Written by Rosehana Amin, Senior Associate, Clyde & Co London
Climate and disaster insurance schemes are turning to parametric insurance where pay-outs are triggered when certain parameters fall within certain values. The parameters, or indices, could be based on the amount of rainfall, wind speed or earthquake strength.
One interesting example of this sort of insurance in action is The African and Asian Resilience in Disaster Insurance Scheme (ARDIS) which is thought to be the world’s largest non-governmental climate insurance programme.
ARDIS is a joint scheme by VisionFund International, the microfinance arm of development charity World Vision, and Global Parametrics, a new venture backed by the British and German governments.
The aim of ARDIS is to increase access to finance and provide post disaster recovery lending to rural families and smallholder farmers who live below the poverty line and participate in VisionFund’s microfinance charity. It is understood the programme’s size and outreach will meet one percent of the G7's goal to increase access for up to 400 million uninsured people in developing countries to insurance products that protect against climate risk.
ARDIS protection will initially be provided to up to four million people in Kenya, Malawi, Mali, Zambia, Cambodia and Myanmar. The scheme will provide increased access to finance and provide post disaster recovery loans to rural families and smallholder farmers who live below the poverty line and participate in VisionFund’s microfinance network.
For instance, if a drought occurs and the soil moisture drops below a certain level during the growing season, it will trigger an injection of debt and "insurance" funding into VisionFund's microfinance funds from the InsuResilience Investment Fund and Global Parametrics. It will then provide rural families and small business holders with quick access to loans, which is much-needed after a natural disaster to allow for economic recovery. These loans are provided on special terms to help this recovery at a time when other financial institutions would typically reduce or stop lending.
Climate insurance programmes
Of course, ARDIS is not the only scheme aimed at preventing natural disasters from becoming human disasters.
Another is the R4 Rural Resilience Initiative (R4) which provides compensation for weather-related losses which not only assists with post-disaster recovery but prevents rural farmers from having to take desperate measures such as selling productive assets, and allows vulnerable communities to increase their food and income security by managing climate-related risks. R4 is currently active in Ethiopia, Senegal, Malawi and Zambia, the initiative is also being piloted in Kenya and Zimbabwe.
In India, there are several different micro-insurance schemes designed to mitigate climate risks caused by natural disasters. The All India Disaster Mitigation Institute (AIDMI) is a non-governmental organisation which provides disaster insurance for urban resilience for the poor and vulnerable
Schemes like ARDIS and others show how innovative approaches insurance models can provide vulnerable communities with protection against extreme weather shocks linked to climate change. The key is often the involvement of third parties such as aid organisations and charities working in partnership with insurers but also, crucially, with local bodies and community groups, which is an important step in establishing trust in economies where that is often the most precious commodity of all.