Background facts 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 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.

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. Such an approach saves people's lives and assets and preserves 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 make 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.

As at: 20/09/2022