
Despite growing interest and enthusiasm from the industry, today’s insurance products still need work if we are to close the climate protection gap. So why is this the case? And more importantly, what can be done to fix it?
Data lies at the heart of the solution: it can highlight the severity of climate change – data from the latest IPCC assessment report, for example, has revealed how the 1.1 degree warming is severely impacting 3.3 billion highly vulnerable people – it can help in making future assumptions – as Erickson H. Balmes, Deputy Insurance Commissioner of the Philippines explained – to understand and decide the correct course of action, and ultimately to design and provide insurance products that meet the needs of the most vulnerable.
Tailoring insurance products is critical in this respect, not least because climate change affects people in different ways, whether this be health and property, or broader risk management. Getting insurance products right is therefore paramount, and although data is the key to achieving this, gathering, collating and utilising information from multiple sources is proving a challenge – despite an increasing willingness from organisations to share their own findings.
Oversimplifying, data are facts, which under the umbrella of climate change can cover everything from information on weather and humidity, to soil quality and crop yields. Collating the right data for microinsurance products, however, isn’t just about number gathering. The source of the data has to be carefully considered too.
For farming purposes, satellite data is a key source of information for insurance, especially for parametric or index-based insurance. However, as Katharine Pulvermacher, Executive Director of the Microinsurance Network (MiN) highlighted, 90% of farmers who could benefit from climate-related insurance products commonly tend two-hectare farms. In these instances, high-resolution satellites, such as Sentinel 2 (which can provide ten-metre resolution data) would be suitable for data collection. Examples of this can be seen in India, where – as Anuj Kumbhat, CEO at WRMS (previously Weather Risk) pointed out – Sentinel 2 is used to scale risk management solutions for farmers on one-hectare farms.
Barriers to data aren’t just found up in the sky, however; ground sources can also prove a challenge. Information, for example, on which crops are being grown is limited, which means that advisory services as part of risk mitigation tools – such as when to plant and what to plant – cannot always be adequately delivered to farmers.
Data on farmer income is also scarce. As Pulvermacher explained, this information is vital for understanding the impact of losses and how they are allocated, whether that is providing income support for families, to ensuring food security at both a national and international level.
“The interpretation of data also requires technological expertise, especially in these days of uncertainty and change, when historical data is not enough to produce accurate risk modelling,” Pulvermacher added.
Closing the protection gap
Unfortunately, no single entity can deliver such information on a grand scale, which is why collaboration from both private and public sectors is vital. As Chit explained, only by working together can the industry develop mechanisms to facilitate the availability and access of data in a cost- and time-efficient manner.
This is where research, such as the MiN’s Landscape of Microinsurance Study, and data sharing platforms such as those from Oasis Loss Modelling and the Global Risk Modelling Alliance (GRMA) – two research groups identifying the causes of low insurance uptake – are fundamental. As Hannah Grant, Head of Secretariat at the Access to Insurance Initiative (A2ii), pointed out, to provide the right products, firstly insurers have to understand why there is a protection gap in the first place.
The A2ii Inclusive Insurance Innovation Lab is one such initiative uncovering the reasons behind this growing protection gap. The latest research has identified multiple reasons, from lack of awareness and affordability, right through to a lack of data and supply issues. In some instances, even government-related issues such as higher tax on non-life insurance products or lack of regulation, have also been identified as obstacles hindering product development and as a result, insurance uptake.
Naturally, once any issues have been identified, insurance products can be designed to either adapt to, or preferably, overcome any potential barriers. If cost is an issue, bundled products could offer a solution. Where getting data for parametric triggers – from crops and yield information to climate or weather observation data – is difficult, multiple data points can be used instead.
As noted by Anuj Kumbhat, CEO of WRMS, examples of this have been seen in Haiti, where precipitation data sets, vegetation indices and vegetation health indices are used to triangulate and understand not only when events will happen, but their severity, and how they could impact agricultural productivity.
Different levels of access to technology is another issue identified as preventing access, and therefore must be taken into consideration when designing and delivering product solutions.
“Insurers need to understand what the inventory of the populations’ current technology access is,” Jaime de Piniés, CEO of Blue Marble said. “In Mozambique, access to mobile money is limited in rural areas, so an agent-led model could work; while in Zambia, mobile money is widespread, so insurers could integrate and channel data and funds directly to the user.”
Once a suitable form and delivery of a product has been established, insurers can then concentrate on the processes. “Focus on communication and education, and ensure that the consumer enjoys the experience of being insured and that claims get paid on time,” de Piniés continued. “Set things up in a way that boosts demand.”
A world of possibilities
Digitalisation underpins all these examples of product innovation, especially for solutions such as parametric insurance or mobile payment mechanisms. Even digital platforms can help integrate technology, from data management, registrations, policy booking, claims calculations and even settlements; however, to ensure consumers are protected, as the panel agreed, such technologies need to be regulated and consumers educated adequately.
As Grant concluded, insurance is not a silver bullet, but when combined with other tools such as risk reduction and risk mitigation, it can make people more resilient to climatic events; and until a magic wand can reverse the impacts of climate change, the only way is building resilience of those who need it most.