The InsuResilience Investment Fund (IIF)

15/09/2017 Blog

This blog entry is a modified version of the article published here: https://www.mfw4a.org/stakeholder-engagement/interviews/mts-interviews/article/2827/the-climate-insurance-fund-cif.html

This blog was contributed by Magdalena Zatorska, Assistant Vice President in charge of Private Equity in Africa at BlueOrchard Finance. It mainly describes the features of global initiatives to address climate risks including the InsuResilience Investment Fund (IIF), an initiative in which BlueOchard Finance is involved.

The impacts of climate events disproportionately affect populations in developing countries. Often located in geographies that are already highly vulnerable to adverse weather and natural disasters such as droughts, floods and typhoons, these economies also lack the infrastructure that can provide resiliency and protection to local populations and their assets. In addition, as developing country economies are typically highly dependent on agriculture and natural resource based sectors, natural disasters – which impact such sectors directly – can have a strong ripple effects throughout the economy. The Climate Insurance Fund, launched in 2015 by the German Development Bank, KfW, on behalf of the German Federal Ministry for Economic Cooperation and Development (BMZ) and managed by the Swiss based impact investment manager, BlueOrchard Finance in partnership with weather risk management specialist CelsiusPro, was created to address these vulnerabilities. The fund has been relaunched as the InsuResilience Investment Fund (IIF) as a public-private partnership, taking on private investors to increase outreach in July 2017.

The underlying premise of the fund is that insurance providers, and insurance-related initiatives, can play a critical role in mitigating the financial impacts of adverse climate events on poor and vulnerable populations. Insurance pay-outs reach people much faster than emergency relief operations and more importantly, insurance can incentivize people to implement effective adaptation measures. But while insurance can effectively complement existing risk management strategies and reduce the vulnerability of countries and their populations towards natural catastrophes, access to such insurance is very limited, particularly in developing economies. The focus of IIF is therefore to help develop and foster the growth of these vital products and services.

In this article we first provide a short background on several important public sector macro initiatives to address these issues at the sovereign level. We then explore how IIF complements such initiatives through its activities. In all its activities, IIF promotes the active involvement of the private sector – including institutional investors – with the goal of achieving long-term sustainability in the provision of products and services to build up more resiliency for the poor and vulnerable against the impacts of climate events.

Public Sector initiatives

The G7 Initiative on Climate Risk Insurance (“InsuResilience”) adopted at the G7 Summit in Elmau, Germany in June 2015 — and further strengthened at the 2016 COP22 meeting in Marrakech — aims to increase access to direct or indirect insurance coverage against the impacts of climate change for an additional 400 million of the most vulnerable people in developing countries by 2020. This initiative is being implemented in close partnership between the G7 states , the EU and the Netherlands with developing countries and emerging economies.

InsuResilience supports a range of important insurance-related facilities and initiatives, including the Climate Insurance Fund specifically, as well as the following public sector initiatives:

African Risk Capacity (ARC): ARC is a macro facility that enables African states to pool capacity in order to mutually cover themselves against drought and other perils. A special feature of ARC is that each government prepares an emergency response plan in which it defines in advance how insurance payments are to be deployed for the benefit of the poor and vulnerable in the event of disaster.

The Caribbean Catastrophe Risk Insurance Facility (CCRIF): CCRIF provides short-term liquidity to participating governments when the policy is triggered by a catastrophe.

Pacific Catastrophe Risk Assessment and Financing Initiative (PCRAFI): offers insurance products to cover tropical cyclones and earthquakes on the Pacific Islands.

Climate Risk and Early Warning Systems (CREW): The CREWS initiative aims to significantly increase the capacity for Multi-Hazard Early Warning Systems.

Another important public-sector initiative is the Global Index Insurance Facility (GIIF), part of the World Bank Group’s Finance & Markets Global Practice that works with various private and public partners to further develop and implement index/catastrophic insurance in developing countries. GIIF’s objective is to expand the use of index insurance – where payouts to policy holders are triggered by specific extreme weather or disaster events as opposed to assessing actual damages incurred – as a risk management tool in agriculture, food security and disaster risk reduction.

The InsuResilience Investment Fund (IIF)

It is against the backdrop of these various developments that IIF was created, with a focus on helping private sector players develop long-term climate insurance solutions. The specific objective of the fund is to reduce the vulnerability of low-income households as well as micro, small and medium enterprises (MSME) to extreme weather events. As such, IIF supports private companies involved in the value chain of insurance (insurers, brokers, reinsurers and insurance distributors mostly) to develop a climate insurance offering for low income populations in Official Development Assistance (ODA) recipient countries. The fund is an impact fund, with a dual objective: social impact and return. While only in operation for a little over two years, IIF has already invested in institutions embarking on innovative, scaleable iniatives in the area of climate insurance.

Leading reinsurers such as Swiss Re, Hannover Re and Munich RE are supporting the Climate Insurance Fund as business partners. These business partners provide non-exclusive support to the Fund with product design, underwriting capacity and industry contacts to successfully develop, expand and scale up the climate insurance offerings of investees.

The majority of IIF investments focus on the micro level, with the aim of expanding the availability of affordable and effective risk management products for MSMEs, individual farmers and the working poor. Other IIF investments aim at providing meso level coverage, supporting investees that provide risk management products at a portfolio level for actors – incuding private sector companies, not-for-profits, and development organizations that serve poor and vulnerable populations — with exposures in the developing world.

An important component of IIF is its technical assistance (TA) facility, managed by Swiss-based weather and climate insurance specialist, CelsiusPro. It is important to underscore that climate insurance remains vastly underdeveloped in most markets. In this development phase, technical assistance can therefore provide crucial know-how and expert assistance in product development, marketing and service delivery.

IIF’s overall aim is to complement the efforts of the international community and donors to the public sector with support geared towards the development of a sustainable insurance industry in developing markets, providing sorely needed cover against climatic risks. While many other climate risk intiatives provide support to government-focused or clean energy programs, there is no other initiative that focusses on combining investment capital, technical assistance and premium subsidy funds to expand climate insurance through private sector channels to support the business sector and low-income households.

With the clear vulnerabilities of developing world populations to climate events, it is critical to develop suitable, affordable and effective solutions to help mitigate such risks. IIF, even in its few years of operation, is already supporting innovative climate insurance schemes and will continue to build on this knowledge to further invest in private sector initiatives, spurring the long term development of climate insurance markets for poor and vulnerable groups globally.

Find out more at www.insuresilienceinvestment.fund