Nora Ferm is a Presidential Management Fellow in Global Climate Change

While health insurance, life insurance, car insurance and flood insurance are very familiar to people in countries like the United States, poor families in developing countries typically lack access to finance, including loans and insurance. When these families are hit with severe shocks like hurricanes or major droughts, their homes and their crops and livestock may be nearly wiped out, and they may be forced to sell off assets in order to survive another year, leaving them with fewer resources to start the next season. With climate change, many communities will see these kinds of extreme events hit with increasing severity and frequency, leaving the poor with even less time to recover before the next storm or drought hits. With the signing of a new agreement today with Swiss Re, USAID aims to increase access to market-based insurance products, using them as tools to promote food security and climate resiliency, by enabling the poor to better prepare for and cope with the impacts of these climatic disasters.

USAID’s insurance projects are mindful of the fact that insurance is not a stand-alone solution. Not all climate risks are insurable, or most cost-effectively addressed through insurance.  For example, it would be very expensive to buy insurance for a drought that could be expected to occur every other year.  Insurance is most effective when used to complement other adaptation measures like risk reduction.  Risk reduction measures like rainwater harvesting, early warning systems, drought-tolerant seeds, drip irrigation, and soil erosion control measures will help deal with minor shocks that may occur fairly frequently. Those measures may be insufficient, however, in the case of a severe drought or storm – that is where insurance can help, providing cash  to help families recover.

We still have a lot to learn about when and how to use insurance to help vulnerable communities manage their risks and adapt to climate change. USAID is supporting 8 micro-insurance pilots around the world, in order to address some of the outstanding questions.  In Ethiopia, for example, we are supporting the design of a micro-insurance product for poor pastoralists who are dealing with increasing drought risk. The pilots are investigating questions like whether insurance can increase involvement in risk reduction activities or farmer uptake of adaptive technology, and how climate change projections can best be factored in to risk analysis and pricing.

Donors like USAID, and other public sector institutions, can help with some of the foundational requirements for the establishment of insurance programs in developing countries.  This includes updating regulatory frameworks, collecting weather data, building the capacity of insurers and customers, and designing insurance products that meet the needs of the poor. These are start-up costs that  no single insurer will pay for, because their competitors will also benefit from these public goods. At the same time, we want to make sure that insurance aimed at vulnerable communities is market based, sustainable, and  that it sends accurate signals about risk. Working with the private sector is critical to achieving these goals.  In our pilots, local insurers market the products and seek international reinsurance. Some of the local insurers have selected Swiss Re, and we look forward to building on those experiences as we pursue future collaboration with Swiss Re under the new MOU.