Is it time to rethink humanitarian insurance?

The human and financial costs of climate and other natural disasters are increasing. These disasters disproportionately affect the poorest and most vulnerable populations- who lose much more of their wealth when disaster strikes.

Yet, only a fraction of the costs of these disasters in the developing world are covered by international aid and even less by insurance.  According to a new report by Risk Management Solutions, only 3 percent of disaster losses were covered by insurance and only 8 percent by international aid.

The remainder of these losses have been left to governments and individuals to absorb, making the poorest and most vulnerable people in the world their own insurers of last resort. The costs to this population go well beyond financial loss and include malnutrition, displacement, disrupted education, loss of productive assets and livelihoods and even death.

In the Philippines over the last two decades, 15 times as many infants died in the 24 months after typhoons as died in the typhoons themselves due to access to health care, sanitation, and adequate diets; 80 percent were infant girls.

Humanitarian organizations have been testing insurance tools for some time, but only in the last few years has the practice begun to accelerate dramatically. This acceleration is due to rapidly growing needs, increasing climate-related risks, and a growing evidence base on the potential cost savings and other benefits from risk financing.

With this accelerating focus on expanding access to insurance to address the impact of natural disasters, it is important to reflect on some of the lessons we have learned in recent years:

Predictability takes more than money.

As we develop much needed risk finance and insurance tools, we will need to redouble efforts to support communities, local governments and national governments to build their capacity to use these funds to reach the most vulnerable populations. 

Experience from a number of sovereign insurance pools have shown how hard it is to realize the promise of early response because of lack of delivery channels and response capacity. Social protection systems and safety nets have proven one of the most effective ways to employ risk finance as they can be scaled up and down as needed.

Insurance is one of a number of risk finance tools.

While insurance has a critical role to play, a broader starting point is needed.  We need to map and quantify risks (financial, human, social) and then assess the appropriateness of the full range of financing tools that can be brought to bear including; national government and donor budgets, aid agency budgets, credit lines and contingent finance, parametric insurance, catastrophe bonds, among others.  

For humanitarians, it is important to incorporate the costs borne by the poorest and most vulnerable people. Our efforts to expand insurance are much more likely to be successful if we start with this broader view, where the role and expectations for insurance mechanisms are well defined and realistic.

Layers, layers and more layers.

We need layers of risk financing at multiple levels.  The vision for humanitarian insurance needs to include expansion of access to micro-insurance so that people are directly covered and able to make their own decisions on how to address losses after disasters. At the same time, natural disasters will happen. Local and national governments, as well as the international and regional organizations that support them, need to have adequate financing in place to be able to meet their needs.

During the most recent droughts in Ethiopia, the national Productive Safety Net Programme (PSNP) has been able to scale up using a combination of its core budget, its contingency budget, and its risk financing mechanism, while growing micro-insurance programs have paid out to farmers directly.

Incentives for risk reduction and risk taking.

As practitioners, we need to understand how to integrate insurance and risk finance into our programs to create incentives and opportunities for reducing and taking risks. Insurance helps us manage risk so that we can invest more in development, invest in disaster risk reduction, and equally as important; take prudent risks.

 Insurance has significant benefits when disasters do not strike.  These are the times when the extra investment in irrigation, improved seeds, a new business venture, or other activities can pay the greatest dividends.

Anticipate. 

Most humanitarian risk financing work has focused on the essential work of getting funding in place to respond immediately after a disaster occurs and to support reconstruction and recovery.  However, the emerging field of forecast-based financing presents some unique opportunities to significantly improve the effectiveness of efforts to limit the impact of climate disasters.

For example, El Niño forecasts were used by the World Food Program’s FoodSECuRE program in Zimbabwe and Guatemala to help farmers switch to drought-tolerant crops, repair irrigation and water conservations structures, and improve on-farm drought management before drought hit. While forecasts are not always right, the potential cost savings and improved response make this action more than worthwhile.

There is clearly a long way to go to realize a vision of a more predictable, localized humanitarian response system. The commitments of the G7, G20, and Paris Agreement, alongside the commitments of the insurance industry and humanitarian community are a critical step in this direction. But, we should be cautions to learn the lessons from the last decade of pioneering work to use insurance to improve the performance of the humanitarian system.