Building Climate Resilience: Inclusive Green Finance and Parametric Insurance for the Pacific’s Vulnerable Communities

October 2, 2024
a group of people sitting at a table in a room

The panel discussion emphasized the need for immediate financial assistance after extreme weather events and pitched parametric insurance as a solution.

Photo: UNDP

As threats from climate change and environmental degradation mount, global attention has turned to inclusive and green financial inclusion policies that respond to the needs of the most vulnerable.  

This conversation is especially relevant in the Pacific, a region highly exposed to climate and economic shocks and one that simultaneously struggles to access the finance needed to respond.  

There is a growing sense among regional experts that government policy must adapt to support the development of innovative financial solutions that respond to the unique needs of climate-vulnerable populations.  

At the 2024 Inclusive Green Finance Working Group (IGFWG) meetings co-hosted in Fiji by the Alliance for Financial Inclusion (AFI) and Reserve Bank of Fiji, this very subject dominated the discussions. 

A panel on ‘parametric insurance for resilient and inclusive MSMEs and microfinance institutions’ explored some potential solutions that could build and strengthen climate resilience in the region.  

The panel included Krishnan Narasimhan, Lead Global Specialist, Climate Disaster Risk Financing and Insurance, UN Capital Development Fund (UNCDF); Ronaldo Limbago, Regional Coordination for Asia, Access to Insurance Initiative (A2ii); and Aholotu Palu, CEO, Pacific Catastrophe Risk Insurance Company (PCRIC).  

The panel emphasized the need for immediate financial assistance after extreme weather events and pitched parametric insurance as a solution, given the advantage it has over traditional insurance in providing quick cash liquidity to those affected. 

The IGFWG was launched in 2019 as a platform for AFI members to collaborate and identify, understand, and implement inclusive green finance policy solutions, with a focus on communities bearing the brunt of climate change. 

Pacific Small Island Developing States (SIDS) suffer average annual losses of US$1.07 billion from natural disasters, with tropical cyclones exacting the bulk of the damage, followed closely by drought, flood and earthquakes.   

Given the escalating situation, central banks and ministries of finance in the Pacific are leading the push for the development of financial products and services that help build resilience against climate events, rising sea levels and changing weather patterns. 

“There is a lot of evidence to show that the first one hundred dollars given within a couple of weeks after an extreme weather event is more valuable than the hundreds of dollars which will come six months or one year later,” UNCDF’s Narasimhan said.  

While stressing the importance of longer-term recovery and rehabilitation, Narasimhan added that the immediate availability of funds could help small holder farmers or fishers resume planting or fishing faster, ensuring protection of livelihoods.  

Parametric insurance – what’s available in the Pacific? 

One of the IGFWG’s key objectives is to “provide a platform for capturing, tracking, and sharing information on innovative IGF products...” and this was the basis for the panel discussion on parametric insurance.  

UNCDF has collaborated with private sector partners, regulators, and agriculture agencies to launch parametric micro and meso insurance products in Fiji, Tonga, Samoa, Vanuatu, and Papua New Guinea.  

The products provide cover against high windspeed, excessive rainfall, droughts, and earthquakes, for farmers, fishers and MSMEs. The scheme as to date covered 17,963 households , over 40% of which are women and 2000 climate-vulnerable social welfare recipients in Fiji.   

To achieve these numbers and ensure sustainability, UNCDF built a local ecosystem of partners from the public, private, and the NGO/CSO sectors. Each stakeholder has a unique and influential role in developing, distributing, marketing, and creating awareness about parametric insurance in the Pacific.  

The region’s financial sector regulators play a pivotal role  in the ecosystem, Narasimhan said, with most Pacific countries lacking specific regulations on insurance, let alone parametric insurance.  

Despite the novelty of parametric insurance, regulators have been flexible and used mechanisms such as regulatory sandboxes and conditional exemptions to make the product market ready and catalyze innovation.  

Innovation has come in the form of a anticipatory action insurance product, combining the key elements of disaster risk reduction and parametric insurance to provide payouts to communities in the lead up to and following a tropical cyclone. 

“With thousands of individuals covered across multiple countries, parametric insurance has for the first time given climate-vulnerable communities, particularly women and persons with disabilities, access to rapid post-disaster financial support,” Narasimhan said.   

The other parametric insurance product currently available in the Pacific is offered by  PCRIC at a sovereign level, providing  quick payouts to regional governments in the aftermath of a natural disaster.  

Speaking on the panel, PCRIC CEO, Aholotu Palu, called for more supportive financial regulations for “unique organizations like PCRIC” to perform its role of helping countries respond quickly and sustain hard-won development gains. 

Regulatory guidelines 

The third panelist, Ronaldo Limbago of A2ii, touched on the importance of regulations to enable and indeed bring out the full potential of innovative products like parametric insurance.  

His presentation was based on the findings of the ‘Index insurance best practices for insurance regulators and practitioners in Pacific Island countries’ jointly authored by A2ii and UNCDF. 

The guideline carries information on how to create a favourable ecosystem for the development of index insurance products, with recommendations for all stages of product development and distribution – from design, to identifying and accounting for risks, to piloting and testing, to consumer protection and market deployment. 

Conclusion 

In closing, the panel called for increased stakeholder collaboration in the face of escalating climate change impacts and the acute vulnerability of the Pacific Islands and other climate-vulnerable nations. 

The panel identified the capacity building of stakeholders, from the developers and distributors of the product to the agriculture agencies marketing it, the beneficiaries and the regulators, as key to the success of such initiatives. 

The rapid cash infusion provided by parametric insurance in the aftermath of extreme weather events can provide a major boost to affected communities, unlike conventional insurance, which requires lengthy assessments and claims processing.  

This expedited payout mechanism enables swift recovery, and builds climate resilience. However, as the panel discussed, the success of these initiatives requires close stakeholder collaboration, a friendly policy environment and a shared commitment to innovative, proactive solutions.