Medhin Reda and her daughter in the village of Adi Ha, Ethiopia. Medhin is a participant in the R4 weather insurance program. (Photo: Coco McCabe / Oxfam)

Four key policy considerations for employing climate-risk insurance in a way that values poor households as active participants.

This post was co-written by Mansi Anand an R4 Rural Resilience Initiative Advisor for Oxfam America.

Insurance is having a bit of a moment.

In global forums ranging from the Third UN World Conference on Disaster Risk Reduction, to the 41^st G7 Summit, to the recent World Humanitarian Summit, world leaders have lauded the promise of climate risk insurance as a vehicle to help build the resilience of vulnerable populations in the face of increasing climate risks. The renewed interest in insurance also comes at a time when national governments, donors and the private sector are looking for innovative ways to finance recovery in the aftermath of natural disasters. The benefits of predictable financing mechanisms like insurance are evident, as they are able to provide vulnerable households and communities with immediate access to financing following a catastrophe, whereas traditional humanitarian assistance often takes several months to arrive. Despite these potential benefits, it’s still worth asking: is insurance a climate cure-all?

Not quite.

For years, Oxfam and the World Food Programme have operated at the nexus of climate, humanitarian response, and development through the R4 Rural Resilience Initiative (R4). R4 offers vulnerable households access to a combination of risk management strategies, including index-insurance.  Through our experience we’ve learned that when properly designed, insurance can be a powerful tool to help communities become more resilient to increasing climate variability and shocks. The following are four key considerations for development actors looking to unlock the potential benefits of climate risk insurance for the poor while also recognizing poor households and countries as active participants—not just subjects—of development and climate adaptation interventions. While these principles are derived from a micro-insurance model, they can be effectively applied to macro and meso-insurance design as well.

1. It ain’t easy.

Climate adaptation is a highly complex process which involves coordinated action at all levels, robust financial commitments by governments and donors, and appropriate tools and technologies.  Climate risk insurance can play a catalytic role in promoting adaptation—however; insurance alone is insufficient.  Insurance must be integrated within a broader risk and poverty reduction program in the context of a changing climate.  For these reasons, the R4 initiative integrates risk transfer (insurance) with risk reduction, credit, and savings to inspire a multiplier effect.  Weather index-insurance complements these strategies by addressing the climate scenarios for which it is difficult to plan.  For instance, rainfall harvesting structures reduce risk by allowing farmers to conserve water in the long run, while weather index-insurance provides added protection if rainfall is unusually low in the short-run.  Weather index-insurance can also encourage farmers to make adaptation investments on credit, which in turn increases their resilience to weather-related shocks.

2. Find creative ways to make insurance affordable.

R4’s insurance-for-assets model allows vulnerable farmers to pay their premiums in labor rather than cash; farmers can choose to work a certain amount of days on community-identified risk reduction assets such as water harvesting structures, drought-resistant plants, restored catchment areas, there by paying for insurance with their labor. The insurance-for-assets scheme also allows farmers to benefit even when there is no payout—meaning the risk reduction measures taken in their communities support climate resilience and agricultural productivity in the long run.

3. Insurance can enhance national safety nets.

Development actors should keep in mind that food security remains the primary and immediate concern of small-scale farmers.  Yes—farmers are concerned about coping with the adverse effects of climate change, but they are even more concerned with meeting their basic needs each day.  If insurance is integrated into a food security program it can contribute significantly to long-term household welfare, while also addressing farmers’ immediate food needs. In Ethiopia, the R4 model uses the Productive Safety Net Program (PSNP) as the primary distribution mechanism to reach the most vulnerable households and the insurance-for-assets component serves as an add-on to the PSNP’s cash-and-food-for-work programs in anticipation of future needs and risks.  In other words, by putting in a few days of additional labor on community risk reduction projects, the PSNP farmers who receive cash and food in exchange of labor on PSNP public works are also able to buy insurance for their crops.

4. Prioritize a community-driven adaptation process.

Although adaptation efforts must be aligned with and bolstered by regional, national, and global policies, ultimately, it is at the individual level that we need to make real impact.  Employing a community-driven, rights-based, and gender-responsive process ensures effective insurance product development and roll-out. R4 is centered on products borne of participatory design. The idea of insurance-for-assets came from the farmers themselves. Additionally, farmers are involved in identifying their educational and risk management needs, are trained in weather data collection, and made aware of risk management strategies that inform their decision to purchase insurance or not.

Stakeholder participation is also important for the design of complementary risk reduction and adaptation activities, so they accurately reflect the preferences and priorities of community members.

So in short, while climate risk insurance is not a cure-all, under the right conditions it can play a critical role in supporting community-led adaptation efforts.  Now let’s create the conditions.