Flooding on the Philippines

Climate risk insurance

Climate risk insurance improves people's protection against climate-related loss and damage, thus strengthening their financial resilience against the negative impacts of climate change. The disbursement of insurance payments can serve as quick assistance in an emergency and prevent impoverishment, hunger and indebtedness. And dialogue between governments, insurance companies and experts can help improve disaster management.

Climate change has an influence on the frequency and intensity of extreme weather events. Nearly everywhere in the world, an increase in extreme heat can be observed. Hurricanes are causing more damage because of increased rainfall and higher floods. Developing and emerging economies are particularly exposed, as climatic changes are posing a threat to development gains that had already been made. 

Climate risk insurance enables people to better cope with the consequences of extreme weather events. The German Development Ministry is pursuing efforts for the comprehensive and active management of climate risks worldwide, especially through its involvement in the InsuResilience Global Partnership. In that connection, it supports cooperation between governments, the private sector, multilateral institutions, civil society organisations and research institutes.

Infographics: InsuResilience Global Partnership

Infographics: InsuResilience Global Partnership

Infographics: InsuResilience Global Partnership

Strengthening resilience to climate change

The negative consequences of climate change are hitting those particularly hard who are less able to recover from disasters economically and financially. The livelihoods and opportunities of these vulnerable groups are at risk, for instance when homes are destroyed, crops fail or livestock dies. This can result in illness, malnutrition and climate-related migration and displacement. As the regions concerned try to deal with the consequences of such developments, they may accumulate more debt and their economic development may suffer severe setbacks.

Sustainable development that strengthens vulnerable countries' and people's resilience against climate change can only be achieved through integrated climate risk management. This includes efforts to address financial damage caused by extreme weather events. Climate risk insurance can assist vulnerable people in instances in which other options for adapting to climate change have been exhausted. It covers damage that cannot be averted through risk prevention and reduction.

There is empirical evidence that the economy recovers much more quickly in countries with functioning insurance systems than in those that lack such systems. However, this is still a new approach in developing countries and emerging economies. According to figures from Munich Re (External link), the proportion of insured losses in these countries is well below 10 per cent, not counting the indirect economic consequences of (climate) disasters. In industrialised countries, by contrast, an estimated 50 per cent of losses are covered by relevant insurance.

How does climate risk insurance work?

Climate risk insurance schemes offer a financial safety net against the negative impacts of extreme weather events. There is direct insurance and indirect insurance.

Women in Sofala Province, Mozambique, who are still being supported by the World Food Programme one year after the devastating cyclone Idai.

Indirect insurance Internal link

Indirect insurance, also referred to as macro insurance, is taken out by governments. When damage occurs, they receive payouts and use these financial resources to assist those in need.

Rice harvest in Bangladesh

Direct insurance Internal link

Direct insurance schemes, which include micro insurance, provide protection for individuals or businesses – for instance microfinance institutions and seed companies – against risks such as crop loss caused by drought. When they incur a loss, they receive direct financial benefits. 

Why is there a need for climate risk insurance?

Quick emergency relief and swift recovery. After a disaster, valuable time passes while the international community and aid organisations often have to work hard to raise money. It is not uncommon for weeks or even months to pass before the survivors receive assistance. More and more governments and humanitarian organisations are realising that climate risk insurance facilitates quick and effective action. Such insurance protects human lives, livelihoods, but also the national budget, from the impacts of climate change.

Risk financing on the basis of climate risk insurance is based on a preparedness approach. This makes it possible in an emergency to pay out money to survivors a short time after, or even before, they have incurred a loss. This saves people's lives and assets and protects development gains that had already been made. In other words, insurance schemes help to reduce poverty, secure debt sustainability, attain sustainable development and also reduce the economic push factors of migration.

Entitlement to compensation for losses. Climate risk insurance gives insurance holders the certainty that, if the predefined events occur, they will really receive assistance after a disaster, enabling them to become less dependent on assistance and making their own contributions towards securing their livelihoods. In the case of index-based drought insurance, for example, the disbursement of benefits is contingent on precipitation levels remaining below a specified limit.

German activities InsuResilience Global Partnership for Climate and Disaster Risk Finance and Insurance Solutions

The aim of the InsuResilience Global Partnership (External link) is to increase the resilience of the poorest and most vulnerable groups in developing countries and emerging economies against climate risks and disasters. The Partnership was launched by Germany, together with other partners, during Germany's 2017 G20 Presidency. The multi-stakeholder partnership now has more than 90 members from industrialised and developing countries, civil society, the private sector, international organisations and the research community. Germany is the biggest supporter of this key initiative.

The various programmes within the Partnership support pre-agreed schemes (such as climate risk insurance) which provide protection against the financial risks of climate impacts and disasters. Quick assistance and recovery protect the livelihoods of poor and vulnerable people against the consequences of climate-related events. Moreover, the Partnership supports the development of comprehensive climate and disaster risk strategies at the national and local levels in poor and vulnerable countries.

The Partnership has set itself an ambitious target in its Vision 2025 (External link): to provide coverage to 500 million of the world's poorest and most vulnerable people by 2025. 

InsuResilience Global Partnership

Storm damage on the Caribbean island of Dominica after Hurricane Maria in September 2017

A global partnership within the framework of the G20 and the V20 Internal link

During Germany's G20 Presidency in 2017, climate risk financing and insurance was a prominent issue on the agenda of this group of major industrialised and emerging economies.

Logo: InsuResilience Global Partnership

Improving resilience against climate risks Internal link

The aim of the InsuResilience Global Partnership is to increase the long-term resilience of the poorest and most vulnerable groups in developing countries and emerging economies against climate risks. The expansion of climate risk financing and insurance instruments is intended to enable governments, enterprises and households to respond more quickly and effectively to natural disasters, thus minimising potential resulting costs.

A farmer with her herd of goats in drought-stricken north-western Kenya

Vision 2025 – increasing global ambition Internal link

In its Vision 2025 (External link), the Partnership has adopted ambitious targets. It seeks to facilitate the provision of coverage against climate risks and disasters for 500 million of the world's poorest and most vulnerable people by 2025.

UN Climate Summit 2019 in New York

Trilateral agreement between Germany, the United Nations Development Programme and the Insurance Development Forum  Internal link

At the UN Climate Action Summit in September 2019, the BMZ, the United Nations Development Programme (UNDP) and – representing the insurance industry – the Insurance Development Forum (IDF) agreed to join forces in order to increase ambition on climate risk financing and insurance. 

Website of the InsuResilience Global Partnership

Pooling the expertise and experience of all major stakeholders Internal link

In order to attain its goals, the Partnership brings together the expertise and experience of all its stakeholders. To that end, it unites representatives of developing and industrialised countries, international organisations and development banks, the private sector, civil society and academia.

BMZ achievements in the field of climate risk insurance

In 2020, the BMZ shouldered premium payments (External link) for drought insurance under the African Risk Capacity (ARC) amounting to some 19.5 million euros as part of its Emergency COVID-19 Support Programme. As a result, up to 20 million poor people in Africa who are particularly vulnerable to crises will be reliably insured against drought damage for the 2020/21 agricultural season.

Since 2013, ARC drought insurance has paid out 65 million US dollars to the governments of Mauritania, Senegal, Malawi, Niger, Zimbabwe, Madagascar and Côte d'Ivoire and to humanitarian players such as the Start Network, assisting more than 3.2 million people in severe drought situations (as at December 2020).

Since its inception, the InsuResilience Global Partnership has already achieved a great deal. More than 800 million euros has been committed by various donors during the period up to 2020 in order to expand and develop insurance and finance solutions for climate and disaster risks. Germany is the largest supporter, providing about 670 million euros (as at January 2021).

The funding is intended, among other things, to assist national and sub-national governments in developing comprehensive climate and disaster risk management strategies so as to improve their preparedness for the negative consequences of climate change.

In 2016, Germany joined forces with the UK, the United States, Japan, the Pacific island states and the World Bank to set up a new risk insurance facility, the Pacific Catastrophe Risk Assessment and Financing Initiative (External link) (PCRAFI). It offers insurance products to Pacific island governments to cover tropical cyclones, tsunamis and earthquakes. For example, following cyclone Gita in early 2018, PCRAFI paid out 3.5 million US dollars to Tonga just seven days after the disaster. In April 2020, another 4.5 million US dollars was paid out for emergency relief and reconstruction just a few days after cyclone Harold.

New implementation programmes

In order to provide larger-scale support for the development of insurance and finance solutions for vulnerable countries, Germany joined forces with the UK and the World Bank in 2018 to set up a new implementation programme, the Global Risk Financing Facility (GRiF). Another new programme is the InsuResilience Solutions Fund (ISF), which was launched jointly by the German government and KfW. While GRiF targets governments, the ISF puts a special focus on engaging and working with the private sector.

In the course of the development of new programmes, the Program Alliance was set up within the InsuResilience Global Partnership in order to ensure coordination of the various implementation efforts. Germany and the UK are represented as important donor countries. Thanks to their regular exchange within the Alliance, the various players are able to tailor their insurance and finance products even more closely to partner countries' needs and to support the introduction of new products in the market.

Global significance

At the UN Climate Action Summit hosted by UN Secretary-General António Guterres in September 2019, the Partnership was highlighted as one of the key global resilience initiatives. The Partnership presented its Vision 2025 during the Summit, in which it made a commitment to place a focus on gender equality. Gender will be mainstreamed as a cross-cutting issue in all activities on insurance and finance solutions for climate and disaster risks.

Cooperation in action

Village in the Somali region of Ethiopia where nomads have settled because of the ongoing drought

Africa: Cooperation in action Insurance policies against drought effects – ARC and ARC Replica Internal link

The African Risk Capacity (ARC) and ARC Replica provide support to African countries' efforts for better drought preparedness and offer them protection against financial losses from drought. This facilitates quick and effective assistance.

A young girl on a makeshift bridge after flooding in Sindh province, Pakistan.

Pakistan: Local micro insurance InsuResilience Investment Fund provides support for local institutions Internal link

Pakistan regularly experiences extreme weather events with negative consequences for the population, especially in agriculture. With support from the InsuResilience Investment Fund (IIF), a local foundation in Pakistan offers farmers a chance to combine micro loans for livestock purchases with micro insurance. 

Flooding in Iquitos, Peru

Peru: Protection for public infrastructure Introduction of a new insurance programme for public schools in Peru Internal link

The increase in extreme weather events such as floods has been presenting a major challenge to Peru. Public infrastructure is particularly important in this context. The InsuResilience Solutions Fund addresses this by supporting an insurance programme for public schools.

Background facts

Damage caused by Cyclone Evan 2012 in Samoa

What is climate risk financing? Internal link

Extreme weather events vary in terms of their intensity and frequency. In order to effectively address the resulting climate risks, mutually harmonised risk financing instruments are needed that cover different kinds of financial needs: direct and indirect climate risk insurance, guarantees, bonds, (reserve) funds, and loans and grants help survivors to recover quickly from disasters and to protect themselves better in the future.

Drought in Northern Kenya

Advantages of risk financing and climate risk insurance  Internal link

Insurance is best suited to cover medium to severe risks that occur less frequently (every 15 years or even more rarely). However, suitability may vary a great deal depending on the region. Risk assessments are needed in order to determine in greater detail how to appropriately use insurance and other risk financing instruments such as reserve funds.

 Caribbean Catastrophe Risk Insurance Facility

Caribbean Catastrophe Risk Insurance Facility (CCRIF) Internal link

When the Caribbean Catastrophe Risk Insurance Facility (CCRIF) was founded in 2007, it was the first regional insurance pool of its kind. In 2015, the Facility was expanded. It now also covers the countries of Central America. Guatemala, Panama and Nicaragua have since joined.

Logo: Global Risk Financing Facility

The Global Risk Financing Facility (GRiF) Internal link

In October 2018, the German government joined forces with the UK and the World Bank to set up a new implementation programme to expand and enhance climate risk insurance solutions for vulnerable countries, the Global Risk Financing Facility (GRiF).

Logo: Global Index Insurance Facility

Global Index Insurance Facility (GIIF) Internal link

The Global Index Insurance Facility (GIIF) is a dedicated World Bank Group programme. This endeavour is being implemented within the framework of the InsuResilience Global Partnership. All GIIF donors are members of the Partnership.

Logo: InsuResilience Solutions Fund

InsuResilience Solutions Fund (ISF) Internal link

Another important implementation programme of the InsuResilience Global Partnership is the à InsuResilience Solutions Fund (ISF). It supports the development of innovative climate risk insurance products in developing and emerging economies in order to cushion the impact of climate change.

Logo: InsuResilience Investment Fund

InsuResilience Investment Fund (IIF) Internal link

The InsuResilience Investment Fund (IIF), which was designed and is being co-financed by Germany through KfW, makes equity investments in, and provides loans to, private insurance companies and intermediaries with activities in developing countries in order to give up to 100 million people poor and vulnerable people access to climate risk insurance.

House in Haiti destroyed by an earth quake

Natural Disaster Fund (NDF) Internal link

The Natural Disaster Fund (NDF) offers developing countries appropriate solutions that are based on scientific weather models, insurance mathematics methods, and risk transfer instruments.