Insurance solutions can play a significant role in dealing with the consequences of climate change. Mirroring its approach at the international level the Munich Climate Insurance Initiative (MCII) has convened public and private stakeholders to develop the Livelihood Protection Policy (LPP), a parametric index-based micro-insurance product as a response to the vulnerability poverty nexus in the Eastern Caribbean.
This product is targeted at those who are the most vulnerable to extreme weather impacts living on the Caribbean islands of Saint Lucia, Jamaica and Grenada. The residents of these islands suffer from the aftermath of storms, hurricanes, and floods, with little support or access to financial assistance. The LPP helps people in the low-income segment of society to access climate risk insurance at a reasonable cost and without any restrictions vis-a-vis a specific sector or occupation. The results of the project are constantly being fed back into international policy-making processes to shape the international dialogue on climate risk insurance.
- LPP has been in the market in Saint Lucia, Grenada and Jamaica for four hurricane seasons, accumulated USD 440,000 in the total sum insured, and paid out USD 132,824;
- It operates with a range of local partners, including primary insurers, social aggregators, risk management agencies, and national Ministries;
- The product is distributed to clients using social aggregators, like credit unions, farmers’ cooperatives, and associations;
- Special provisions are made to existing regulatory frameworks to address parametric index insurance in existing insurance acts;
- Training on parametric index insurance and micro-insurance has successfully been provided to local stakeholders.
Extreme weather events related to climate change impact those least able to adapt to them. Low-income communities are often excluded from financial services like risk insurance, as they cannot afford the high premiums or fees of traditional insurance solutions. Access to finance in the aftermath of a disaster is often blocked due to a lack of a formal or regular income, insufficient credit history, low collateral, or proper identification.
Owing to the lack of insurance or other formal protection schemes, many at risk in developing countries are unable to raise sufficient capital to restore livelihoods following major catastrophe. This leads to affected people resorting to a variety of coping strategies (e.g. activity diversification, selling assets, reducing food consumption, taking children out of school or borrowing) in the event of a crisis. Applied on their own, these strategies might further trap them in poverty and impede development.
The Livelihood Protection Policy (LPP) designed by the Munich Climate Insurance Initiative was introduced to the Caribbean islands of Jamaica, Saint Lucia and Grenada, providing access to affordable micro-insurance for those most at risk from extreme weather events such as hurricanes and flooding. This means introducing new, simplified, and low transaction cost insurance and to consider climate risk insurance in the context of integrated climate risk management, as part of effective national and sectoral adaptation planning.
By extending financial protection to underserved vulnerable communities, MCII has demonstrated the role financial inclusion can play in climate change adaptation. The project also aims to improve linkages between the insurance product and disaster risk reduction measures and to streamline the regulation of climate risk micro-insurance approaches across the Caribbean.
To achieve this, MCII links important local stakeholders like national disaster management agencies, local insurance companies, social aggregators like farmers’ associations, insurance regulators and relevant ministries, with a regional risk insurance pool (CCRIF SPC), independent climate service providers (DHI), enabling organizations (ILO’s Impact Insurance Facility), and global reinsurance companies (Munich Re).
Helping the planet
Generally, transparent insurance programmes help pricing the risks of disasters. Creating such price tags can become an important motivator to undertake resilience creating activities; it can also help to indicate disaster costs and help to exemplify the cost of inaction to mitigate climate change.
Efforts are made to bundle any such micro-insurance or index-based products with activities and/or measures that support sustainable ecological practices to avoid unsustainable practices that would further harm the natural environment.
This project aims to motivate a paradigm shift in addressing and dealing with climate risks among vulnerable populations in the low-wage sector. It also promotes international climate financing dialogue among political decision-makers at national and regional levels to development corporations and climate negotiators at the international level. By virtue of this initiative, payout recipients can get back on their feet faster than was previously possible without having to resort to erosive coping measures.
Overall, the project has increased the adaptive capacity of target stakeholders, as climate risk insurance enables people to access the resources needed to escape climate-related poverty and, the application of climate risk insurance, holds a direct incentive for risk reduction.
In the long term, the effects of climate risk insurance, such as economic diversification or the possibility to invest in their own livelihoods, will contribute to the increase in economic resilience and lead to a general improvement in the economic situation.
Building the capacities of insurance regulators and primary insurers in the target countries has helped to lay the groundwork for effective upscaling of the Livelihood Protection Policy into other countries in Latin America and the Caribbean. Private sector stakeholders have expressed their interest in expanding the provision of weather risk insurance to vulnerable communities in 21 additional countries in the region. Having gained the first proof of concept, efforts are underway to revise the product to make it more suitable and further improve its performance. A new element is branchless banking, to decrease transaction costs and make premiums more affordable. The project currently explores ways of including additional perils in addition to the already existing coverage of damages through heavy rain and strong wind speed. Targeted extensive capacity-building and close cooperation with local actors has resulted in attempts to roll the project out across the Caribbean. The LPP Itself is an agile product that can be easily adapted to different circumstances in other countries and contexts. It is designed as a parametric index-based insurance product that considers specific rainfall amounts or wind velocities to calculate a given payout. These trigger thresholds can be adjusted to local contexts by the calculation agent who monitors the underlying weather data and assesses the necessary parametric index. Payout levels can be adjusted to the needs of the target group in each location.
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