Nella Canales (Sweden) 1; Adis Dzebo (Sweden) 2
1 - Stockholm Environment Institute; 2 - Stockholm Environment Institute
Index-based insurance is being promoted as a climate risk transfer mechanism for the most vulnerable; and is expected to incentivize private actors to invest in climate change adaptation. This type of insurance reduces moral hazard and administration costs, as it doesn’t require in-field assessments to estimate compensations after an extreme event. These characteristics are expected to incentivize private actors to invest in sectors considered otherwise too risky to invest in, such as smallholder agriculture. Therefore, both international and domestic public financial support is currently deployed for the development and scale up of this type of insurance.
This paper uses discourse analysis to unpack the rationale behind promoting index-based insurance as a risk transfer mechanism for climate change adaptation and resilience; and based upon the experience of internationally-led initiatives, provides critical insights on who is benefiting and whose risks are transferred, particularly when private sector investment is pursued. High-level statements on climate change, disaster risk reduction, and international development are analyzed; as well as statements used by internationally-funded initiatives promoting index-based insurance in sub-Saharan Africa: African Risk Capacity, Global Index Insurance Facility, and InsuResilience. Evidence from the design and implementation of insurance schemes part of these initiatives is used to assess coherence between discourse and action.
This analysis shows that index-based insurance is justified as a climate change adaptation or resilience measure because it is expected to facilitate adaptive capacity for vulnerable populations, including greater access to credit, and access to new or improved technologies or techniques (e.g. improved seeds, fertilizer). However, there is almost no evidence of the results of the implementation of such mechanisms in sub-Saharan Africa, and there are little incentives in place to conduct field impact assessments.
The justification for the use of public funding support for these mechanisms is thus based mainly in assumptions and expectations, rather than on evidence of effectiveness. In addition, business models most attractive for private actors are those benefiting the middle-man (e.g. private insurance brokers, agribusinesses, or micro-finance institutions) or better-off population (e.g. commercial smallholder farmers versus subsistence farmers), rather than the most vulnerable; and can imply making the acquisition of the insurance policy mandatory, rather than voluntary. These results question the capacity of index-based insurance in reaching its double objective of facilitating climate change resilience of the most vulnerable while at the same time attracting the private sector into climate change action.