Field report
Two insurance products offered by the project, Climate Risk Adaptation and Insurance in the Caribbean, are creating space for financial certainty in an increasingly unpredictable climate.
Over the last 30 years, 1.5 million people have been affected by floods and tropical storms in Belize, Grenada, Jamaica and St Lucia, causing more than €4.23 billion in damage. As these extreme weather events increase in their frequency and intensity, affected individuals in the Caribbean are benefitting from an innovative insurance initiative to help them safeguard against damaging impacts.
The loss and damage associated with climate change can set back development by potentially increasing not only the incidence, but also the severity of poverty. Poverty and vulnerability are deeply intertwined: the poor have low adaptive capacity because they have fewer resources to cope with climate risk; this resource base is further diminished with every extreme weather event, thus deepening their poverty. However, by compensating for damages caused by extreme weather events, climate risk insurance is helping individuals break out of this vicious cycle.
The Climate Risk Adaptation and Insurance in the Caribbean project, launched in 2011 by the Munich Climate Insurance Initiative (MCII), targets low-income individuals who are exposed to weather-related risks. Funding for the project, worth €4.6 million, has been provided under the International Climate Initiative by the German Federal Ministry for the Environment, Nature Conservation, Nuclear Safety and Building. The project has developed two climate risk insurance products: Livelihood Protection Policy (LPP) – directed at individuals; and Loan Portfolio Coverage (LPC) – aimed at financial institutions.
The LPP is a parametric weather-index based insurance policy, which ensures the rapid distribution of pay outs to policyholders when threshold values for wind and/or rainfall are exceeded. Not only does the timely provision of pay outs help vulnerable individuals to get on with rebuilding their lives in the wake of a natural disaster, but the insurance coverage also reduces policyholders’ credit risk giving them greater access to financial services. To encourage uptake of the insurance policy among the most at-risk individuals, the project engages vulnerable communities through its awareness raising and outreach activities.
The LPC aims to help stabilise financial institutions after an extreme weather event by protecting their equity base against financial shocks brought on by the disaster. The level of certainty created by this risk coverage helps ensure that there will be no shrinking of economic activity in the long run. The LPC, therefore, has the potential to improve low-income individuals’ access to lending and affordable financial services. This increased access to credit, combined with the guarantee of an insurance pay out in the event of severe weather, allows LPP policyholders to invest in assets to boost their productivity. The risk protection offered by both insurance products, therefore, helps to stimulate economic growth, in spite of the growing frequency of natural disasters, creating jobs and developing markets and value chains.
By fuelling economic development in climate-sensitive sectors, the ultimate goal of MCII’s Climate Risk Adaptation and Insurance in the Caribbean project – implemented with the Caribbean Catastrophe Risk Insurance Facility (CCRIF), and other partners – is to increase the resilience of communities affected by climate change in the Caribbean.
Climate insurance in action
During May 2017, 10 of the 14 parishes in Jamaica were flooded due to extremely heavy rain, which caused major landslides. The Jamaica Meteorological Services said the island had experienced an unprecedented level of rainfall, with the World Meteorological Organization recording rainfall figures of 63 mm at Norman Manley International Airport in Kingston on the 15th and 16th May, and 92.6 mm at Sangster International Airport in Montego Bay on 17th and 18th May – where the average rainfall usually totals 100 mm over a 12-day period during May.
In the wake of this heavy rainfall, several bridges were washed away and multiple roads damaged, leaving communities marooned. The island’s agricultural sector was also hard hit by the heavy rainfall, suffering an estimated €5.3 million in damage with around 10,000 farmers affected. Bobby Pottinger has cultivated bananas and coconuts on his 44 ha farm at Highgate in the north-eastern parish of St Mary for the last 50 years. Explaining the impact of the rains on his farm, he stated that, “There was very, very heavy and sustained rain for days, which oversaturated the soil. When the soil is oversaturated and the wind is up, you have toppling of banana plants, so I had quite a loss of fruits that were almost ready for reaping.”
However, thanks to the LPP pay out in response to the severe weather, it was not long before Pottinger was able to recover from the impact of the heavy rains. Pottinger explained that farmers like himself previously depended on the Banana Insurance Board for protection against such weather phenomenon, but the funds had depleted after about eight major hurricanes and multiple windstorms. The Climate Risk Adaptation and Insurance in the Caribbean project is welcomed states Pottinger, “Because we had nothing to fill the void for a long time and I am not only encouraging banana farmers to utilise it; I also sit on the Coconut Industry Board and I am encouraging them to go into this type of insurance.”
Like Jamaica, St Lucia is also prone to extreme weather linked to climate change. In 2016, the island’s agriculture suffered as a result of flooding and landslides triggered by Hurricane Matthew. Cutis Fontenelle, a banana and plantain farmer and exporter based in southern St Lucia, said he lost 100% of his crops during Hurricane Matthew, the third time this had happened since he began farming. “Based on my experience in this business, it can be very difficult to bounce back after natural disasters. Usually we go flat down,” he said. But fortunately for Fontenelle, who received compensation for his farm’s losses, the Climate Risk Adaptation and Insurance project could not have come at a more opportune time. “In my opinion, it’s one of the best things to have happened, particularly for people in agriculture. This insurance is something that I would definitely recommend that everybody taps into,” he explained.
Strengthening the insurance services
The Climate Risk Adaptation and Insurance project is working with national disaster management agencies to closely align the flow of information to local insurers, so that policyholders can receive early warning alerts about an approaching extreme weather event. This allows policyholders to proactively manage and mitigate the risks that they may face by giving them time to implement necessary measures to protect their livelihoods. To this end, the project conducted workshops facilitating dialogue between the local insurers, national disaster management agencies and regional disaster and emergency management organisations (i.e. CCRIF).
The workshops aimed to strengthen transparency and trust between the different organisations involved in the project so that it can provide the necessary services to policyholders, as and when they are required. Successfully meeting policyholders’ needs in this way will encourage more individuals and institutions to invest in the insurance products – there are currently 300 paying customers in Jamaica and plans are to expand this to 3,000 over the next 12 months. The workshops also sought to engage Caribbean ministries of climate change, sustainable development and local government to build a consensus in support of weather-index insurance and help the Climate Risk Adaptation and Insurance project gain momentum in the region.
LPP: How it works
Under the LPP, farmers and other low-income individuals are entitled to insurance cover for any loss of income due to heavy rain or high wind speeds. Premiums are determined by the extent of insurance cover that policyholders wish to buy and can be paid on a weekly, monthly or annual basis. A trigger index for the amount of rainfall or the speed of wind that must occur for a payment to be made to policyholders is predefined. The four index levels are determined by a rigorous analysis of historical rainfall and wind data in the region.
The Climate Risk Adaptation and Insurance in the Caribbean project collaborates with partner organisation, DHI, to monitor extreme weather events using satellite data, which is continually reported to local insurers. When the threshold for an extreme weather event is triggered, policyholders receive a text message from the insurers telling them at what level a trigger has been met, and the amount that they can expect to receive in payment – which can range from €67 to €3,337. This system means that policyholders themselves do not have to submit a claim to receive payment; instead insurance payments are automatically deposited into their accounts within 30 days of the weather event.
The process also avoids the need for insurers to make costly and time-consuming visits to verify claims; policyholders simply receive a text notifying them when the transaction has been completed. The simplicity and relative immediacy of the pay outs helps to ease the financial stress caused by the impacts of harsh weather events for farmers and other low-income individuals. The amount paid out by the insurer is calculated as a percentage of the coverage value purchased by the policyholder, but in all cases the more extreme the weather event (determined by the index level triggered), the larger the pay out.
Desmond Brown
